United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2010 | |
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o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission File Number 333-140448
MANHATTAN BANCORP
(Exact name of registrant as specified in its charter)
California |
| 20-5344927 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
2141 Rosecrans Avenue, Suite 1160
El Segundo, California 90245
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number: (310) 606-8000
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer o |
| Smaller reporting company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of April 30, 2010, there were 3,987,631 shares of the issuer’s common stock outstanding.
Manhattan Bancorp
QUARTERLY REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 | |
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PART I — FINANCIAL INFORMATION
Item 1 — Financial Information
Manhattan Bancorp and Subsidiaries
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| March 31, 2010 |
| December 31, 2009 |
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Assets |
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Cash and due from banks |
| $ | 2,051,916 |
| $ | 1,213,837 |
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Federal funds sold |
| 16,476,776 |
| 50,241,455 |
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Total cash and cash equivalents |
| 18,528,692 |
| 51,455,292 |
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Time deposits-other financial institutions |
| 3,066,000 |
| 3,462,000 |
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Investments securities-available for sale |
| 23,250,218 |
| 13,360,750 |
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Investments securities-held to maturity |
| 494,828 |
| 493,942 |
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Loans |
| 85,354,662 |
| 80,116,019 |
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Allowance for loan losses |
| (1,484,304 | ) | (1,202,494 | ) | ||
Net loans |
| 83,870,358 |
| 78,913,525 |
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Property and equipment, net |
| 1,197,393 |
| 1,281,940 |
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Stock in other financial institutions |
| 1,668,500 |
| 1,699,650 |
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Accrued interest receivable and other assets |
| 2,284,134 |
| 1,647,744 |
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Total assets |
| $ | 134,360,123 |
| $ | 152,314,843 |
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Liabilities and Stockholders’ Equity |
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Deposits: |
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Non-interest bearing demand |
| $ | 30,810,152 |
| $ | 29,647,199 |
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Interest bearing: |
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Demand |
| 2,610,090 |
| 4,026,157 |
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Savings and money market |
| 25,530,063 |
| 17,899,434 |
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Certificates of deposit equal to or greater than $100,000 |
| 37,105,286 |
| 54,351,901 |
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Certificates of deposit less than $100,000 |
| 4,965,384 |
| 4,995,301 |
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Total deposits |
| 101,020,975 |
| 110,919,992 |
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FHLB advances |
| 4,500,000 |
| 12,000,000 |
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Accrued interest payable and other liabilities |
| 1,555,058 |
| 992,648 |
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Total liabilities |
| 107,076,033 |
| 123,912,640 |
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Commitments and contingencies |
| — |
| — |
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Stockholders’ equity |
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Manhattan Bancorp stockholders’ equity: |
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Serial preferred stock-no par value; 10,000,000 shares authorized: issued and outstanding, none in 2010 and 2009 |
| — |
| — |
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Common stock-no par value; 10,000,000 shares authorized; issued and outstanding, 3,987,631 in 2010 and 2009 |
| 38,977,282 |
| 38,977,282 |
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Additional paid in capital |
| 1,708,093 |
| 1,566,396 |
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Unrealized gain on available-for-sale securities |
| 286,249 |
| 305,152 |
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Accumulated deficit |
| (14,055,532 | ) | (12,737,537 | ) | ||
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Total Manhattan Bancorp stockholders’ equity |
| 26,916,092 |
| 28,111,293 |
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Noncontrolling interest |
| 367,998 |
| 290,910 |
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| 27,284,090 |
| 28,402,203 |
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Total liabilities and stockholders’ equity |
| $ | 134,360,123 |
| $ | 152,314,843 |
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The accompanying notes are an integral part of this financial statement.
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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| For the three months |
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| ended March 31, |
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| 2010 |
| 2009 |
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Interest income |
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Interest and fees on loans |
| $ | 1,249,140 |
| $ | 795,176 |
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Interest on investment securities |
| 299,886 |
| 101,815 |
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Interest on federal funds sold |
| 15,583 |
| 11,371 |
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Interest on time deposits-other financial institutions |
| 11,150 |
| 42,437 |
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Total interest income |
| 1,575,759 |
| 950,799 |
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Interest expense |
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NOW, money market and savings |
| 65,405 |
| 33,255 |
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Time deposits |
| 173,894 |
| 133,592 |
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FHLB advances |
| 49,300 |
| 49,322 |
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Total interest expense |
| 288,599 |
| 216,169 |
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Net interest income |
| 1,287,160 |
| 734,630 |
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Provision for loan losses |
| 370,000 |
| 174,000 |
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Net interest income after provision for loan losses |
| 917,160 |
| 560,630 |
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Non-interest income |
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Bank-related fees |
| 69,200 |
| 17,281 |
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Non-bank related income |
| 1,675,091 |
| — |
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Non-interest income |
| 1,744,291 |
| 17,281 |
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Non-interest expense |
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Compensation and benefits |
| 2,575,145 |
| 1,014,680 |
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Professional and administrative expenses |
| 644,767 |
| 384,204 |
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Occupancy and equipment |
| 273,390 |
| 172,393 |
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Technology and communication |
| 273,426 |
| 137,160 |
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Other non-interest expenses |
| 134,830 |
| 102,632 |
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Total non-interest expenses |
| 3,901,558 |
| 1,811,069 |
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Loss before income taxes |
| (1,240,107 | ) | (1,233,158 | ) | ||
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Provision for income taxes |
| 800 |
| — |
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Net loss |
| (1,240,907 | ) | (1,233,158 | ) | ||
Less: Net gain attributable to the noncontrolling interest |
| 77,088 |
| — |
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Net loss attributable to Manhattan Bancorp |
| $ | (1,317,995 | ) | $ | (1,233,158 | ) |
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Weighted average number of shares outstanding (basic and diluted) |
| 3,987,631 |
| 3,987,631 |
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Basic and diluted loss per share |
| $ | (0.33 | ) | $ | (0.31 | ) |
The accompanying notes are an integral part of this financial statement.
Manhattan Bancorp and Subsidiaries
Consolidated Statement of Stockholders’ Equity (Unaudited)
March 31, 2010 and 2009
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| Accumulated |
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| Common |
| Additional |
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| Other |
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| Preferred |
| Common Stock |
| Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Comprehensive |
| Noncontrolling |
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| Stock |
| Shares |
| Amount |
| Warrants |
| Capital |
| Income (Loss) |
| Deficit |
| Income (Loss) |
| Interest |
| Total |
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Balance at December 31, 2008 |
| $ | 1,558,517 |
| 3,987,631 |
| $ | 38,977,282 |
| $ | 120,417 |
| $ | 957,825 |
| $ | — |
| $ | (7,634,001 | ) | $ | 307,488 |
| $ | — |
| $ | 34,287,528 |
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Accretion of preferred stock discount |
| 6,021 |
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| (6,021 | ) |
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| — |
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Dividend on preferred stock |
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| (16,528 | ) |
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| (16,528 | ) | |||||||||
Share-based compensation expense |
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| 196,063 |
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| 196,063 |
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Unrealized gain on investment securities |
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| 10,457 |
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| 10,457 |
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| 10,457 |
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Net loss |
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| (1,233,158 | ) | $ | (1,233,158 | ) |
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| (1,233,158 | ) | ||||||||
Total comprehensive loss |
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| $ | (1,222,701 | ) |
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Balance at March 31, 2009 |
| $ | 1,564,538 |
| 3,987,631 |
| $ | 38,977,282 |
| $ | 114,396 |
| $ | 1,153,888 |
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| $ | (8,883,687 | ) | $ | 317,945 |
| $ | — |
| $ | 33,244,362 |
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Balance at December 31, 2009 |
| $ | — |
| 3,987,631 |
| $ | 38,977,282 |
| $ | — |
| $ | 1,566,396 |
| $ | — |
| $ | (12,737,537 | ) | $ | 305,152 |
| $ | 290,910 |
| $ | 28,402,203 |
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Share-based compensation expense |
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| 141,697 |
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| 141,697 |
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Unrealized loss on investment securities |
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| (18,903 | ) |
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| (18,903 | ) |
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| (18,903 | ) | |||||||||
Net gain (loss) |
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| (1,317,995 | ) | (1,317,995 | ) |
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| 77,088 |
| (1,240,907 | ) | |||||||||
Total comprehensive loss |
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| $ | (1,336,898 | ) |
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Balance at March 31, 2010 |
| $ | — |
| 3,987,631 |
| $ | 38,977,282 |
| $ | — |
| $ | 1,708,093 |
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| $ | (14,055,532 | ) | $ | 286,249 |
| $ | 367,998 |
| $ | 27,284,090 |
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Manhattan Bancorp and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
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| For the thee months |
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| ended March 31 |
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| 2010 |
| 2009 |
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Cash flows from operating activities |
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Net loss |
| $ | (1,240,907 | ) | $ | (1,249,686 | ) |
Net amortization of discounts and premiums on securities |
| (108,710 | ) | $ | (5,567 | ) | |
Depreciation and amortization |
| 108,294 |
| 76,681 |
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Provision for loan losses |
| 370,000 |
| 174,000 |
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Share-based compensation |
| 141,697 |
| 196,063 | �� | ||
(Increase) in accrued interest receivable and other assets |
| (636,390 | ) | (8,763 | ) | ||
Increase in accrued interest payable and other liabilities |
| 562,410 |
| 323,969 |
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Net cash used in operating activities |
| (803,606 | ) | (493,303 | ) | ||
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Cash flows from investing activities |
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Net (increase) in loans |
| (5,339,358 | ) | (4,516,999 | ) | ||
Allowance for loan and less loss recoveries |
| 12,525 |
| — |
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(Increase) decrease in time deposits - other financial institutions |
| 396,000 |
| (4,812,000 | ) | ||
Proceeds from repayment and maturities from investment securities |
| 4,014,236 |
| 345,429 |
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Purchase of investments |
| (13,814,783 | ) | — |
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(Purchase) Redemption of stock in other financial institutions |
| 31,150 |
| (281,150 | ) | ||
Purchase of premises and equipment |
| (23,747 | ) | (4,135 | ) | ||
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Net cash used in investing activities |
| (14,723,977 | ) | (9,268,855 | ) | ||
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Cash flows from financing activities |
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Net increase (decrease) in: |
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Demand deposits |
| 1,162,953 |
| 44,215 |
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Interest bearing demand deposits |
| (1,416,067 | ) | (320,532 | ) | ||
Savings and money market deposits |
| 7,630,629 |
| 2,882,807 |
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Certificates of deposit equal to or greater than $100,000 |
| (17,246,615 | ) | 964,745 |
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Certificates of deposit less than $100,000 |
| (29,917 | ) | 329,177 |
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Increase (decrease) from borrowings |
| (7,500,000 | ) | 2,000,000 |
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Net cash (used in)/provided by financing activities |
| (17,399,017 | ) | 5,900,412 |
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Net decrease in cash and cash equivalents |
| (32,926,600 | ) | (3,861,746 | ) | ||
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Cash and cash equivalents at beginning of period |
| 51,455,292 |
| 19,710,235 |
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Cash and cash equivalents at end of period |
| $ | 18,528,692 |
| $ | 15,848,489 |
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Supplementary information |
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Interest paid on deposits |
| $ | 240,876 |
| $ | 166,938 |
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Income taxes paid |
| $ | 800 |
| $ | — |
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The accompanying notes are an integral part of this financial statement.
MANHATTAN BANCORP
MARCH 31, 2010
Note 1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of Manhattan Bancorp (the “Bancorp”) and its wholly-owned subsidiaries, Bank of Manhattan, N.A. (the “Bank”) and MBFS Holdings, Inc. (“MBFS”), together referred to as the “Company” have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. On October 1, 2009, the Bancorp, through its wholly-owned subsidiary MBFS, acquired a 70% interest in Banc of Manhattan Capital, LLC, (“BOMC”). As this is a condensed interim presentation, certain information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements are not included herein. In the opinion of Management, all adjustments considered necessary for a fair presentation of results for the interim periods presented have been included. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2009 Annual Report on Form 10-K.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. All material intercompany accounts and transactions have been eliminated.
Certain amounts in prior presentations may have been reclassified to conform to the current presentation. These reclassifications, if any, had no effect on stockholders’ equity, net loss or loss-per-share amounts.
Note 2. RECENT ACCOUNTING PRONOUNCEMENTS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: In June 2009, accounting standards were revised to establish the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the Financial Accounting Standard Board (“FASB”) to be applied by nongovernmental entities in the preparation of financial statements in conformity with United States Generally Accepted Accounting Principles (U.S. GAAP). The Codification does not change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents were superseded. The Company adopted the Codification for the year ended December 31, 2009 and all subsequent statements will reference the Codification as the sole source of authoritative literature.
BUSINESS COMBINATIONS: Effective January 1, 2009, the Company adopted the new accounting guidance that applies to all transactions and other events in which one entity obtains control over one or more other businesses. The guidance requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under old accounting literature whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case. Accounting for costs associated with exit or disposal activities would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria delineated in the FASB statement related to accounting for contingencies. Subsequent accounting literature released during 2009 amends the new accounting guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated, removes subsequent accounting guidance for assets and liabilities arising from contingencies and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. It also eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date.
SUBSEQUENT EVENTS: In May 2009, accounting standards were revised to require that management evaluate, as of the end of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued, or are available to be issued, and to disclose the date through which the evaluation has been made. The Company is required to evaluate whether events subsequent to the end of the reporting period require disclosure or recognition through the date the financial statements are issued. The adoption of these amendments did not have a material impact on the Company’s Consolidated Balance Sheets or Statements of Operations.
In February 2010, accounting standards were revised to remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company. This change became effective immediately.
FAIR VALUE MEASUREMENTS: In January 2010, the FASB modified current accounting standards to add disclosure requirements about significant transfers into and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions in preparing the Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions, which were subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.
The new accounting disclosure also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted and will be effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.
Note 3. INTEREST-EARNING ASSETS WITH OTHER FINANCIAL INSTITUTIONS
At March 31, 2010, the Company had interest-earning deposits with other financial institutions of $3.1 million, with a weighted average yield of 1.44%, and an average weighted remaining life of approximately 11.2 months. At December 31, 2009, the Company had interest-earning deposits with other
financial institutions of $3.5 million, with a weighted average yield of 1.81%, and an average weighted remaining life of approximately 3.3 months.
Note 4. INVESTMENT SECURITIES
Investment securities have been classified in the balance sheet according to management’s intent. The following table sets forth the investment securities at their amortized cost and estimated fair value with gross unrealized gains and losses as of March 31, 2010, and December 31, 2009.
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| Gross |
| Gross |
| Estimated |
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| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
March 31, 2010 (unaudited) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
|
| (in thousands) |
| ||||||||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 2,647 |
| $ | 12 |
| $ | 1 |
| $ | 2,658 |
|
Mortgage-backed securities |
| 6,114 |
| 314 |
| 12 |
| 6,416 |
| ||||
Other securities |
| 14,203 |
| 128 |
| 155 |
| 14,176 |
| ||||
Total available-for-sale securities |
| $ | 22,964 |
| $ | 454 |
| $ | 168 |
| $ | 23,250 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
| ||||
State and municipal securities |
| $ | 495 |
| $ | 12 |
| $ | — |
| $ | 507 |
|
|
|
|
| Gross |
| Gross |
| Estimated |
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
December 31, 2009 (audited) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
|
| (in thousands) |
| ||||||||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 2,647 |
| $ | — |
| $ | 21 |
| $ | 2,626 |
|
Mortgage-backed securities |
| 7,009 |
| 320 |
| 1 |
| 7,328 |
| ||||
Other securities |
| 3,399 |
| 62 |
| 54 |
| 3,407 |
| ||||
Total available-for-sale securities |
| $ | 13,055 |
| $ | 382 |
| $ | 76 |
| $ | 13,361 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
| ||||
State and municipal securities |
| $ | 494 |
| $ | 4 |
| $ | — |
| $ | 498 |
|
The fair value of these securities is based upon quoted market prices unless otherwise indicated in Note 7, “Fair Value Measurements”.
There were realized gains during the three-month period ended March 31, 2010 of approximately $20,000. The net unrealized loss on available-for-sale securities included in accumulated other comprehensive income was approximately $19,000 for the three-month period ended March 31, 2010. Available-for-sale securities with an amortized cost of approximately $4.6 million (fair value of approximately $4.9 million) were pledged as collateral for Federal Home Loan Bank advances as of March 31, 2010.
Management does not believe that any of the Company’s investment securities are impaired due to reasons of credit quality. Declines in the fair value of available-for-sale securities below their cost, that are deemed to be other-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 the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At March 31, 2010, the Company had no securities with unrealized losses that were in a continual loss position for over a twelve-month period. The following table reflects unrealized losses for securities that were in a continual loss position for less than a twelve-month period as of March 31, 2010.
(unaudited) |
| Less than 12 Months |
| ||||
(In thousands) |
| Fair Value |
| Unrealized Losses |
| ||
Securities available for sale: |
|
|
|
|
| ||
U.S. Government and agency securities |
| $ | 699 |
| $ | 1 |
|
Mortgage-backed securities |
| 591 |
| 12 |
| ||
Other securities |
| 8,177 |
| 155 |
| ||
Securities held to maturity |
|
|
|
|
| ||
State and municipal securities |
| — |
| — |
| ||
Total imparied securities |
| $ | 9,467 |
| $ | 168 |
|
Any intra-period decline in market values was attributable to changes in market rates of interest rather than credit quality; and because the Company has the ability and intent to hold all of its investments until a recovery of fair value, which may be at maturity, the Company considers none of its investments to be temporarily impaired at March 31, 2010.
The amortized cost, estimated fair value and average yield of debt securities at March 31, 2010 are shown below. In the case of available-for-sale securities, the average yields are based on effective rates of book balances at year end. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost. Mortgage-backed securities are classified in accordance with estimated lives. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations.
|
| Available-for-Sale Securities |
| Held-to Maturity Securities |
| ||||||||||||
|
|
|
| Estimated |
| Weighted |
|
|
| Estimated |
| Weighted |
| ||||
|
| Amortized |
| Fair |
| Average |
| Amortized |
| Fair |
| Average |
| ||||
(unaudited) |
| Cost |
| Value |
| Yield |
| Cost |
| Value |
| Yield |
| ||||
|
| (dollars in thousands) |
| ||||||||||||||
Due in One Year or Less |
| $ | 6,931 |
| $ | 7,001 |
| 3.91 | % | $ | — |
| $ | — |
|
|
|
Due from One Year to Five Years |
| 8,280 |
| 8,409 |
| 4.77 | % | 495 |
| 507 |
| 4.55 | % | ||||
Due from Five Years to Ten Years |
| 4,192 |
| 4,162 |
| 5.96 | % |
|
|
|
|
|
| ||||
Due after Ten Years |
| 3,561 |
| 3,678 |
| 3.48 | % |
|
|
|
|
|
| ||||
|
| $ | 22,964 |
| $ | 23,250 |
| 4.53 | % | $ | 495 |
| $ | 507 |
| 4.55 | % |
Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows:
|
| March 31, 2010 (unaudited) |
| December 31, 2009 (audited) |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
(dollars in thousands) |
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
Commercial loans |
| $ | 27,925 |
| 32.7 | % | $ | 26,531 |
| 33.1 | % |
Real estate loans |
| 49,580 |
| 58.1 | % | 46,055 |
| 57.5 | % | ||
Other loans |
| 7,849 |
| 9.2 | % | 7,530 |
| 9.3 | % | ||
Total loans, including net loan costs |
| 85,354 |
| 100.0 | % | 80,116 |
| 100.0 | % | ||
Less : allowance for loan losses |
| (1,484 | ) |
|
| (1,202 | ) |
|
| ||
Net loans |
| $ | 83,870 |
|
|
| $ | 78,914 |
|
|
|
The Company has had no impaired or non-accrual loans and there were no loans past due 90 days or more in either interest or principal as of March 31, 2010 and December 31, 2009.
The following table presents an analysis of changes in the allowance for loan losses during the periods indicated:
|
| For the Three Months |
| ||||
|
| Ended March 31, |
| ||||
(Unaudited) |
| 2010 |
| 2009 |
| ||
|
| (in thousands) |
| (in thousands) |
| ||
Balance at beginning of period |
| $ | 1,202 |
| $ | 975 |
|
Additions to the allowance charged to expense |
| 370 |
| 174 |
| ||
Recoveries |
| 13 |
| — |
| ||
|
| 1,585 |
| 1,149 |
| ||
Less loans charged-off |
| (101 | ) | — |
| ||
|
|
|
|
|
| ||
Balance at end of period |
| $ | 1,484 |
| $ | 1,149 |
|
Note 6. SHARE-BASED COMPENSATION
During the three-month period ended March 31, 2010, the Company recorded approximately $142,000 of stock-based compensation expense. At March 31, 2010, unrecorded compensation expense related to non-vested stock option grants totaled approximately $700,000 and is expected to be recognized as follows:
|
| Share-Based |
| |
|
| Compensation |
| |
(unaudited) |
| Expense |
| |
|
| (in thousands) |
| |
Remainder of 2010 |
| $ | 440 |
|
2011 |
| 238 |
| |
2012 |
| 35 |
| |
2013 |
| 5 |
| |
Total |
| $ | 718 |
|
The Company uses the Black-Scholes option valuation model to determine the fair value of options. The Company utilizes assumptions on expected life, risk-free rate, expected volatility and dividend yield to determine such values. As grants occur, the Company estimates the life of the options by calculating the average of the vesting period and the contractual life. The risk-free rate would be based upon treasury instruments in effect at the time of the grant whose terms are consistent with the expected life of the Company’s stock options. Expected volatility would be based on historical volatility of other financial institutions within the Company’s operating area as the Company has limited market history.
The following table summarizes the weighted average assumptions utilized for stock options granted for the period presented:
|
| Period Ended |
| ||||
|
| March 31, |
| ||||
(unaudited) |
| 2010 |
| 2009 |
| ||
Risk-free rate |
| 2.90 | % | 2.04 | % | ||
Expected term |
| 6 years |
| 6 years |
| ||
Expected volatility |
| 28.12 | % | 25.98 | % | ||
Dividend yield |
| 0.00 | % | 0.00 | % | ||
Fair value per share |
| $ | 2.25 |
| $ | 0.52 |
|
The following table summarizes the stock option activity under the plan for the periods indicated:
|
|
|
|
|
| Weighted Average |
| Aggregate |
| ||
|
|
|
| Weighted Average |
| Remaining |
| Intrinsic |
| ||
(unaudited) |
| Shares |
| Exercise Price |
| Contractual Life |
| Value |
| ||
2009 |
|
|
|
|
|
|
|
|
| ||
Outstanding at December 31, 2008 |
| 657,480 |
| $ | 9.99 |
|
|
|
|
| |
Granted |
| 30,250 |
| $ | 8.43 |
|
|
|
|
| |
Exercised |
| — |
| — |
|
|
|
|
| ||
Expired |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| 12,438 |
| $ | 10.00 |
|
|
|
|
| |
Outstanding at March 31, 2009 |
| 675,292 |
| $ | 9.45 |
| 8.79 |
| $ | — |
|
Options exercisable at March 31, 2009 |
| 154,433 |
| $ | 9.96 |
| 8.41 |
| $ | — |
|
Options unvested at March 31, 2009 |
| 520,859 |
| $ | 9.29 |
| 8.85 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||
2010 |
|
|
|
|
|
|
|
|
| ||
Outstanding at December 31, 2009 |
| 686,942 |
| $ | 9.42 |
|
|
|
|
| |
Granted |
| 40,000 |
| $ | 6.79 |
|
|
|
|
| |
Exercised |
| — |
| $ | — |
|
|
|
|
| |
Expired |
| — |
| $ | — |
|
|
|
|
| |
Forfeited |
| — |
| $ | — |
|
|
|
|
| |
Outstanding at March 31, 2010 |
| 726,942 |
| $ | 9.27 |
| 7.93 |
| $ | — |
|
Options exercisable at March 31, 2010 |
| 379,481 |
| $ | 9.66 |
| 7.63 |
| $ | — |
|
Options unvested at March 31, 2010 |
| 347,461 |
| $ | 8.85 |
| 8.23 |
| $ | — |
|
Note 7. FAIR VALUE MEASUREMENTS
Current accounting literature defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The literature describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s assets and liabilities, if any, which were measured at fair value on a recurring basis during the period, with dollars reported in thousands:
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Quoted Price in |
| Significant |
|
|
| ||||
|
|
|
| Active Markets |
| Other |
| Significant |
| ||||
|
|
|
| for Identical |
| Observable |
| Unobservable |
| ||||
(unaudited) |
| March 31, |
| Assets |
| Inputs |
| Inputs |
| ||||
Description of Assets/Liability |
| 2010 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Available-for-sale securities |
| $ | 23,250 |
| $ | — |
| $ | 23,250 |
| $ | — |
|
Available-for-sale securities are valued based upon inputs derived principally from observable market data. Changes in fair market value are recorded in other comprehensive income as the securities are available for sale.
Note 8. OTHER BORROWINGS
At March 31, 2010, the Company had a collateralized line of credit with the Federal Home Loan Bank (“FHLB”) totaling $20.0 million, against which it had outstanding $4.5 million consisting of a FHLB five-year fixed rate advance at 4.38% maturing on June 27, 2013.
Note 9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents income available (loss reported) to common stock divided by the weighted average number of common shares outstanding during the period reported on the Statement of Operations. Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. There were no dilutive potential common shares outstanding for any periods reported on the Statement of Operations. The weighted average number of shares for the three-month periods ended March 31, 2010 and March 31, 2009 was 3,987,631.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q, that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are based upon management’s current expectations and beliefs concerning further developments and their potential effects on Manhattan Bancorp and its subsidiaries. The Company’s forward-looking statements involve risks and uncertainties, including the risks and uncertainties described herein and those enumerated in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. There can be no assurance that future developments affecting Manhattan Bancorp will be the same as those anticipated by management, and actual results may differ from those projected in the forward-looking statements. Statements regarding policies and procedures are not intended, and should not be interpreted to mean, that such policies and procedures will not be amended, modified, or repealed at any time in the future.
The Company
Manhattan Bancorp (“Bancorp”) is a bank holding company which was incorporated in August 2006, in order to acquire Bank of Manhattan, N.A. (the “Bank”), a de novo bank which it acquired on August 14, 2007. The Bank is a nationally-chartered banking association organized under the laws of the United States, which commenced its banking operations on August 15, 2007. Bancorp operates primarily through the Bank, and the investment in the Bank is its principal asset. The Bank is located in El Segundo, California, and at March 31, 2010, had $133 million in assets, $84 million in net loans receivable and $106 million in deposits. On October 1, 2009, Manhattan Bancorp, through its wholly owned subsidiary, MBFS Holdings, Inc. (“MBFS”), acquired a 70% interest in Banc of Manhattan Capital, LLC, (“BOMC”) a full-service mortgage-centric broker/dealer. The gross investment in MBFS was $1.7 million as of March 31, 2010. Unless the context requires otherwise, references in this Form 10-Q to the “Company,” “we” or “us” refers to Bancorp and its consolidated subsidiaries, the Bank and MBFS and its subsidiary.
Management’s discussion and analysis of financial condition and results of operation is intended to provide a better understanding of the significant changes in trends relating to the Company’s financial condition, results of operation, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the unaudited financial statements contained within this report including the notes thereto.
Earnings and Financial Condition Overview
The Company recorded a net loss of $1,240,907 (including the gain from the minority interest of $77,088) or $0.33 basic and fully-diluted loss per share of common stock for the shareholders of the Company for the three-month period ended March 31, 2010, as compared with a net loss of $1,233,000 or $0.31 basic and fully-diluted loss per share of common stock for the three-month period ended March 31, 2009. The per-share values are based upon the loss attributable to the shareholders of the Bancorp and the related shares outstanding. Comparing the Company’s prior year’s first quarter loss with the current operating quarter reflects an approximate increase of less than 1% in the reported comparable quarterly losses. The continuation of first quarter losses is the result of three primary reasons:
· Increased loan provisions to cover charge-offs and to recognize potential weakness in the loan portfolio due to the general deterioration in the economy.
· The exploration of potential business opportunities by the Bancorp.
· Increased non-interest expenses, primarily resulting from compensation and benefits and other components, including legal and professional fees.
Due to the current condition in the general economy, the Company continues to be cautious in granting new credit extensions, and demand for credit, in general, has been modest. Despite the fact that as of both December 31, 2009 and March 31, 2010, the Bank had no past due loans or loans on non-accrual, Bank’s management elected to increase the allowance for loan loss to 1.74% of outstanding loans as of March 31, 2010, compared to 1.50% of outstanding loans as of December 31, 2009. The Company charged off approximately $101,000 in loans during the quarter ended March 31, 2010. Management continuously reviews the portfolio for indication of specific weaknesses and adjusts the provision accordingly. The provision for the three-month period ended March 31, 2010 was $370,000 compared to $174,000 for the three-month period ended March 31, 2009.
The Company’s management has invested time and resources in the evaluation and exploration of additional financial products and services deemed essential to meeting the needs of its customer base and to enhance its franchise value. Much of that effort has occurred during the first quarter of 2010 with returns anticipated during the latter half of the year.
During the first quarter of 2010, changes in the Company’s management and structure resulted in one-time expenses of approximately $200,000.
The Company benefited from pre-tax income of approximately $105,000 from BOMC for the three-month period ended March 31, 2010.
Net interest income after provision for loan losses for the three-month period ended March 31, 2010 was approximately $917,000, an increase of approximately $356,000 over the three-month period ended March 31, 2009. This 64% improvement in net interest income was primarily due to an increase in interest income, up approximately $625,000 (66%) for the comparable three-month period ended March 31, 2010 over 2009. Interest expense also increased by a reduced percentage (34%) for the comparable three-month period ended March 31, 2010 over March 31, 2009, with the actual dollar increase only $72,000.
With the addition of non-bank related income from BOMC, total non-interest income increased significantly from approximately $17,000 for the three-month period ended March 31, 2009 to $1,744,000 for the comparable period ended March 31, 2010.
Non-interest expense for the three-month period ended March 31, 2010 compared to March 31, 2009 increased by approximately $2.1 million, and an analysis is found under Non-Interest Expense on page 21.
As of March 31, 2010, total assets of the Company were approximately $134.4 million. This represents a decrease of approximately $18.0 million or 11.8% from the amount reported as of December 31, 2009. The decline in total assets can be attributed to a modification in the source of the Bank’s funding, which reduced the excess balances in assets with minimal interest-bearing yields. The excess was the result of temporary funding, much of which was paid off within the weeks following December 31, 2009. There were increases in investments of approximately $9.9 million, representing a 74% increase from $13.9
million as of December 31, 2009 to $23.7 million as of March 31, 2010. Gross loan balances also increased over the three-month period ended March 31, 2010 to approximately $85.4 million, representing a 6.5% increase from the approximately $80.1 million reported as of December 31, 2009 to $85.4 million as of March 31, 2010. Funding for the loan and investment growth was obtained primarily from reductions in cash and cash equivalent balances.
At March 31, 2010, total deposits were approximately $101.0 million compared with approximately $110.9 million as of December 31, 2009. This represents an approximately $9.9 million decrease or 8.9%. The outflow of deposits was the result of the planned non-renewal of non-local non-brokered deposits but was partially offset by the influx of money-market funds from local sources. A net decrease of $7.5 million in overnight Federal Home Loan Bank (“FHLB”) advances also reduced funding.
The following table provides selected financial data that highlights the Company’s financial performance for each of the last six full quarters. Dollars are in thousands, except per share amounts.
|
| For the three months ended |
| ||||||||||||||||
|
| 3/31/2010 |
| 12/31/2009 |
| 9/30/2009 |
| 6/30/2009 |
| 3/31/2009 |
| 12/31/2008 |
| ||||||
|
| (Unaudited) |
| (Audited) |
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
| (Audited) |
| ||||||
Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest income |
| $ | 1,576 |
| $ | 1,338 |
| $ | 1,204 |
| $ | 1,109 |
| $ | 951 |
| $ | 909 |
|
Interest expense |
| 289 |
| 251 |
| 200 |
| 179 |
| 216 |
| 248 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income |
| 1,287 |
| 1,087 |
| 1,004 |
| 930 |
| 735 |
| 661 |
| ||||||
Provision for loan losses |
| 370 |
| 84 |
| 468 |
| 454 |
| 174 |
| 275 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income after provision |
| 917 |
| 1,003 |
| 536 |
| 476 |
| 561 |
| 386 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-interest income |
| 1,744 |
| 921 |
| 47 |
| 34 |
| 17 |
| 11 |
| ||||||
Non-interest expense |
| 3,902 |
| 3,009 |
| 1,857 |
| 1,964 |
| 1,811 |
| 1,498 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss from operations excluding minority interest |
| $ | (1,318 | ) | $ | (1,076 | ) | $ | (1,274 | ) | $ | (1,454 | ) | $ | (1,233 | ) | $ | (1,101 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Per Share and Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic and diluted loss per share |
| $ | (0.33 | ) | $ | (0.27 | ) | $ | (0.32 | ) | $ | (0.36 | ) | $ | (0.31 | ) | $ | (0.42 | ) |
Book value per common share- period end |
| $ | 6.75 |
| $ | 7.05 |
| $ | 7.31 |
| $ | 7.61 |
| $ | 7.94 |
| $ | 8.21 |
|
Weighted average shares outstanding basic and diluted |
| 3,988 |
| 3,988 |
| 3,988 |
| 3,988 |
| 3,988 |
| 2,646 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investments and fed funds sold |
| $ | 43,288 |
| $ | 67,558 |
| $ | 33,770 |
| $ | 27,114 |
| $ | 17,085 |
| $ | 12,603 |
|
Loans, net |
| $ | 83,870 |
| $ | 78,914 |
| $ | 71,963 |
| $ | 71,154 |
| $ | 60,810 |
| $ | 56,467 |
|
Assets |
| $ | 134,360 |
| $ | 152,315 |
| $ | 110,270 |
| $ | 103,835 |
| $ | 97,221 |
| $ | 92,040 |
|
Deposits |
| $ | 101,021 |
| $ | 110,920 |
| $ | 68,753 |
| $ | 59,650 |
| $ | 51,891 |
| $ | 47,991 |
|
Shareholders’ equity |
| $ | 26,916 |
| $ | 28,111 |
| $ | 29,141 |
| $ | 31,899 |
| $ | 33,244 |
| $ | 34,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net loss as a percentage of average assets |
| -3.90 | % | -3.57 | % | -5.15 | % | -6.53 | % | -5.71 | % | -5.98 | % | ||||||
Net loss as a percentage of average equity |
| -19.16 | % | -14.79 | % | -16.14 | % | -17.75 | % | -14.75 | % | -21.73 | % | ||||||
Dividend payout ratio |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Equity to asset ratio |
| 20.03 | % | 18.46 | % | 26.43 | % | 30.72 | % | 34.19 | % | 37.25 | % | ||||||
Net interest margin |
| 3.99 | % | 3.79 | % | 4.26 | % | 4.42 | % | 3.60 | % | 3.82 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Credit Quality |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Allowance for loan losses |
| $ | 1,484 |
| $ | 1,202 |
| $ | 1,095 |
| $ | 1,090 |
| $ | 1,149 |
| $ | 975 |
|
Allowance /total loans |
| 1.74 | % | 1.50 | % | 1.50 | % | 1.51 | % | 1.85 | % | 1.70 | % | ||||||
Non-performing loans |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Net (recoveries) charge-offs |
| $ | 88 |
| $ | (24 | ) | $ | 464 |
| $ | 513 |
| $ | — |
| $ | — |
|
RESULTS OF OPERATIONS
Net Interest Income
The Company’s earnings depend largely upon our net interest income, which is the difference between the income we earn on interest-bearing assets, such as loans, and the interest we pay on deposits and borrowed funds. Net interest income is related to (i) the relative amounts of interest-earning assets and liabilities and (ii) the interest rates earned and paid on these balances. Total interest income can fluctuate based upon the mix of earning assets amongst loans, investments and federal funds sold and the related rates associated with their balances. Some of the funding sources for these assets also have an interest cost which can fluctuate based upon the mix of interest-bearing liabilities and the related rates associated with their balances.
The interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities. The interest rate spread increased from 2.44% for the three-month period ended March 31, 2009 to 3.40% for the three-month period ended March 31, 2010, due to the significant decline in effective interest rates associated with interest-bearing liabilities coupled with a moderate increase in the effective interest rates on interest-bearing assets.
Net interest margin is net interest income expressed as a percentage of average total interest-earning assets, allowing the sources of funding as factors in the calculation. While the interest rate spread increased by 96 basis points, net interest margin increased by only 39 basis points, reflecting an improved mix in interest-bearing assets with a higher percentage in categories with better returns coupled with the fact that a higher percentage of the sources of the funding were from interest-bearing liabilities. The percentage of interest-bearing funds to interest-earning assets increased from 47.8% to 60.3% for the three-month periods ended March 31, 2009 and 2010, respectively.
Net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes in the relative amounts of interest-earning assets and interest- bearing liabilities, referred to as volume changes. Interest rates earned and paid are affected principally by our competition, general economic conditions and other factors beyond the Company’s control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the Federal Reserve Board.
The following table sets forth interest income, interest expense, net interest income before provision for loan losses and net interest margin for the periods presented:
|
| Three Months Ended |
|
|
| ||||
|
| March 31, |
| Percent |
| ||||
|
| 2010 |
| 2009 |
| Change |
| ||
|
| (Unaudited) |
| ||||||
|
| (Dollars in thousands) |
| ||||||
Interest income |
| $ | 1,576 |
| $ | 951 |
| 65.72 | % |
Interest expense |
| 289 |
| 216 |
| 33.36 | % | ||
Net interest income before provision for loan losses |
| $ | 1,287 |
| $ | 735 |
| 75.25 | % |
Net interest margin |
| 3.99 | % | 3.60 | % | 10.95 | % |
The following table presents the weighted average yield on each specified category of interest-earning assets, the weighted average rate paid on each specified category of interest-bearing liabilities, the resulting interest rate spread, and the net interest margin for the periods indicated:
ANALYSIS OF NET INTEREST INCOME
|
| (Unaudited) |
| ||||||||||||||
|
| Three months ended March 31, |
| ||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
|
|
| Interest |
| Average |
|
|
| Interest |
| Average |
| ||||
|
| Average |
| Income/ |
| Rate |
| Average |
| Income/ |
| Rate |
| ||||
|
| Balance |
| Expense |
| Earned/Paid |
| Balance |
| Expense |
| Earned/Paid |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold |
| $ | 27,077 |
| $ | 16 |
| 0.24 | % | $ | 9,796 |
| $ | 11 |
| 0.46 | % |
Deposits with other financial institutions |
| 2,876 |
| 11 |
| 1.55 | % | 7,943 |
| 43 |
| 2.20 | % | ||||
Investments |
| 20,207 |
| 300 |
| 6.02 | % | 8,268 |
| 102 |
| 5.00 | % | ||||
Loans(1) |
| 80,579 |
| 1,249 |
| 6.29 | % | 56,778 |
| 795 |
| 5.68 | % | ||||
Total interest-earning assets |
| 130,739 |
| 1,576 |
| 4.89 | % | 82,785 |
| 951 |
| 4.66 | % | ||||
Non-interest-earning assets |
| 6,353 |
|
|
|
|
| 4,792 |
|
|
|
|
| ||||
Total assets |
| $ | 137,092 |
|
|
|
|
| $ | 87,577 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand |
| $ | 2,570 |
| 1 |
| 0.10 | % | $ | 1,753 |
| 0 |
| 0.10 | % | ||
Savings and money market |
| 24,825 |
| 65 |
| 1.06 | % | 10,091 |
| 33 |
| 1.33 | % | ||||
Certificates of deposit |
| 46,643 |
| 174 |
| 1.51 | % | 23,060 |
| 134 |
| 2.36 | % | ||||
FHLB advances |
| 4,750 |
| 49 |
| 4.13 | % | 4,633 |
| 49 |
| 4.23 | % | ||||
Total interest-bearing liabilities |
| 78,788 |
| 289 |
| 1.49 | % | 39,537 |
| 216 |
| 2.22 | % | ||||
Non-interest-bearing demand deposits |
| 29,252 |
|
|
|
|
| 13,726 |
|
|
|
|
| ||||
Total funding sources |
| 108,040 |
|
|
| 1.08 | % | 53,263 |
|
|
| 1.65 | % | ||||
Non-interest-bearing liabilities |
| 1,154 |
|
|
|
|
| 397 |
|
|
|
|
| ||||
Shareholders’ equity |
| 27,898 |
|
|
|
|
| 33,917 |
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 137,092 |
|
|
|
|
| $ | 87,577 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Excess of interest-earning assets over funding sources |
| $ | 22,699 |
|
|
|
|
| $ | 29,522 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 1,287 |
|
|
|
|
| $ | 735 |
|
|
| ||
Net interest rate spread |
|
|
|
|
| 3.40 | % |
|
|
|
| 2.44 | % | ||||
Net interest margin |
|
|
|
|
| 3.99 | % |
|
|
|
| 3.60 | % |
(1) The average balance of loans is calculated net of deferred loan fees/cost but would include non-accrual loans, if any, with a zero yield. Loan fees net of amortized costs included in total net income were approximately $21,000 for the three-month period ended March 31, 2010. Loan fees net of amortized costs included in total net income were approximately $6,000 for the three-month period ended March 31, 2009.
The table below sets forth changes for the comparable three-month periods ended March 31, 2010 and March 31, 2009 for average interest-earning assets, average interest-bearing liabilities, and their respective rates:
VARIANCE IN BALANCES AND RATES
|
| Average Balance |
|
|
| Average Yield/Rate |
|
|
| |||||||||
|
| for the three months ended |
|
|
| for the three months ended |
|
|
| |||||||||
|
| March 31, |
| Variance |
| March 31, |
|
|
| |||||||||
(dollars in thousands) |
| 2010 |
| 2009 |
| dollar |
| percent |
| 2010 |
| 2009 |
| Variance |
| |||
|
| (Unaudited) |
| |||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Federal funds sold |
| $ | 27,077 |
| $ | 9,796 |
| $ | 17,281 |
| 176.41 | % | 0.24 | % | 0.46 | % | -0.22 | % |
Deposits with other financial institutions |
| 2,876 |
| 7,943 |
| (5,067 | ) | -63.79 | % | 1.55 | % | 2.20 | % | -0.65 | % | |||
Investments |
| 20,207 |
| 8,268 |
| 11,939 |
| 144.40 | % | 6.02 | % | 5.00 | % | 1.02 | % | |||
Loans |
| 80,579 |
| 56,778 |
| 23,801 |
| 41.92 | % | 6.29 | % | 5.68 | % | 0.61 | % | |||
Total interest-earning assets |
| $ | 130,739 |
| $ | 82,785 |
| $ | 47,954 |
| 57.93 | % | 4.89 | % | 4.66 | % | 0.23 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest-bearing demand |
| $ | 2,570 |
| $ | 1,753 |
| $ | 817 |
| 46.61 | % | 0.10 | % | 0.10 | % | 0.00 | % |
Savings and money market |
| 24,825 |
| 10,091 |
| 14,734 |
| 146.01 | % | 1.06 | % | 1.33 | % | -0.27 | % | |||
Certificates of deposit |
| 46,643 |
| 23,060 |
| 23,583 |
| 102.27 | % | 1.51 | % | 2.36 | % | -0.85 | % | |||
FHLB advances |
| 4,750 |
| 4,633 |
| 117 |
| 0.00 | % | 4.13 | % | 4.23 | % | -0.10 | % | |||
Total interest-bearing liabilities |
| $ | 78,788 |
| $ | 39,537 |
| $ | 39,251 |
| 99.28 | % | 1.49 | % | 2.22 | % | -0.73 | % |
A volume and rate variance table is provided below which sets forth the dollar differences in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the comparable three-month periods ended March 31, 2010 and March 31, 2009:
|
| For the three months ended |
| |||||||
|
| March 31, 2010 over 2009 |
| |||||||
(dollars in thousands) |
| Volume |
| Rate |
| Total |
| |||
|
| (Unaudited) |
| |||||||
Interest income: |
|
|
|
|
|
|
| |||
Federal funds sold |
| $ | 19 |
| $ | (14 | ) | $ | 5 |
|
Deposits with other financial institutions |
| (27 | ) | (5 | ) | (32 | ) | |||
Investments |
| 147 |
| 51 |
| 198 |
| |||
Loans |
| 333 |
| 121 |
| 454 |
| |||
Net increase (decrease) |
| 472 |
| 153 |
| 625 |
| |||
|
|
|
|
|
|
|
| |||
Interest expense: |
|
|
|
|
|
|
| |||
Interest-bearing demand |
| — |
| — |
| — |
| |||
Savings and money market |
| 48 |
| (16 | ) | 32 |
| |||
Certificates of deposit |
| 138 |
| (98 | ) | 40 |
| |||
FHLB advances |
| 1 |
| (1 | ) | — |
| |||
Net increase (decrease) |
| 187 |
| (115 | ) | 72 |
| |||
Total net increase (decrease) |
| $ | 285 |
| $ | 268 |
| $ | 553 |
|
A review of the above tables shows that the overall increase in net interest income of approximately $553,000 between the two comparative quarters ended at March 31, 2010 and March 31, 2009 is the result of several factors.
Among the most significant factors in the increase in net interest income is the overall growth in earning assets, up approximately $48.0 million or 58.0% between March 31, 2010 and March 31, 2009.
This increase was primarily a result of loan growth ($23.8 million) reflecting 49.6% of the total. The percentage of average loan dollars outstanding, as a percentage of interest-earning assets, has softened slightly from 68.6% as of March 31, 2009 to 61.6% as of March 31, 2010. The higher outstanding volume of loans between the first quarter periods would have resulted in an increase of approximately $333,000 in interest income. However, the actual amount of interest income earned was augmented by approximately $121,000 due to the increase in the overall effective yield on the loan portfolio. The overall yield on outstanding loans increased from 5.68% for the three-month period ended March 31, 2009 to 6.29% for the three-month period ended March 31, 2010.
The Bank continues to have seven significant deposit relationships, some of which are with related parties, which total, as of March 31, 2010, approximately $36.1 million or 34.2% of the Bank’s deposits. Included in these deposits are funds subject to unscheduled withdrawals, mandating the Bank to hold funds in cash or cash equivalents at a higher level to provide necessary liquidity. The amount of Fed funds sold as a percentage of all interest-earning assets has increased from 11.8% to 20.7% for the comparable three-month periods ended in March 31, 2009 and March 31, 2010, with the average balance in Fed funds sold increasing by approximately $17.3 million. This higher outstanding volume would have resulted in an increase in interest income of approximately $19,000. However the historically low effective yield on this category, which declined by an additional 22 basis points from an effective yield of just 0.46% for the three-month period ended March 31, 2009 to 0.24% for the three-month period ended March 31, 2010 almost completely offset any positive benefit by reducing the potential interest income by approximately $14,000.
The Bank, in order to improve the overall yield on interest-earning assets, has placed additional funds into its available-for-sale investment category. The higher average outstanding volume of funds invested of
approximately $11.9 million between the first quarterly periods would have resulted in an increase of approximately $147,000 in interest income. This, coupled with improved yields within the investment category, added approximately $51,000 to the amount of interest on investments, bringing the total to $198,000. The effective yield on investments increased by 102 basis points from 5.00% for the three-month period ended March 31, 2009 to 6.02% for the comparable three-month period ended March 31, 2010.
The change in the mix of interest-yielding assets coupled with the overall growth resulted in the increase of interest income of approximately $625,000, with approximately $472,000 due to volume increases, which more than fully offset the result of the general market interest rate decline. More aggressive pricing on loans in addition to the aforementioned improvement in investment yields augment the interest income increase related to the volume variance, adding approximately $153,000 to interest income during the three-month period ended March 31, 2010 over the comparable three-month period ended March 31, 2009. While general interest rates have remained at historical lows since the first quarter of 2009, the average effective yield on the Company’s earning assets have shown a modest improvement by approximately 23 basis points as a result primarily of the aforementioned change in loan pricing.
Interest expense increased by only $72,000, with increases in balances outstanding on interest-bearing liabilities being partially offset by the savings available on the repricing associated with the overall declining market rates.
The increase in interest expense due to the change in outstanding average interest-bearing liabilities was $187,000 with average outstanding interest-bearing balances almost doubling from the balance for the three-month period ended March 31, 2009 of approximately $39.5 million to $78.8 million.
The increase in interest expense due to the change in overall effective interest rates resulted in a savings of approximately $115,000 with the average rates declining by 73 basis points, from 2.22% for the three-month period ended March 31, 2009 to approximately 1.49%.
The rate/volume table reflects that two of the interest-bearing categories, Interest-bearing Demand and Federal Home Loan Bank Advances, had no effect on the increase in the interest expense between the comparable periods.
For the comparable three-month periods ended March 31, 2010 and March 31, 2009, the average balance in Certificate of Deposits increased by approximately $23.6 million. The higher outstanding volume in certificates of deposits would have resulted in an increase of expense of approximately $138,000. However the significant decline in the effective yield on this category by 85 basis points, from an effective yield of 2.36% for the three-month period ended March 31, 2009 to 1.51% for the three-month period ended March 31, 2010, offset much of the additional expense by reducing the potential interest cost by approximately $98,000.
A similar result occurred in the Savings and Money Market category. For the comparable three-month periods ended March 31, 2010 and March 31, 2009, the average balance in Savings and Money Market deposits increased by approximately $14.7 million. The higher outstanding volume in this category would have resulted in an increase of expense of approximately $48,000. However the decline in the effective yield on this category by 27 basis points from 1.33% for the three-month period ended March 31, 2009 to 1.06% for the three-month period ended March 31, 2010, offset about one-third of the additional expense and reduced the potential interest cost by approximately $16,000.
Provision for Loan Losses
The Company made provisions for loan losses of $370,000 for the three-month period ended March 31, 2010, compared to $174,000 for the comparable three-month period ended March 31, 2009. These provisions were determined based upon the periodic credit review of the loan portfolio, consideration of past loan loss experience, current and predicted economic conditions, and other pertinent factors. For further analysis of the adequacy of the loan loss reserve, see Asset Quality and Allowance for Loan Losses.
Non-Interest Income
Non-interest income for the three-month period ended March 31, 2010 consists of fees for two sources, the Bank and BOMC. Bank-related fee income increased by 300% from approximately $17,000 for the three-month period ended March 31, 2009 to $69,000 for the three-month period ended March 31, 2010.
Non-bank related income totaled approximately $1.7 million and was generated by BOMC for the first quarter of 2010. There are no comparable numbers for the first quarter of 2009, as BOMC was not affiliated with the Company until October 1, 2009.
The revenue from BOMC came from three primary sources. The largest of the sources is from riskless institutional trading in bonds and totaled approximately $987,000 during the first quarter of 2010. BOMC also generated income from facilitating trades in whole loans between institutional clients. The firm generated approximately $259,000 during the first quarter of 2010 associated with that aspect of the business. A third source of revenue came from consulting services regarding evaluation and packaging of other institutions’ bond portfolios. During the first quarter of 2010, BOMC earned approximately $429,000 in this activity.
Non-Interest Expense
The following table sets forth changes for the two comparable three-month periods ending March 31, 2010 and March 31, 2009, allowing comparisons between these two quarters:
|
| For the three months ended |
|
|
|
|
| |||||
|
| March, 31, |
|
|
| |||||||
|
| 2010 |
| 2009 |
|
|
|
|
| |||
|
| (dollars in thousands) |
| Variance |
| |||||||
|
| (Unaudited) |
| Dollars |
| Percent |
| |||||
Compensation and benefits |
| $ | 2,575 |
| $ | 1,015 |
| $ | 1,560 |
| 153.7 | % |
Professional expenses |
| 483 |
| 340 |
| 143 |
| 42.1 | % | |||
Occupancy and equipment |
| 273 |
| 172 |
| 101 |
| 58.7 | % | |||
Technology and communication |
| 273 |
| 137 |
| 136 |
| 99.3 | % | |||
Other non-interest expenses |
| 298 |
| 147 |
| 151 |
| 102.7 | % | |||
Total non-interest expenses |
| $ | 3,902 |
| $ | 1,811 |
| $ | 2,091 |
| 115.5 | % |
The differences in expense between the first quarters of 2010 and 2009 can be primarily attributed to the following:
· Compensation and benefits increases associated with approximately 15 employees for BOMC not present in the first quarter of 2009, which totaled approximately $1,002,000 and five (5) employees in the Bancorp also not present in the first quarter of 2009, which totaled approximately $556,000.
· Costs for professional services associated with the transition in management including recruiting and legal fees of approximately $140,000.
· Costs associated with consulting and accounting services required by BOMC accounted for approximately $150,000.
· Costs associated with increase in the occupancy, furniture and equipment costs for both BOMC and Bancorp not present in the first quarter of 2009. Of the increase of approximately $101,000, 72% is connected with BOMC and 21% originated in Bancorp.
· Data processing costs associated with the BOMC operating requirements accounted for 100% of the noted increase in technology and communication expenses.
· Included with the increased expense noted in the other category are increased FDIC insurance assessments, the payment of fees to Company directors and other costs associated with the activation of activities at the holding company level and entrance into business by BOMC.
FINANCIAL CONDITION
The Company’s decrease in total assets level to $134.4 million as of March 31, 2010 represents an 11.8% decline, or approximately $18.0 million, from the total assets level of $152.3 million as of December 31, 2009. The decline is centered in overnight Federal funds sold, which were temporarily augmented by both brokered and non-brokered non-locally generated deposits and secured overnight FHLB advances. Asset balances as of December 31, 2009 had been augmented to facilitate potential acquisition opportunities and increase certain borrowing levels presently tied to quarter-end asset totals.
Investments
Total investments increased by approximately $9.9 million from $13.9 million as of December 31, 2009 to $23.7 million as of March 31, 2010. The following schedule provides an overview of the types of investments on the Company’s books at the date noted and at their carrying value in thousands of dollars:
|
| March 31, 2010 (unaudited) |
| December 31, 2009 (audited) |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
(dollars in thousands) |
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
Municipal obligations |
| $ | 495 |
| 2.1 | % | $ | 494 |
| 3.6 | % |
Non-mortgage-backed US Government Agency obligations |
| 2,647 |
| 11.1 | % | 2,626 |
| 19.0 | % | ||
Mortgage-backed securities |
| 6,428 |
| 27.1 | % | 7,328 |
| 52.9 | % | ||
Asset-backed securities |
| 14,175 |
| 59.7 | % | 3,407 |
| 24.6 | % | ||
Total investments |
| $ | 23,745 |
| 100.0 | % | $ | 13,855 |
| 100.0 | % |
The expected weighted life of the Company’s investment portfolio is approximately four and a half years.
Additional information regarding the composition, maturities, and yields of the security portfolio as of March 31, 2010 is found in Note 4 of the Company’s financial statements included within this document.
Loans
Total gross loans as of March 31, 2010 were $85.4 million, an increase of approximately $5.2 million from $80.1 million at December 31, 2009. Outstanding loan balances increased in all categories, with the most monetary growth occurring in real estate construction loans, where the total grew by approximately $2.0 million or 35.6%.
The table below sets forth the changes from December 31, 2009 to March 31, 2010 in the composition of the loan portfolio:
|
| March 31, 2010 (unaudited) |
| December 31, 2009 (audited) |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
(unaudited) |
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
|
| (Dollars in Thousands) |
| (Dollars in Thousands) |
| ||||||
Commercial loans |
| $ | 27,908 |
| 32.6 | % | $ | 26,520 |
| 33.0 | % |
Real estate loans |
| 42,106 |
| 49.2 | % | 40,566 |
| 50.5 | % | ||
Real estate - construction |
| 7,668 |
| 9.0 | % | 5,656 |
| 7.0 | % | ||
Other loans |
| 7,838 |
| 9.2 | % | 7,516 |
| 9.4 | % | ||
Total Loans |
| 85,520 |
| 100.0 | % | 80,258 |
| 100.0 | % | ||
|
|
|
|
|
|
|
|
|
| ||
Add: Purchase Premium |
| 27 |
|
|
| 30 |
|
|
| ||
Add: Unamortized Costs |
| 78 |
|
|
| 81 |
|
|
| ||
Less: Deferred Fees |
| (271 | ) |
|
| (253 | ) |
|
| ||
Less – Allowance for loan losses |
| (1,484 | ) |
|
| (1,202 | ) |
|
| ||
Net loans |
| $ | 83,870 |
|
|
| $ | 78,914 |
|
|
|
Of the Bank’s total loans outstanding as of March 31, 2010, 27.0% were due in one year or less, 35.4% were due in one to five years, and 37.6% were due after five years. As is customary in the banking industry, loans can be renewed by mutual agreement between the borrower and the Bank. Because we are unable to accurately estimate the extent to which our borrowers will renew their loans, the following table is based on contractual maturities, reflecting gross outstanding loans without consideration of purchase premium, deferred fees or deferred costs.
Loan Maturity Schedule as of March 31, 2010
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| Maturing |
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| ||||
|
| Within One |
| One to Five |
| After Five |
|
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| ||||
(unaudited) |
| Year |
| Years |
| Years |
| Total |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
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Commercial |
| $ | 14,150 |
| $ | 11,758 |
| $ | 2,000 |
| $ | 27,908 |
|
Real Estate |
| — |
| 16,631 |
| 25,475 |
| 42,106 |
| ||||
Real Estate-Construction |
| 6,796 |
| 872 |
| — |
| 7,668 |
| ||||
Other Loans |
| 2,150 |
| 1,006 |
| 4,682 |
| 7,838 |
| ||||
Total |
| $ | 23,096 |
| $ | 30,267 |
| $ | 32,157 |
| $ | 85,520 |
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| ||||
Loans with pre-determined interest rates |
| $ | 459 |
| $ | 13,320 |
| $ | 2,397 |
| $ | 16,176 |
|
Loans with floating or adjustable rates |
| 22,637 |
| 16,947 |
| 29,760 |
| 69,344 |
| ||||
Total |
| $ | 23,096 |
| $ | 30,267 |
| $ | 32,157 |
| $ | 85,520 |
|
Of the gross loan dollars outstanding as of March 31, 2010, approximately 81.1% had adjustable rates. 62.3% of the loan dollars of these adjustable rate loans have interest rates tied to the prime rate and are subject to changes in the rate index immediately when the prime rate is changed.
The balance of the adjustable rate loans are tied to other indices subject to periodic adjustment prior to the contract maturity.
Commercial Loans
The Bank offers a variety of commercial loans, including secured and unsecured term and revolving lines of credit, equipment loans and accounts receivable loans. As of March 31, 2010, approximately 86.8% of
the commercial loans had adjustable rates. The Bank underwrites secured term loans and revolving lines of credit primarily on the basis of a borrower’s cash flow and the ability to service the debt, although we rely on the liquidation of the underlying collateral as a secondary payment source, where applicable. Should the borrower default and the Bank forecloses on the assets, we may not be able to recover the full amount of the loan.
Real Estate/ Construction Loans
The Bank’s real estate loans are secured primarily by commercial property, including a significant percentage in multi-family complexes. Approximately 75.7% of the real estate loans are adjustable during the term of the loan. Approximately 51.2% of the real estate loans have a remaining maturity between five and ten years. As of March 31, 2010, the weighted average ratio of the original loan extension to the underlying value of the property was approximately 47% with weighted average debt service coverage of 1.97. No individual loan to value ratio exceeded 75%.
Other Loans
The Bank offers other types of loans, including home equity lines of credit. Home equity lines of credit have adjustable rates and provide the borrower with a line of credit in an amount which does not exceed 80% of the appraised value of the borrower’s property at the time of origination.
Off-Balance Sheet Credit Commitments and Contingent Obligations
We enter into and may issue financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of our customers. Since inception through March 31, 2010, these had been limited to undisbursed commitments to extend credit to both businesses and individuals. Beginning with the second quarter of 2008, the Bank issued several letters of credit for the first time. The outstanding balance was approximately $120,000 as of March 31, 2010. All commitments noted above were associated with loans and were therefore subject to the same credit underwriting policies and practices as those used for the loans reflected in the financial statements. When deemed advisable, the Bank obtains collateral to support such commitments.
Commitments to extend credit are agreements to lend up to a specific amount to a customer as long as there is no violation of any condition in the contract. Commitments generally have fixed expiration dates or other termination clauses, which may require payment of a fee. Since we expect some commitments to expire without being drawn upon, the total commitment amounts do not necessarily represent future loans. There was approximately $26.2 million in undisbursed loan commitments as of March 31, 2010, an increase of approximately $321,000 or 1.2% from the December 31, 2009 amount of approximately $25.8 million.
Non-Performing Assets
Non-performing assets consist of non-performing loans and other real estate owned (“OREO”). Non-performing loans are (i) loans which have been placed on non-accrual status; (ii) loans which are contractually past due 90 days or more with respect to principal or interest, have not been restructured or placed on non-accrual status, and are accruing interest; and (iii) troubled debt restructures ( “TDRs”). OREO is comprised of real estate acquired in satisfaction of the loan either through foreclosure or deed in lieu of foreclosure.
The Bank had no non-performing assets as of March 31, 2010 and December 31, 2009.
Deposits and Borrowed Funds
Deposits are the Bank’s primary source of funds. The following table sets forth the amount of deposits outstanding by category at March 31, 2010 and December 31, 2009, and the net changes between the two periods.
|
| March 31, |
| December 31, |
| Variance |
| |||||
(dollars in thousands) |
| 2010 |
| 2009 |
| Dollars |
| Percent |
| |||
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| (unaudited) |
| (audited) |
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| |||
Deposit Classifications: |
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| |||
Non-interest-bearing deposits |
| $ | 30,810 |
| $ | 29,647 |
| $ | 1,163 |
| 3.92 | % |
Interest-bearing demand |
| 2,610 |
| 4,026 |
| (1,416 | ) | -35.17 | % | |||
Savings and money market |
| 25,530 |
| 17,900 |
| 7,630 |
| 42.63 | % | |||
Certificate of deposit $100,000 and over |
| 37,105 |
| 54,352 |
| (17,247 | ) | -31.73 | % | |||
Certificate of deposit less than $100,000 |
| 4,966 |
| 4,995 |
| (29 | ) | -0.58 | % | |||
Total deposits |
| $ | 101,021 |
| $ | 110,920 |
| $ | (9,899 | ) | -8.92 | % |
As of March 31, 2010, 30.5% of the Company’s deposits were non-interest-bearing demand deposits, an increase from December 31, 2009 at 26.7%. At March 31, 2010, the Bank held no funds in ‘reciprocal brokered funds’ or one-way-buy under the CDARS program. Most funds have been placed with the Bank by local depositors at competitive rates within the Bank’s marketing area. While the goal of the Bank is to fund credit commitments using local funding sources, it is anticipated that some of the future funding sources may include additional funds both brokered and non-brokered.
The outflow of deposits in the Certificate of Deposits of $100,000 and over from the aforementioned planned non-renewal of non-local, non-brokered deposits resulting in a decline in the category by approximately $2.8 million from approximately $21.1 million as of December 31, 2010 to approximately $18.3 million as of March 31, 2010 coupled with the returned of $16.5 million of ‘one-way-buy’ funds from the CDARS program.
The growth in Savings and Money-Markets deposits stems primarily from significant deposits from a single customer whose balances fluctuate with business needs.
The Analysis of Net Interest Income, found within this document, summarizes the distribution of the average deposit balances and the average rates paid on deposits during the Bank’s two comparative quarters ended March 31, 2010 and 2009.
The following table shows the maturity of all of the Bank’s time deposits as of March 31, 2010:
Maturities |
| Amounts |
| |
(unaudited) |
| (in thousands) |
| |
Three months or less |
| $ | 21,184 |
|
Over three and through twelve months |
| 18,054 |
| |
Over twelve months |
| 2,833 |
| |
Total |
| $ | 42,071 |
|
The Bank has established borrowing lines with the Federal Home Loan Bank (“FHLB”). At December 31, 2009, the Bank had borrowed $12.0 million from the FHLB collateralized by both loans and securities. The average rate that was paid on FHLB borrowings was 4.36% for the quarter ended December 31, 2009. At March 31, 2010, the Bank had borrowed $4.5 million from the FHLB collateralized by securities. The average rate that was paid on FHLB borrowings was 4.21% for the
quarter ended March 31, 2010.
Asset Quality and Allowance for Loan Losses
The Company maintains an allowance for loan losses (“ALLL”) to provide for potential losses in its loan portfolio. Additions to the allowance are made by charges to operating expense in the form of a provision for loan losses. All loans that are judged to be uncollectible will be charged against the allowance, while recoveries would be credited to the allowance. We have instituted loan policies designed primarily for internal use, to adequately evaluate and assess the analysis of the risk factors associated with the Bank’s loan portfolio, to enable us to assess such risk factors prior to granting new loans and to assess the sufficiency of the allowance. We conduct an evaluation on the loan portfolio monthly.
The calculation of the adequacy of the ALLL necessarily includes estimates by management applied to known loan portfolio elements. We employ a 10-point loan grading system in an effort to more accurately track the inherent quality of the loan portfolio. The 10-point system assigns a value of “1” or “2” to loans that are substantially risk free. Modest, average and acceptable risk loans are assigned point values of “3”, “4”, and “5”, respectively. Loans on the watch list are assigned a point value of “6.” Point values of “7,” “8,” “9” and “10” are assigned, respectively, to loans classified as special mention, substandard, doubtful and loss. Using these risk factors, management continues the analysis of the general reserves applying quantitative factors based upon different risk scenarios.
In addition, management considers other trends that are qualitative relative to our marketplace, demographic trends, the risk rating of the loan portfolios as discussed above, amounts and trends in non-performing assets and concentration factors.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can trigger mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a material effect on the Bank’s financial statements and operations. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accepted accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators such as components, risk-weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require both the Company and the Bank to maintain the following minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital to risk-weighted assets and Tier 1 Capital to average assets. As of March 31, 2010, the Company and the Bank exceeded all applicable capital adequacy requirements.
Under the Federal Reserve Board’s guidelines, Bancorp is a “small bank holding company,” and thus qualifies for an exemption from the consolidated risk-based and leverage capital adequacy guidelines applicable to bank holding companies with assets of $500 million or more. However, while not required to do so under the Federal Reserve Board’s capital adequacy guidelines, the Company still maintained levels of capital on a consolidated basis required to be considered “well capitalized” under generally applicable regulatory guidelines as of March 31, 2010.
The following table sets forth the Company’s and the Bank’s regulatory capital ratios as of March 31, 2010:
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|
| To Be Adequately |
| To Be Well |
| |||||||
|
| Actual |
| Capitalized |
| Capitalized |
| |||||||||
(unaudited) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (in thousands) |
| |||||||||||||
Company |
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| |||
Total Capital (risk-weighted assets) |
| $ | 28,194 |
| 29.6 | % | $ | 7,628 |
| 8 | % | $ | 9,535 |
| 10 | % |
Tier 1 Capital (risk-weighted assets) |
| $ | 26,998 |
| 28.3 | % | $ | 3,814 |
| 4 | % | $ | 5,721 |
| 6 | % |
Tier 1 Capital (average assets) |
| $ | 26,998 |
| 19.7 | % | $ | 5,484 |
| 4 | % | $ | 6,855 |
| 5 | % |
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| |||
Bank |
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| |||
Total Capital (risk-weighted assets) |
| $ | 22,986 |
| 24.5 | % | $ | 7,514 |
| 8 | % | $ | 9,392 |
| 10 | % |
Tier 1 Capital (risk-weighted assets) |
| $ | 21,808 |
| 23.2 | % | $ | 3,757 |
| 4 | % | $ | 5,635 |
| 6 | % |
Tier 1 Capital (average assets) |
| $ | 21,808 |
| 16.0 | % | $ | 5,442 |
| 4 | % | $ | 6,803 |
| 5 | % |
Liquidity and Liquidity Management
Liquidity management for banks requires that funds always be available to pay anticipated deposit withdrawals, fund loan commitments, and meet other commitments on a timely and cost-effective basis. The acquisition of deposits is our primary source of funds. This relatively stable and low-cost source of funds has, along with the balances in stockholder’s equity, provided substantially all of the funding since the Bank’s inception.
We also have liquidity as a net seller of overnight federal funds at a level that would cushion in part any unexpected increase in demand for loans or decrease in funds deposited. During the three-month period ended March 31, 2010, we had an average balance of $27.1 million in overnight federal funds sold representing approximately 20% of our average assets. This ratio is far above the minimum guideline of 3% established in the Bank’s liquidity policy.
To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, federal funds and investment securities. As of December 31, 2009, liquid assets (including cash, federal funds sold, interest-bearing deposits in other financial institutions and available-for-sale investment securities that have not been pledged as collateral), as a percentage of the Company’s deposits, were 57%. As of March 31, 2010, liquid assets as a percentage of the Company’s deposits, although declining, remained acceptable at 40% due primarily to the reduction in the Federal funds sold.
While liquidity was not a major concern in either 2010 or 2009, management has established and is seeking to establish secondary sources of liquidity. The Bank maintains lines of credit totaling $6 million with two correspondent banks for the purchase of overnight federal funds. The lines are subject to availability of funds and have restrictions as to the number of days used during defined periods of time. Another method that the Bank currently has available for acquiring additional deposits is through the acceptance of “brokered deposits” (defined to include not only deposits acquired with deposit brokers, but also deposits bearing effective yield more than 75 basis points above the prevailing market rates), typically attracting large certificates of deposits at high interest rates. The Bank had a no “brokered deposits” as of March 31, 2010 but held $16.5 million as of December 31, 2009, all of which was returned by the end of January 2010. The Bank has established a credit line with the Federal Home Loan Bank of San Francisco and has outstanding, as of March 31, 2010, a five-year fixed rate advance of $4.5 million at 4.38%, which was established to stabilize the funding source of certain longer-term assets.
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
The Company’s market risk results primarily from two sources, credit risk and interest rate risk. Risk management is an important part of our operations and a key element of our overall financial results. Banking regulators, in recent years, have emphasized appropriate risk management, prompting banks to have adequate systems to identify, monitor and manage risks. The Bank has both board and management committees who meet on a regular basis to oversee risk functions. The Company’s Audit Committee is responsible for overseeing internal auditing functions and for interfacing with the Company’s external auditors. The Bank’s Loan Committee establishes loan policy, reviews loans made by management and approves loans in excess of management’s lending authority. This committee is also responsible for the review of any problem credits and assessing the adequacy of our allowance for loan losses. The Asset/Liability Committee reviews investments made by management, and monitors compliance with investment, interest rate risk and liquidity policies.
Credit Risk
Credit risk generally arises as a result of the Bank’s lending activities but may also be present in the Bank’s investment functions. To manage the credit risk inherent in our lending activities, we rely on the adherence to underwriting standards and loan policies, as well as our allowance for loan losses. The Bank employs frequent monitoring procedures and takes prompt corrective action when necessary. Additionally, the Bank’s loan portfolio and the ALLL methodology are expected to be examined on a regular basis by both regulatory agencies and independent loan review professionals.
Interest Rate Risk
Interest rate risk is the exposure of a bank’s financial condition and the results of operations to adverse movements in interest rates. Movements in interest rates affect both the generation of earnings as well as the market value of assets and liabilities. Interest rate risk results from more than just the differences in the maturity or repricing opportunities of interest-earning assets and interest-bearing liabilities. Other factors that affect the interest rate risk include changes in the slope of the yield curves over time, imperfect correlation in the adjustment of rates earned and paid on different instruments with similar characteristics, interest-rate-related embedded options such as loan floors, ceilings, and prepayments, as well as callable investment securities and early withdrawal of time deposits.
The potential impact of interest rate risk is significant because of the liquidity and capital adequacy consequences that reduced earnings or losses may imply. While we recognize and accept that interest rate risk is a routine part of banking operations, the objective of interest rate risk management is to measure, monitor and control exposure of net interest income to excessive risks associated with interest rate movements.
Understanding the inherent weakness in traditional gap analysis to properly measure interest rate risk, the Bank employs modeling techniques which measure the affect of interest rate shocks on the net interest income and the market value of equity on the Bank’s existing mix of assets and liabilities.
The results of the model’s simulations on the potential loss of net interest income as of March 31, 2010 reflect the following:
Earnings at Risk |
| ||||
(unaudited) |
|
|
|
|
|
Rate |
| Maximum |
| % (Loss) Gain |
|
Shock |
| Policy |
| in Net Interest |
|
(in basis points) |
| Guideline |
| Income |
|
-300 |
| -15 | % | -12.5 | % |
-200 |
| -10 | % | -8.0 | % |
-100 |
| -5 | % | -3.6 | % |
+100 |
| -5 | % | 3.3 | % |
+200 |
| -10 | % | 6.5 | % |
+300 |
| -15 | % | 9.8 | % |
The method employed in rate shocking the earnings 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, 2010, the Bank’s interest rate risk exposure as measured by rate movement on net interest income is within policy guidelines.
The results of the model’s simulations on the potential loss of the Company’s equity as of March 31, 2010 reflect the following:
Market Value of Equity |
| ||||
(unaudited) |
|
|
|
|
|
Rate |
| Maximum |
| % (Loss) Gain |
|
Shock |
| Policy |
| in Market |
|
(in basis points) |
| Guideline |
| Value of Equity |
|
-300 |
| -30 | % | -0.4 | % |
-200 |
| -20 | % | -1.9 | % |
-100 |
| -10 | % | -1.0 | % |
+100 |
| -10 | % | -1.9 | % |
+200 |
| -20 | % | -3.3 | % |
+300 |
| -30 | % | -3.9 | % |
The method employed in rate shocking the market value of equity is referred to as “regulatory shock”, i.e., changing the indicated rates instantaneously.
Based upon the model simulation as of March 31, 2010, the Bank interest rate exposure as measured by rate movement on the market value of the Bank’s equity is within policy guidelines.
Item 4T — Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well-designed and operated, can provide reasonable assurance
only of achieving the desired control objectives, and management necessarily is required to apply its judgment in weighing the costs and benefits of possible new or different controls and procedures. Limitations are inherent in all control systems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within the Company have been detected.
As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report, the Company, under the supervision and with participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date.
During the quarter ended March 31, 2010, there were no significant changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is not a party to any material legal proceedings.
As a smaller reporting company, the Company is not required to provide the information required by this item as a part of the Form 10-Q.
Item 2 — Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item 3 — Defaults upon Senior Securities
Not Applicable.
Item 4 — (Removed and Reserved)
Exhibit |
| Index to Exhibits |
10.1 |
| Manhattan Bancorp 2010 Equity Incentive Plan (1) |
10.2 |
| Employment Agreement dated March 1, 2010 by and among Manhattan Bancorp, Bank of Manhattan, N.A. and Deepak Kumar (2) |
31.1 |
| Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended |
31.2 |
| Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended |
32.1 |
| Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
| Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as amended pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) The information required by this exhibit is incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on March 30, 2010.
(2) The information required by this exhibit is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company filed on March 30, 2010.
Table of Contents
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| MANHATTAN BANCORP |
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Date: | May 13, 2010 | /s/ Deepak Kumar |
|
| Deepak Kumar |
|
| President and |
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| Chief Executive Officer |
|
| (Principal Executive Officer) |
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|
Date: | May 13, 2010 | /s/ Dean Fletcher |
|
| Dean Fletcher |
|
| Executive Vice President and |
|
| Chief Financial Officer |
|
| (Principal Financial and |
|
| Accounting Officer) |