United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q/A
(Amendment No. 1)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Commission File Number 000-54116
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, including area code: (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 S 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). S 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 (check one):
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 July 31, 2011, 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 JUNE 30, 2011
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Item 1. | FINANCIAL STATEMENTS |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21 | |
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38 |
Manhattan Bancorp (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to amend its Quarterly Report on Form 10-Q for the period ended June 30, 2011, as filed with the Securities and Exchange Commission on August 19, 2011 (the “Original Filing”). The purpose of this Amendment is to correct certain errors that resulted primarily from the inclusion of the Company’s non-controlling interests in the calculation of the Company’s basic and diluted loss per share and book value per common share.
For the three and six month periods ended June 30, 2011, the Company had a net loss per basic and fully-diluted share of common stock of $0.40 and $0.76, respectively, as opposed to a net loss per basic and fully-diluted share of common stock of $0.44 and $0.83, respectively, as reported in the Original Filing. For the three month period ended June 30, 2010, the Company had a net loss per basic and fully-diluted share of common stock of $0.30, as opposed to a net loss per basic and fully-diluted share of common stock of $0.32, as reported in the Original Filing. As of June 30, 2011, the Company’s book value per common share was $5.33, as opposed to a book value per common share of $5.31, as reported in the Original Filing. As of June 30, 2010, the Company’s book value per common share was $6.49, as opposed to a book value per common share of $6.56, as reported in the Original Filing.
In addition, while the narrative in the Original Filing accurately stated the Company’s net interest margin and non-performing loans, the Company has identified certain errors with respect to these items in the financial highlights table on page 23 of the Original Filing. For the three and six month periods ended June 30, 2011, the Company had a net interest margin of 3.72% and 3.93%, respectively, as opposed to a net interest margin of 3.73% and 3.34%, respectively, as reported on page 23 of the Original Filing. For the six month period ended June 30, 2010, the Company had a net interest margin of 4.39%, as opposed to a net interest margin of 3.80%, as reported on page 23 of the Original Filing. As of June 30, 2011, the Company had non-performing loans of $2.0 million, as opposed to no non-performing loans as reported on page 23 of the Original Filing.
Except for the corrections described above, the information contained in the Original Filing is not amended hereby and shall be as set forth in the Original Filing. This Amendment continues to speak as of the date of the Original Filing and the Company has not updated the disclosure in this Amendment to speak to any later date. Currently-dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer have been included as exhibits to this Amendment.
PART I — FINANCIAL INFORMATION
Manhattan Bancorp and Subsidiaries
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| (Unaudited) |
| (Audited) |
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| June 30, 2011 |
| December 31, 2010 |
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Assets |
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Cash and due from banks |
| $ | 2,222,613 |
| $ | 1,845,808 |
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Federal funds sold/interest-bearing demand funds |
| 23,002,414 |
| 37,249,872 |
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Total cash and cash equivalents |
| 25,225,027 |
| 39,095,680 |
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Time deposits-other financial institutions |
| 2,123,000 |
| 2,868,000 |
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Investments securities-available for sale, at fair value |
| 16,761,166 |
| 14,875,814 |
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Investments securities-held to maturity |
| 499,337 |
| 497,521 |
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Loans held for sale, at lower of cost or fair market value |
| 5,267,256 |
| 3,512,417 |
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Loans |
| 81,150,818 |
| 89,236,265 |
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Allowance for loan losses |
| (1,833,244 | ) | (1,877,133 | ) | ||
Net loans |
| 79,317,574 |
| 87,359,132 |
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Property and equipment, net |
| 2,991,177 |
| 1,259,457 |
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Federal Home Loan Bank and Federal Reserve Bank stock |
| 1,072,350 |
| 1,155,600 |
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Investment in Limited Partnership Fund |
| 2,518,400 |
| — |
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Accrued interest receivable and other assets |
| 3,083,814 |
| 2,324,602 |
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Total assets |
| $ | 138,859,101 |
| $ | 152,948,223 |
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Liabilities and Stockholders’ Equity |
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Deposits: |
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Non-interest bearing demand |
| $ | 42,995,362 |
| $ | 52,893,770 |
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Interest bearing: |
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Demand |
| 4,192,101 |
| 3,165,267 |
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Savings and money market |
| 23,833,839 |
| 28,556,155 |
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Certificates of deposit equal to or greater than $100,000 |
| 35,942,857 |
| 33,934,109 |
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Certificates of deposit less than $100,000 |
| 3,132,931 |
| 3,696,069 |
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Total deposits |
| 110,097,090 |
| 122,245,370 |
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FHLB advances and other borrowings |
| 5,600,000 |
| 4,500,000 |
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Accrued interest payable and other liabilities |
| 1,969,273 |
| 1,872,820 |
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Total liabilities |
| 117,666,363 |
| 128,618,190 |
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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 2011 and 2010 |
| — |
| — |
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Common stock-no par value; 30,000,000 shares authorized; issued and outstanding, 3,987,631 in 2011 and 2010 |
| 38,977,282 |
| 38,977,282 |
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Additional paid in capital |
| 2,247,182 |
| 2,162,124 |
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Unrealized gain on available-for-sale securities |
| 415,459 |
| 334,773 |
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Accumulated deficit |
| (20,395,749 | ) | (17,347,612 | ) | ||
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Total Manhattan Bancorp stockholders’ equity |
| 21,244,174 |
| 24,126,567 |
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Non-controlling interest |
| (51,436 | ) | 203,466 |
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Total equity |
| 21,192,738 |
| 24,330,033 |
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Total liabilities and stockholders’ equity |
| $ | 138,859,101 |
| $ | 152,948,223 |
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The accompanying notes are an integral part of these financial statements.
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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| For the Three Months |
| For the Six Months |
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| ended June 30, |
| ended June 30, |
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| 2011 |
| 2010 |
| 2011 |
| 2010 |
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Interest income |
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Interest and fees on loans |
| $ | 1,238,840 |
| $ | 1,306,376 |
| $ | 2,510,371 |
| $ | 2,555,516 |
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Interest on investment securities |
| 207,270 |
| 336,766 |
| 397,407 |
| 636,652 |
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Interest on federal funds sold |
| 17,908 |
| 4,784 |
| 34,433 |
| 20,367 |
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Interest on time deposits-other financial institutions |
| 2,833 |
| 11,103 |
| 22,279 |
| 22,253 |
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Total interest income |
| 1,466,851 |
| 1,659,029 |
| 2,964,490 |
| 3,234,788 |
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Interest expense |
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NOW, money market and savings |
| 42,547 |
| 50,935 |
| 86,351 |
| 116,340 |
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Time deposits |
| 137,393 |
| 141,944 |
| 261,108 |
| 315,838 |
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FHLB advances and other borrowed funds |
| 62,961 |
| 49,832 |
| 112,236 |
| 99,132 |
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Total interest expense |
| 242,901 |
| 242,711 |
| 459,695 |
| 531,310 |
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Net interest income |
| 1,223,950 |
| 1,416,318 |
| 2,504,795 |
| 2,703,478 |
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Provision for loan losses |
| (50,000 | ) | 207,506 |
| (50,000 | ) | 577,506 |
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Net interest income after provision for loan losses |
| 1,273,950 |
| 1,208,812 |
| 2,554,795 |
| 2,125,972 |
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Non-interest income |
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Non-bank related income |
| 1,107,505 |
| 1,597,829 |
| 2,881,354 |
| 3,273,040 |
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Bank-related fees |
| 637,759 |
| 48,427 |
| 973,254 |
| 117,507 |
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Total non-interest income |
| 1,745,264 |
| 1,646,256 |
| 3,854,608 |
| 3,390,547 |
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Non-interest expense |
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Compensation and benefits |
| 3,276,006 |
| 2,831,023 |
| 6,813,931 |
| 5,406,168 |
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Occupancy and equipment |
| 242,774 |
| 265,334 |
| 656,719 |
| 538,724 |
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Technology and communication |
| 533,810 |
| 344,962 |
| 833,380 |
| 618,388 |
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Professional fees |
| 228,660 |
| 301,687 |
| 492,869 |
| 784,987 |
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Administrative expenses |
| 205,877 |
| 190,405 |
| 394,737 |
| 351,872 |
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Other non-interest expenses |
| 290,924 |
| 195,271 |
| 511,207 |
| 330,101 |
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Total non-interest expenses |
| 4,778,051 |
| 4,128,682 |
| 9,702,843 |
| 8,030,240 |
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Loss before income taxes |
| (1,758,837 | ) | (1,273,614 | ) | (3,293,440 | ) | (2,513,721 | ) | ||||
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Provision for income taxes |
| 4,399 |
| 2,400 |
| 9,599 |
| 3,200 |
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Net loss |
| $ | (1,763,236 | ) | $ | (1,276,014 | ) | $ | (3,303,039 | ) | $ | (2,516,921 | ) |
Less: Net (loss) gain attributable to the non-controlling interest |
| (160,798 | ) | (65,673 | ) | (254,902 | ) | 11,415 |
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Net loss attributable to Manhattan Bancorp |
| $ | (1,602,438 | ) | $ | (1,210,341 | ) | $ | (3,048,137 | ) | $ | (2,528,336 | ) |
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Weighted average number of shares outstanding (basic and diluted) |
| 3,987,631 |
| 3,987,631 |
| 3,987,631 |
| 3,987,631 |
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Basic and diluted loss per share |
| $ | (0.40 | ) | $ | (0.30 | ) | $ | (0.76 | ) | $ | (0.63 | ) |
The accompanying notes are an integral part of these financial statements.
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Changes in Total Equity
June 30, 2011 and 2010
(Unaudited)
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| Accumulated |
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| Additional |
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| Other |
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| Common Stock |
| Paid-in |
| Comprehensive |
| Accumulated |
| Comprehensive |
| Non-controlling |
| Total |
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| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Income (Loss) |
| Interest |
| Equity |
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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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| 284,181 |
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| 284,181 |
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Unrealized loss on investment securities |
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| 9,272 |
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| 9,272 |
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| 9,272 |
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Net (loss) gain |
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| (2,528,336 | ) | $ | (2,528,336 | ) |
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| $ | 11,415 |
| (2,516,921 | ) | |||||
Total comprehensive loss |
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| $ | (2,519,064 | ) |
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Balance at June 30, 2010 |
| 3,987,631 |
| $ | 38,977,282 |
| $ | 1,850,577 |
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| $ | (15,265,873 | ) | $ | 314,424 |
| $ | 302,325 |
| $ | 26,178,735 |
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Balance at December 31, 2010 |
| 3,987,631 |
| $ | 38,977,282 |
| $ | 2,162,124 |
| $ | — |
| $ | (17,347,612 | ) | $ | 334,773 |
| $ | 203,466 |
| $ | 24,330,033 |
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Share-based compensation expense |
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| 85,058 |
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| 85,058 |
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Unrealized gain on investment securities |
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| 80,686 |
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| 80,686 |
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| 80,686 |
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Net (loss) |
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| (3,048,137 | ) | (3,048,137 | ) |
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| (254,902 | ) | (3,303,039 | ) | |||||||
Total comprehensive loss |
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| $ | (2,967,451 | ) |
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Balance at June 30, 2011 |
| 3,987,631 |
| $ | 38,977,282 |
| $ | 2,247,182 |
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| $ | (20,395,749 | ) | $ | 415,459 |
| $ | (51,436 | ) | $ | 21,192,738 |
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The accompanying notes are an integral part of these financial statements.
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
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| For the Six Months |
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| ended June 30, |
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| 2011 |
| 2010 |
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Cash flows from operating activities |
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Net loss |
| $ | (3,303,039 | ) | $ | (2,516,921 | ) |
Loans originated or purchased for sale |
| (46,897,453 | ) | — |
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Proceeds from the sale of loans held for sale |
| 45,637,768 |
| — |
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Gain on sale of loans |
| (495,154 | ) | — |
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Fair value of interest rate lock commitments |
| (146,852 | ) | — |
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Fair value of forward sale commitments |
| (27,845 | ) | — |
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Net amortization of discounts and premiums on securities |
| (120,938 | ) | (228,777 | ) | ||
Depreciation and amortization |
| 164,301 |
| 209,134 |
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Provision for loan losses |
| (50,000 | ) | 577,506 |
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Share-based compensation |
| 85,058 |
| 284,181 |
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Decrease (increase) in accrued interest receivable and other assets |
| 15,687 |
| (291,378 | ) | ||
Increase in accrued interest payable and other liabilities |
| 96,453 |
| 783,553 |
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Net cash used in operating activities |
| (5,042,014 | ) | (1,182,702 | ) | ||
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Cash flows from investing activities |
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Net decrease (increase) in loans |
| 8,109,146 |
| (6,252,167 | ) | ||
Allowance for loan losses - recoveries |
| 6,111 |
| 13,715 |
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Decrease in time deposits - other financial institutions |
| 745,000 |
| 250,000 |
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Increase in deposit for securities clearing |
| (600,202 | ) | — |
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Proceeds from repayment and maturities of investment securities |
| 3,379,300 |
| 7,179,576 |
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Purchase of investments |
| (5,064,844 | ) | (13,814,798 | ) | ||
Investment in limited partnership fund |
| (2,518,400 | ) | — |
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Redemption of Federal Reserve and Federal Home Loan Bank stock |
| 83,250 |
| 68,700 |
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Purchase of premises and equipment |
| (1,919,720 | ) | (64,056 | ) | ||
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Net cash provided by (used in) investing activities |
| 2,219,641 |
| (12,619,030 | ) | ||
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Cash flows from financing activities |
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Net increase (decrease) in: |
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Demand deposits |
| (9,898,408 | ) | 49,968 |
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Interest bearing demand deposits |
| 1,026,834 |
| (683,179 | ) | ||
Savings and money market deposits |
| (4,722,316 | ) | 1,845,338 |
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Certificates of deposit equal to or greater than $100,000 |
| 2,008,748 |
| (25,194,578 | ) | ||
Certificates of deposit less than $100,000 |
| (563,138 | ) | (231,209 | ) | ||
Increase (decrease) in FHLB advances and other borrowings |
| 1,100,000 |
| (7,500,000 | ) | ||
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Net cash used in financing activities |
| (11,048,280 | ) | (31,713,660 | ) | ||
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Net decrease in cash and cash equivalents |
| (13,870,653 | ) | (45,515,392 | ) | ||
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Cash and cash equivalents at beginning of period |
| 39,095,680 |
| 51,455,292 |
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Cash and cash equivalents at end of period |
| $ | 25,225,027 |
| $ | 5,939,900 |
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Supplementary information: |
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Interest paid on deposits |
| $ | 349,938 |
| $ | 546,896 |
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Income taxes paid |
| $ | 8,800 |
| $ | 3,200 |
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The accompanying notes are an integral part of these financial statements.
MANHATTAN BANCORP
JUNE 30, 2011
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 BOM Capital, LLC (“BOMC,” formerly Bodi Capital LLC) a full-service mortgage-centric broker-dealer. On November 30, 2010, a recapitalization and restructuring was completed whereby a newly-formed limited liability company, Manhattan Capital Markets LLC (“MCM”), acquired 100% of BOMC in a multi-step transaction. MBFS holds a 70% interest in MCM. References throughout the remainder of this Quarterly Report on Form 10-Q to MCM shall be deemed to include BOMC and MCM’s other direct and indirect subsidiaries. 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 unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes contained in the Company’s 2010 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
The following accounting pronouncements applicable to the Company were issued or became effective during the six months ended June 30, 2011:
In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Receivables (Topic 31): Deferral of the Effective Date of Disclosures about Troubled Debt Restructuring in Update No. 2010-20. The ASU delayed the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 until the FASB completes its deliberations on what constitutes a troubled debt restructuring. The guidance is effective for interim and annual periods concurrent with the effective date of ASU 2011-02 (described below).
In April of 2011, the FASB issued ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The ASU requires that, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. ASU 2011-02 clarifies the guidance on whether a lender has granted a concession, and on the lender’s evaluation of whether a borrower is experiencing financial difficulties. ASU 2011-02 is effective for interim and annual periods ending after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the year. Thus, the Company was required to apply the new guidance to determine whether modifications that were not previously considered TDRs and that have occurred since the beginning of the year would now be considered TDRs. The Company did not identify any modifications that were not previously considered TDRs to be TDRs as a result of this new guidance.
In May of 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The primary purpose of the ASU is to improve the comparability of fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). The ASU does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. Certain amendments clarify the intent about the application of existing fair value measurement and disclosure requirements. The amendments in the ASU apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The ASU is to be applied prospectively for interim and annual periods beginning after December 15, 2011 and is not expected to have a material impact on the Company’s results of operations or financial position.
In June of 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, The ASU eliminates the option of presenting changes in other comprehensive income as part of the statement of changes in stockholders’ equity. All non-owner changes in stockholders’ equity must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements(s) where the components of net income and the components of other comprehensive income are presented. The revisions in the presentation of comprehensive income in the financial statements are effective for all annual and interim reporting periods beginning after December 15, 2011. The revisions should be applied retrospectively. Since ASU 2011-05 affects only disclosure requirements related to comprehensive income, the adoption of this update is not expected to have a material impact on the Company’s results of operations or financial position.
Note 3. INTEREST-EARNING ASSETS WITH OTHER FINANCIAL INSTITUTIONS
At June 30, 2011, the Company had interest-earning time deposits with other financial institutions of $2.1 million, with a weighted average yield of 1.22%, and a weighted average remaining life of approximately 4.4 months. At December 31, 2010, the Company had interest-earning time deposits with other financial institutions of $2.9 million, with a weighted average yield of 1.36%, and a weighted average remaining life of approximately 5.2 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 June 30, 2011, and December 31, 2010.
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
|
| Cost |
| Gains |
| Losses |
| Value |
| ||||
|
|
|
| (unaudited) |
|
|
| ||||||
|
|
|
| (in thousands) |
|
|
| ||||||
June 30, 2011 |
|
|
|
|
|
|
|
|
| ||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 1,500 |
| $ | — |
| $ | 7 |
| $ | 1,493 |
|
Mortgage-backed securities |
| 8,444 |
| 325 |
| — |
| 8,769 |
| ||||
Asset-backed securities |
| 6,402 |
| 153 |
| 56 |
| 6,499 |
| ||||
Total available-for-sale securities |
| $ | 16,346 |
| $ | 478 |
| $ | 63 |
| $ | 16,761 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
| ||||
State and municipal securities |
| $ | 499 |
| $ | 3 |
| $ | — |
| $ | 502 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
|
| Cost |
| Gains |
| Losses |
| Value |
| ||||
|
|
|
| (audited) |
|
|
| ||||||
|
|
|
| (in thousands) |
|
|
| ||||||
December 31, 2010 |
|
|
|
|
|
|
|
|
| ||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
| ||||
U.S. government and agency securities |
| $ | 1,500 |
| $ | — |
| $ | 51 |
| $ | 1,449 |
|
Mortgage-backed securities |
| 4,317 |
| 268 |
| — |
| 4,585 |
| ||||
Asset-backed securities |
| 8,724 |
| 195 |
| 77 |
| 8,842 |
| ||||
Total available-for-sale securities |
| $ | 14,541 |
| $ | 463 |
| $ | 128 |
| $ | 14,876 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
| ||||
State and municipal securities |
| $ | 498 |
| $ | 6 |
| $ | — |
| $ | 504 |
|
The fair value of these securities is based upon quoted market prices. At June 30, 2011, the Company did not hold the securities of any one issuer in an amount greater than 10% of shareholders’ equity.
There were no realized gains or losses during the six-month period ended June 30, 2011. The net unrealized gain on available-for-sale securities (included in accumulated other comprehensive income) was $81 thousand for the six-month period ended June 30, 2011. Available-for-sale securities with an amortized cost of $9.2 million (fair value of $9.5 million) were pledged as collateral for Federal Home Loan Bank (“FHLB”) advances as of June 30, 2011.
Management does not believe that any of the Company’s investment securities are impaired due to reasons of credit quality. Any declines in the fair value of available-for-sale securities below their cost, which 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.
The following table reflects unrealized losses for securities that were in a continual loss position as of June 30, 2011:
|
| Less than 12 Months |
| 12 months or longer |
| Total |
| ||||||||||||||||||
|
|
|
|
|
| Gross |
|
|
|
|
| Gross |
|
|
|
|
| Gross |
| ||||||
|
| Number of |
| Fair |
| Unrealized |
| Number of |
| Fair |
| Unrealized |
| Number of |
| Fair |
| Unrealized |
| ||||||
Description of securities |
| Securities |
| Value |
| Losses |
| Securities |
| Value |
| Losses |
| Securities |
| Value |
| Losses |
| ||||||
|
| (unaudited) |
| ||||||||||||||||||||||
|
| (in thousands) |
| ||||||||||||||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government and agency securities |
| 1 |
| $ | 1,493 |
| $ | 7 |
| — |
| $ | — |
| $ | — |
| 1 |
| $ | 1,493 |
| $ | 7 |
|
Mortgage-backed securities |
| 1 |
| 69 |
| — |
| — |
| — |
| — |
| 1 |
|
| 69 |
|
| — |
| ||||
Asset-backed securities |
| 8 |
| 1,059 |
| 5 |
| 5 |
| 1,818 |
| 51 |
| 13 |
| 2,877 |
| 56 |
| ||||||
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State and municipal securities |
| — |
| — |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
| ||||||
Total impaired securities |
| 10 |
| $ | 2,621 |
| $ | 12 |
| 5 |
| $ | 1,818 |
| $ | 51 |
| 15 |
| $ | 4,439 |
| $ | 63 |
|
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 the recovery of fair value, which may be at maturity, the Company considers none of its investments to be temporarily impaired at June 30, 2011.
The amortized cost, estimated fair value and yield of debt securities at June 30, 2011 are shown in the table below. In the case of available-for-sale securities, the average yields are based on effective rates of book balances at period 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 |
| ||||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
| Amortized |
| Fair |
| Average |
| Amortized |
| Fair |
| Average |
| ||||
|
| Cost |
| Value |
| Yield |
| Cost |
| Value |
| Yield |
| ||||
|
| (unaudited) |
| ||||||||||||||
|
| (in thousands) |
| ||||||||||||||
Due in One Year or Less |
| $ | 3,105 |
| $ | 3,176 |
| 3.32 | % | $ | 499 |
| $ | 502 |
| 4.55 | % |
Due from One Year to Five Years |
| 8,699 |
| 8,840 |
| 3.30 | % |
|
|
|
|
|
| ||||
Due from Five Years to Ten Years |
| 3,002 |
| 3,112 |
| 4.89 | % |
|
|
|
|
|
| ||||
Due after Ten Years |
| 1,540 |
| 1,633 |
| 4.67 | % |
|
|
|
|
|
| ||||
|
| $ | 16,346 |
| $ | 16,761 |
| 3.72 | % | $ | 499 |
| $ | 502 |
| 4.55 | % |
Note 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows:
|
| June 30, 2011 |
| December 31, 2010 |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
|
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
|
| (unaudited) |
| ||||||||
|
| (in thousands) |
| ||||||||
Commercial loans |
| $ | 26,196 |
| 32.3 | % | $ | 28,697 |
| 32.2 | % |
Commercial real estate loans |
| 42,417 |
| 52.2 | % | 48,115 |
| 53.9 | % | ||
Real estate - construction |
| 1,524 |
| 1.9 | % | 4,069 |
| 4.6 | % | ||
Other loans |
| 11,014 |
| 13.6 | % | 8,355 |
| 9.3 | % | ||
Total loans, including net loan costs |
| 81,151 |
| 100.0 | % | 89,236 |
| 100.0 | % | ||
Allowance for loan losses |
| (1,833 | ) |
|
| (1,877 | ) |
|
| ||
Net loans |
| $ | 79,318 |
|
|
| $ | 87,359 |
|
|
|
The Bank had four non-accrual loans totaling $2.0 million as of June 30, 2011 which were comprised of three commercial loans totaling $1.9 million and one personal loan of $119 thousand. Of these, one commercial loan of $59 thousand and the personal loan of $119 thousand were considered troubled debt restructurings. Although all four of these loans were current as of June 30, 2011, specific loan allowances of $472 thousand were established. As of June 30, 2011, the Company had no loans past due 90 days or more. As of December 31, 2010, the Company had no non-accrual loans, troubled debt restructurings or loans past due 90 days or more in either interest or principal.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, this potential weakness may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that could jeopardize the liquidation of the debt. There is a distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. Based on the most recent analysis performed, the risk category of loans by loan type is as follows as of June 30, 2011:
|
|
|
| Special |
|
|
|
|
| ||||
|
| Pass |
| Mention |
| Substandard |
| Doubtful |
| ||||
|
| (unaudited) |
| ||||||||||
|
| (in thousands) |
| ||||||||||
Commercial loans |
| $ | 22,974 |
| $ | 692 |
| $ | 2,421 |
| $ | 109 |
|
Commercial real estate |
| 40,887 |
| 1,530 |
| — |
| — |
| ||||
Real estate - construction |
| 1,524 |
| — |
| — |
| — |
| ||||
Other loans |
| 10,650 |
| — |
| 364 |
| — |
| ||||
Total Loans |
| $ | 76,035 |
| $ | 2,222 |
| $ | 2,785 |
| $ | 109 |
|
The following table presents an analysis of changes in the allowance for loan losses during the periods indicated:
|
| For the Three Months |
| For the Six Months Ended |
| ||||||||
|
| Ended June 30, |
| Ended June 30, |
| ||||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
|
| (unaudited) |
| ||||||||||
|
| (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| $ | 1,882 |
| $ | 1,484 |
| $ | 1,877 |
| $ | 1,202 |
|
(Deletions) additions to the allowance |
| (50 | ) | 208 |
| (50 | ) | 578 |
| ||||
Recoveries |
| 2 |
| 1 |
| 7 |
| 14 |
| ||||
|
| 1,834 |
| 1,693 |
| 1,834 |
| 1,794 |
| ||||
Loans charged-off |
| (1 | ) | — |
| (1 | ) | (101 | ) | ||||
Balance at end of period |
| $ | 1,833 |
| $ | 1,693 |
| $ | 1,833 |
| $ | 1,693 |
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based upon impairment method as of June 30, 2011:
|
| General |
| Specific |
|
|
| |||
|
| Allowance |
| Allowance |
| Total |
| |||
|
| (unaudited, in thousands) |
| |||||||
Commercial loans |
| $ | 458 |
| $ | 452 |
| $ | 910 |
|
Commercial real estate |
| 696 |
| — |
| 696 |
| |||
Real estate - construction |
| 23 |
| — |
| 23 |
| |||
Other loans |
| 184 |
| 20 |
| 204 |
| |||
Total Loans |
| $ | 1,361 |
| $ | 472 |
| $ | 1,833 |
|
Note 6. SHARE-BASED COMPENSATION
During the six-month period ended June 30, 2011, the Company recorded $85 thousand of stock-based compensation expense. At June 30, 2011, unrecorded compensation expense related to non-vested stock option grants and unrestricted stock grants totaled $247 thousand, which is expected to be recognized as follows:
|
| Share-Based |
| |
|
| Compensation |
| |
|
| Expense |
| |
|
| (unaudited) |
| |
|
| (in thousands) |
| |
Remainder of 2011 |
| $ | 95 |
|
2012 |
| 102 |
| |
2013 |
| 82 |
| |
2014 |
| 11 |
| |
Total |
| $ | 290 |
|
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 |
| ||||
|
| June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (unaudited) |
| ||||
Risk-free rate |
| 2.31 | % | 2.43 | % | ||
Expected term |
| 6 years |
| 6 years |
| ||
Expected volatility |
| 28.21 | % | 28.15 | % | ||
Dividend yield |
| 0.00 | % | 0.00 | % | ||
Fair value per share |
| $ | 1.46 |
| $ | 1.34 |
|
The following table summarizes the stock option activity under the plan for the periods indicated:
|
|
|
|
|
| Weighted Average |
| Aggregate |
| ||
|
|
|
| Weighted Average |
| Remaining |
| Intrinsic |
| ||
|
| Shares |
| Exercise Price |
| Contractual Life |
| Value |
| ||
|
| (unaudited) |
| ||||||||
2011 |
|
|
|
|
|
|
|
|
| ||
Outstanding at December 31, 2010 |
| 564,491 |
| $ | 8.81 |
|
|
|
|
| |
Granted |
| 90,000 |
| 6.02 |
|
|
|
|
| ||
Exercised |
| — |
| — |
|
|
|
|
| ||
Expired |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| — |
| — |
|
|
|
|
| ||
Outstanding at June 30, 2011 |
| 654,491 |
| $ | 8.42 |
| 7.41 |
| $ | — |
|
Options exercisable at June 30, 2011 |
| 429,021 |
| $ | 9.42 |
| 6.54 |
| $ | — |
|
Options unvested at June 30, 2011 |
| 225,470 |
| $ | 6.53 |
| 9.06 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||
2010 |
|
|
|
|
|
|
|
|
| ||
Outstanding at December 31, 2009 |
| 686,942 |
| $ | 9.42 |
|
|
|
|
| |
Granted |
| 233,031 |
| 6.66 |
|
|
|
|
| ||
Exercised |
| — |
| — |
|
|
|
|
| ||
Expired |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| 179,682 |
| 9.55 |
|
|
|
|
| ||
Outstanding at June 30, 2010 |
| 740,291 |
| $ | 8.52 |
| 8.31 |
| $ | — |
|
Options exercisable at June 30, 2010 |
| 296,196 |
| $ | 9.54 |
| 7.44 |
| $ | — |
|
Options unvested at June 30, 2010 |
| 444,095 |
| $ | 7.83 |
| 8.45 |
| $ | — |
|
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 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 |
| ||||
|
| June 30, |
| Assets |
| Inputs |
| Inputs |
| ||||
Description of Asset/Liability |
| 2011 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
|
| (unaudited, in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Available-for-sale securities |
| $ | 16,761 |
| $ | — |
| $ | 16,761 |
| $ | — |
|
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.
The Company’s derivative assets are also measured at fair value. See Note 12.
Note 8. FHLB ADVANCES AND OTHER BORROWINGS
At June 30, 2011, the Company had a $21.6 million line of credit with the FHLB which was collateralized by loans with principal balances of $39.9 million and securities with book values of $9.2 million. Advances outstanding as of June 30, 2011 totaled $4.5 million with interest at 4.38%, payable semi-annually, and maturing on June 27, 2013. The Company also had a $1.1 million mortgage on a future branch location at June 30, 2011 with interest-only payments at 5%, maturing on April 5, 2021(included in other borrowings).
Note 9. LOSS PER SHARE
Basic loss per share represents the loss reported to common stockholders, excluding the loss attributable to the non-controlling interest, divided by the weighted average number of common shares outstanding during the periods reported on the Consolidated Statements of Operations. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to loss that would have resulted from the assumed conversion. There were no potentially dilutive common shares outstanding for any period reported on the Consolidated Statement of Operations. The weighted average number of shares outstanding for the three month and six month periods ended June 30, 2011 and June 30, 2010 was 3,987,631.
Note 10. SEGMENT INFORMATION
The Company segregates its operations into three primary segments: The banking operations (Bank), non-banking financial operations (MCM) and “Other”, which includes Bancorp, MBFS and eliminations between segments. The Company determines the operating results of each segment based upon internal management systems. There have been no modifications in the segmentation of the Company from the structure reported in the last annual report. Accounting policies for segments are the same as those described in Note 1. Segment performance is evaluated using operating income. Transactions among segments are made at estimated market rates.
|
| Three Months Ended |
|
|
|
|
| |||||
|
| June 30, |
| $ Change in |
| % Change in |
| |||||
|
| 2011 |
| 2010 |
| Contribution |
| Contribution |
| |||
|
| (unaudited) |
| |||||||||
|
| (dollars in thousands) |
| |||||||||
Net interest income, after loan loss provision: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 1,278 |
| $ | 1,209 |
| $ | 69 |
| 6 | % |
MCM |
| (4 | ) | — |
| (4 | ) | N/A |
| |||
Other |
| — |
| — |
| — |
| N/A |
| |||
Total net interest income |
| $ | 1,274 |
| $ | 1,209 |
| $ | 65 |
| 5 | % |
|
|
|
|
|
|
|
|
|
| |||
Non-interest income: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 622 |
| $ | 48 |
| $ | 574 |
| 1196 | % |
MCM |
| 1,124 |
| 1,598 |
| (474 | ) | -30 | % | |||
Other |
| — |
| — |
| — |
| N/A |
| |||
Total non-interest income |
| $ | 1,746 |
| $ | 1,646 |
| $ | 100 |
| 6 | % |
|
|
|
|
|
|
|
|
|
| |||
Net revenue: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 1,900 |
| $ | 1,258 |
| $ | 642 |
| 51 | % |
MCM |
| 1,130 |
| 1,597 |
| (467 | ) | -29 | % | |||
Other |
| (11 | ) | — |
| (11 | ) | N/A |
| |||
Total net revenue |
| $ | 3,019 |
| $ | 2,855 |
| $ | 164 |
| 6 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | (908 | ) | $ | (262 | ) | $ | (646 | ) | 247 | % |
MCM |
| (529 | ) | (219 | ) | (310 | ) | 142 | % | |||
Other |
| (321 | ) | (792 | ) | 471 |
| -59 | % | |||
Total segment profit (loss) before taxes |
| $ | (1,758 | ) | $ | (1,273 | ) | $ | (485 | ) | 38 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment assets: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 137,121 |
| $ | 116,990 |
| $ | 20,131 |
| 17 | % |
MCM |
| 1,505 |
| 2,321 |
| (816 | ) | -35 | % | |||
Other |
| 233 |
| (150 | ) | 383 |
| -255 | % | |||
Total segment assets |
| $ | 138,859 |
| $ | 119,161 |
| $ | 19,698 |
| 17 | % |
|
| Six Months Ended |
|
|
|
|
| |||||
|
| June 30, |
| $ Change in |
| % Change in |
| |||||
|
| 2011 |
| 2010 |
| Contribution |
| Contribution |
| |||
|
| (unaudited) |
| |||||||||
|
| (dollars in thousands) |
| |||||||||
Net interest income, after loan loss provision: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 2,549 |
| $ | 2,126 |
| $ | 423 |
| 20 | % |
MCM |
| 6 |
| — |
| 6 |
| N/A |
| |||
Other |
| — |
| — |
| — |
| N/A |
| |||
Total net interest income |
| $ | 2,555 |
| $ | 2,126 |
| $ | 429 |
| 20 | % |
|
|
|
|
|
|
|
|
|
| |||
Non-interest income: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 957 |
| $ | 118 |
| $ | 839 |
| 711 | % |
MCM |
| 2,898 |
| 3,314 |
| (416 | ) | -13 | % | |||
Other |
| — |
| (41 | ) | 41 |
| N/A |
| |||
Total non-interest income |
| $ | 3,855 |
| $ | 3,391 |
| $ | 464 |
| 14 | % |
|
|
|
|
|
|
|
|
|
| |||
Net revenue: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 3,506 |
| $ | 2,244 |
| $ | 1,262 |
| 56 | % |
MCM |
| 2,914 |
| 3,273 |
| (359 | ) | -11 | % | |||
Other |
| (11 | ) | — |
| (11 | ) | N/A |
| |||
Total net revenue |
| $ | 6,409 |
| $ | 5,517 |
| $ | 892 |
| 16 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment profit (loss): |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | (1,871 | ) | $ | (871 | ) | $ | (1,000 | ) | 115 | % |
MCM |
| (842 | ) | 39 |
| (881 | ) | -2259 | % | |||
Other |
| (580 | ) | (1,681 | ) | 1,101 |
| -65 | % | |||
Total segment profit (loss) before taxes |
| $ | (3,293 | ) | $ | (2,513 | ) | $ | (780 | ) | 31 | % |
|
|
|
|
|
|
|
|
|
| |||
Segment assets: |
|
|
|
|
|
|
|
|
| |||
Bank |
| $ | 137,121 |
| $ | 116,990 |
| $ | 20,131 |
| 17 | % |
MCM |
| 1,505 |
| 2,321 |
| (816 | ) | -35 | % | |||
Other |
| 233 |
| (150 | ) | 383 |
| -255 | % | |||
Total segment assets |
| $ | 138,859 |
| $ | 119,161 |
| $ | 19,698 |
| 17 | % |
Note 11. INVESTMENT IN LIMITED PARTNERSHIP FUND
General Description of the Partnership
MIMS-1, L.P. was organized as a Delaware limited partnership Act on July 30, 2010 for the primary purpose of investing, reinvesting, and trading in private label and agency mortgage-backed and asset-backed securities. It commenced operations on August 20, 2010. The investment objective of MIMS-1 is to seek a high total return consisting of both current income and capital gains. The general partner of MIMS-1 is Manhattan Investment Management Services, Inc., an indirect wholly-owned subsidiary of MCM. The Bank became a limited partner of MIMS-1 on April 25, 2011 with an initial investment of $2.5 million. The initial term of the Bank’s investment is one year and is renewable for up to two one-year terms if agreed to by the General Partner and a majority of the Limited Partners.
Note 12. DERIVATIVES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Derivatives of BOMC
BOMC is engaged in buying and selling securities for a diverse group of customers, primarily financial institutions. As an introducing broker-dealer, BOMC introduces these customer transactions for clearance to its clearing broker on a fully-disclosed basis.
In the normal course of business, BOMC effectuates buy and sell orders from customers in mortgaged backed to-be-announced (TBA) securities. In order to mitigate principal risk, BOMC does not take a position in these transactions but rather arranges for simultaneous buyers and sellers for all transactions prior to executing either a buy trade or a sell trade. (BOMC’s transactions are deemed to be “Riskless Principal Transactions” per Federal Reserve System Regulation Y, Part 225 - Subpart C - Sec. 225.28.)
TBAs, which provide for the delayed delivery of the underlying financial instruments, are deemed to be derivatives and involve off-balance sheet financial risk. The contractual or notional amounts related to these transactions reflect BOMC’s volume and activity rather than the amounts at risk. Instead, the risk related to BOMC’s TBA activity, which is due primarily to counterparty risk, is limited to the unrealized fair valuation gains recorded in the Consolidated Balance Sheets. These gains are substantially dependent upon the value of the underlying financial instruments and are affected by market forces such as market volatility and changes in interest rates.
Quantitative Disclosures for Derivative Financial Instruments Used by BOMC for Trading Purposes
The notional amounts and fair values of derivative financial instruments for BOMC are as follows for the periods indicated:
|
| Notional Amount |
| ||||
|
| As of June 30, |
| As of December 31, |
| ||
|
| 2011 |
| 2010 |
| ||
|
| (unaudited, in thousands) |
| ||||
Mortgage-backed Securities: |
|
|
|
|
| ||
Forward contracts (TBAs) Purchased |
| $ | 119,550 |
| $ | 704,400 |
|
Forward contracts (TBAs) Sold |
| $ | (119,550 | ) | $ | (704,400 | ) |
Net |
| $ | — |
| $ | — |
|
|
| Fair Value |
| ||||
|
| Assets |
| Liabilities |
| ||
|
| (unaudited, in thousands) |
| ||||
Mortgage-backed securities: |
|
|
|
|
| ||
Forward contracts (TBAs) as of June 30, 2011 |
| $ | 35 |
| $ | (27 | ) |
Forward contracts (TBAs) as of December 31, 2010 |
| $ | 8,016 |
| $ | (7,802 | ) |
All of BOMC’s transactions in TBAs with off-balance sheet risk outstanding at June 30, 2011 and December 31, 2010 are short-term in nature with maturities of three months or less. The fair values of these derivative financial instruments are included in other assets in the net amounts of $7,240 and $214,069 as of June 30, 2011 and December 31, 2010, respectively. The unrealized gains are netted against unrealized losses on the Consolidated Statements of Operations.
Financial Instruments with Off-Balance-Sheet Risk
In its mortgage division, the Bank originates loans primarily for sale to other investors. Typically, the Bank locks interest rates with borrowers prior to loan origination and simultaneously locks in a price to sell the loans to other investors. Rate lock commitments with borrowers are considered derivatives and must be valued on a fair value basis. A $146,852 gain was recorded on interest rate lock commitments during the second quarter and first six months of 2011. The notional amount of interest rate lock commitments outstanding as of June 30, 2011 was $14.2 million. There were no interest rate lock commitments outstanding as of December 31, 2010.
The commitment to sell the loan to other investors is also considered a derivative if the commitment is made on a mandatory basis. A $27,845 gain on mandatory forward sale commitments was recorded during the second quarter and first six months of 2011. There were no comparable amounts recorded in 2010 as the Company had not yet commenced its efforts to originate mortgage loans for sale to other investors.
NOTE 13. SUBSEQUENT EVENTS
On July 25, 2011, Bancorp entered into a credit agreement (the “Credit Agreement”) with Carpenter Fund Management Company, LLC, as administrative agent (“Agent”), and Carpenter Community Bancfund, L.P. and Carpenter Community Bancfund-A, L.P., as lenders (the “Lenders”). The Credit Agreement provides for (i) an initial loan to Bancorp in the amount of $5 million (the “Initial Loan”), and (ii) a subsequent loan to Bancorp in the amount of $2 million (the “Optional Loan”) to be made at the sole and exclusive option of the Lenders at the written request of Bancorp given not later than November 30, 2011. Bancorp received the proceeds from the Initial Loan on July 26, 2011, and used the proceeds to make a $5 million loan to MCM.
The obligations of Bancorp under the Credit Agreement are secured by a first priority pledge of all of the equity interests of the Bank. Loans under the Credit Agreement bear interest at a rate of 8.0% per annum and have a final maturity date of June 30, 2012. Bancorp is permitted to make voluntary prepayments at any time without payment of a premium, and is required to make mandatory prepayments (without payment of a premium) with (i) net cash proceeds from certain issuances of capital stock, (ii) net cash proceeds from certain issuances of debt, and (iii) net cash proceeds from certain asset sales.
Bancorp paid a facility fee of $100,000 upon execution of the Credit Agreement, and will pay an additional facility fee of $40,000 upon the first to occur of the issuance of a commitment by the Lenders to provide the Optional Loan or the funding of the Optional Loan.
The Credit Agreement contains customary representations, warranties and affirmative and negative covenants applicable to Bancorp and its subsidiaries, including, among other things, restrictions on liens, indebtedness, investments, acquisitions, dispositions, affiliate transactions, leases, fundamental changes, and dividends and other distributions. Bancorp is required to maintain a minimum consolidated net worth of $18 million plus the net cash proceeds of any issuance of capital stock by Bancorp after July 25, 2011, and a total tier one leverage capital ratio of 10.0%. The Bank is required to maintain risk based capital and tier one leverage capital ratios of not less than 10.0% and 12.0%, respectively.
The Credit Agreement also provides that Bancorp may not issue or sell any shares of its common stock, or other securities representing the right to acquire shares of common stock, representing more than 4.9% of the issued and outstanding shares of Bancorp, or any shares of preferred stock other than pursuant to the Small Business Lending Fund. In addition, if Bancorp offers for sale any shares of its common stock or other securities in a public offering or private placement, the Agent or its designees or affiliates are entitled to purchase any such securities that are not subscribed for and purchased by other investors at the same price and on such other financial terms as such securities are offered and sold to other investors.
The Credit Agreement includes customary events of default, including nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties; bankruptcy or similar proceedings; ERISA events; and change of control.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Manhattan Bancorp and its subsidiaries (collectively, the “Company”) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of Federal and state securities laws. Words such as “will likely result,” “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of these words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the regulatory environment, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements. The Company cautions you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: the impact of changes in interest rates; a continuing decline in economic conditions; increased competition among financial service providers; the Company’s ability to attract deposit and loan customers; the quality of the Company’s earning assets; government regulation; and management’s ability to manage the Company’s operations. For further discussion of these and other risk factors, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.
General
Manhattan Bancorp, a California corporation (“Bancorp”) was incorporated in August 2006. Bancorp has one banking subsidiary, Bank of Manhattan, N.A. (the “Bank”). 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 June 30, 2011 had $139 million in assets, $85 million in net loans receivable and $110 million in deposits.
On October 1, 2009, Bancorp, through its wholly-owned subsidiary, MBFS Holdings, Inc. (“MBFS”), acquired a 70% interest in BOM Capital, LLC (formerly Bodi Capital LLC) (“BOMC”), a full-service mortgage-centric broker/dealer. On November 30, 2010, a recapitalization and restructuring was completed whereby a newly-formed limited liability company, Manhattan Capital Markets LLC (“MCM”), acquired 100% of BOMC in a multi-step transaction. MBFS holds a 70% interest in MCM. MCM is located in Calabasas, California and at June 30, 2011 had $1.5 million in assets primarily in cash and cash equivalent balances. References throughout the remainder of this Quarterly Report on Form 10-Q to MCM shall be deemed to include BOMC and MCM’s other direct and indirect subsidiaries.
Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to examination and regulation by the Federal Reserve Board (the “FRB”). The Bank is subject to supervision, examination and regulation by the Office of the Comptroller of Currency (“the “OCC”). As a nationally chartered financial institution, the Bank is a Federal Reserve Bank member. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum limits thereof.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “we” or “us” refers to Bancorp and its consolidated subsidiaries, the Bank and MBFS, and its subsidiary, MCM.
Management’s discussion and analysis of financial condition and results of operations 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.
Recent Developments
On July 25, 2011, Bancorp entered into a credit agreement (the “Credit Agreement”) with Carpenter Fund Management Company, LLC, as administrative agent, and Carpenter Community Bancfund, L.P. and Carpenter Community Bancfund-A, L.P., as lenders (the “Lenders”). The Credit Agreement provides for (i) an initial loan to Bancorp in the amount of $5 million (the “Initial Loan”), and (ii) a subsequent loan to Bancorp in the amount of $2 million (the “Optional Loan”) to be made at the sole and exclusive option of the Lenders at the written request of Bancorp given not later than November 30, 2011. Bancorp received the proceeds from the Initial Loan on July 26, 2011, and used the proceeds to make a $5 million loan to MCM.
The obligations of Bancorp under the Credit Agreement are secured by a first priority pledge of all of the equity interests of the Bank. Loans under the Credit Agreement bear interest at a rate of 8.0% per annum and have a final maturity date of June 30, 2012. Bancorp is permitted to make voluntary prepayments at any time without payment of a premium, and is required to make mandatory prepayments (without payment of a premium) with (i) net cash proceeds from certain issuances of capital stock, (ii) net cash proceeds from certain issuances of debt, and (iii) net cash proceeds from certain asset sales.
For more information regarding the Credit Agreement and the terms of the Initial Loan and Optional Loan, see Note 13 of the Notes to the Consolidated Financial Statements.
Earnings and Financial Condition Overview
The Company recorded a net loss of $1.8 million for the three month period ended June 30, 2011 which, after excluding a net loss attributable to the non-controlling interest of $161 thousand, translates to a loss of $0.40 per basic and fully-diluted share of common stock. This compares with a net loss of $1.3 million for the three month period ended June 30, 2010 which, after excluding a net loss attributable to the non-controlling interest of $66 thousand, translates to a loss of $0.30 per basic and fully-diluted share of common stock.
The Company recorded a net loss of $3.3 million for the six month period ended June 30, 2011 which, after excluding a net loss attributable to the non-controlling interest of $255 thousand, translates to a loss of $0.76 per basic and fully-diluted share of common stock. This compares with a net loss of $2.5 million for the six month period ended June 30, 2010 which, after excluding a net gain attributable to the non-controlling interest of $11 thousand, translates to a loss of $0.63 per basic and fully-diluted share of common stock.
Net losses continued during the second quarter and first six months of 2011, primarily because non-interest expenses exceeded additional revenues from increased advisory fees, gains on sale of loans, gains on interest rate lock commitments, forward sale commitments and lower provisions for loan losses compared to the same periods of the prior year. Also, net interest income decreased due to lower average balances of loans and investment securities due to payoffs and amortization.
Non-interest expenses increased as a result of additional compensation, occupancy and technology costs associated with the Bank’s mortgage lending activities. In the fourth quarter of 2010, the Bank began originating single family residential loans for sale to other investors. During the first six months of 2011, the Bank originated $46.9 million in loans for sale to other investors and sold $45.1 million in loans to other investors. The outstanding balance of loans held for sale totaled $5.3 million at June 30, 2011 (with a fair value of $5.3 million). The net gain on sale and fee income associated with the sale of loans totaled $548 thousand during the second quarter of 2011 and $833 thousand during the first six months of 2011. There were no gains or fees associated with the sale of loans during the comparable periods of 2010. Additionally, during the second quarter of 2011 the Bank recorded gains on interest rate lock commitments of $147 thousand and gains on mandatory forward sale commitments of $28 thousand. No gains on interest rate lock commitments or forward sale commitments were recorded during the first quarter of 2011 or any period during 2010.
Total assets decreased to $138.9 million as of June 30, 2011 from $152.9 million as of December 31, 2010. The decline in assets reflected a $14.5 million decrease in federal funds and an $8.1 million decrease in loans receivable, primarily due to payoffs and amortizations. The decreases were offset by a $1.9 million increase in investment securities available for sale, a $1.8 million increase in loans held for sale, and a $1.7 million increase in property and equipment. Additionally, the Bank invested $2.5 million in MIMS-1, L.P. during the second quarter of 2011. See Footnote 11 in the Notes to Consolidated Financial Statements.
The Company had non-accrual loans totaling $2.0 million as of June 30, 2011, of which $178 thousand was considered troubled debt restructurings. Although all of these loans were current as of June 30, 2011, specific loan allowances of $472 thousand were established. The Company had no non-accrual loans prior to June 30, 2011, although some performing loans were charged-off prior to any default by the borrowers when the full collectability of the loan became doubtful. The Company’s allowance for loan losses was $1.8 million or 2.26% of gross loans outstanding (excluding loans held for sale) at June 30, 2011 compared to $1.9 million or 2.10% of gross outstanding loans (excluding loans held for sale) at December 31, 2010. For a more detailed discussion, please see “Non-Performing Assets,” “Provision for Loan Losses,” and “Allowance for Loan Losses” below.
Total deposits were $110 million at June 30, 2011, 10% lower than the level reported at December 31, 2010. The decrease is primarily due to the outflow of short-term local funds that were included in the December 31, 2010 balances, particularly in the non-interest-bearing demand category. For a more detailed discussion regarding the sources of funds, please see “Deposits and Borrowed Funds” below.
Shareholders’ equity totaled $21 million at June 30, 2011, representing a 12% decrease from $24 million at December 31, 2010 due to the $3.0 million loss attributable to Manhattan Bancorp for the first six months of 2011 (excluding a net loss of $255 thousand attributable to the non-controlling interest).
The following table provides selected financial data that highlights the Company’s financial performance for the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010:
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| 6/30/2011 |
| 6/30/2010 |
| 6/30/2011 |
| 6/30/2010 |
| ||||
|
| (unaudited) |
| ||||||||||
|
| (dollars in thousands, except for per share amounts) |
| ||||||||||
Statements of Operations: |
|
|
|
|
|
|
|
|
| ||||
Interest income |
| $ | 1,467 |
| $ | 1,659 |
| $ | 2,965 |
| $ | 3,235 |
|
Interest expense |
| 243 |
| 243 |
| 460 |
| 531 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| 1,224 |
| 1,416 |
| 2,505 |
| 2,704 |
| ||||
Provision for loan losses |
| (50 | ) | 207 |
| (50 | ) | 578 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income after provision |
| 1,274 |
| 1,209 |
| 2,555 |
| 2,126 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Non-interest income |
| 1,745 |
| 1,646 |
| 3,855 |
| 3,391 |
| ||||
Non-interest expense |
| 4,778 |
| 4,129 |
| 9,703 |
| 8,030 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss from operations excluding minority interest |
| $ | (1,602 | ) | $ | (1,210 | ) | $ | (3,048 | ) | $ | (2,528 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Per Share and Other Data: |
|
|
|
|
|
|
|
|
| ||||
Basic and diluted loss per share |
| $ | (0.40 | ) | $ | (0.30 | ) | $ | (0.76 | ) | $ | (0.63 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Book value per common share- period end |
| $ | 5.33 |
| $ | 6.49 |
| $ | 5.33 |
| $ | 6.49 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding (basic and diluted) |
| 3,987,631 |
| 3,987,631 |
| 3,987,631 |
| 3,987,631 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
| ||||
Investments and fed funds sold |
| $ | 42,386 |
| $ | 27,735 |
| $ | 42,386 |
| $ | 27,735 |
|
Loans, net |
| $ | 84,585 |
| $ | 84,574 |
| $ | 84,585 |
| $ | 84,574 |
|
Assets |
| $ | 138,859 |
| $ | 119,161 |
| $ | 138,859 |
| $ | 119,161 |
|
Deposits |
| $ | 110,097 |
| $ | 86,706 |
| $ | 110,097 |
| $ | 86,706 |
|
Total equity |
| $ | 21,193 |
| $ | 26,179 |
| $ | 21,193 |
| $ | 26,179 |
|
|
|
|
|
|
|
|
|
|
| ||||
Selected Financial Ratios: |
|
|
|
|
|
|
|
|
| ||||
Net loss as a percentage of average assets |
| -4.51 | % | -3.74 | % | -4.48 | % | -3.82 | % | ||||
Net loss as a percentage of average equity |
| -29.13 | % | -18.02 | % | -27.10 | % | -18.59 | % | ||||
Dividend payout ratio |
| — |
| — |
| — |
| — |
| ||||
Equity to asset ratio |
| 15.26 | % | 21.97 | % | 15.26 | % | 21.97 | % | ||||
Net interest margin |
| 3.72 | % | 4.83 | % | 3.93 | % | 4.39 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Credit Quality: |
|
|
|
|
|
|
|
|
| ||||
Allowance for loan losses(1) |
| $ | 1,833 |
| $ | 1,693 |
| $ | 1,833 |
| $ | 1,693 |
|
Allowance /total loans |
| 2.26 | % | 1.96 | % | 2.26 | % | 1.96 | % | ||||
Non-performing loans |
| $ | 2,046 |
| $ | — |
| $ | 2,046 |
| $ | — |
|
Net (recoveries) charge-offs |
| $ | (1 | ) | $ | (1 | ) | $ | (6 | ) | $ | 87 |
|
(1) Allowance includes $472 thousand in specific loan allowances associated with four troubled debt restructurings.
RESULTS OF OPERATIONS
Net Interest Income
The Company’s ability to produce earnings is directly tied to our net interest income, which is the difference between the income we earn on interest-bearing assets, such as loans and other interest-earning assets, 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 difference between interest income and interest expense is called net interest income and is often expressed as interest rate spread and net interest margin.
The interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on funding sources. The interest rate spread decreased to 3.64% from 4.59% for the three months ended June 30, 2011 compared to the same period of the prior year and to 3.83% from 4.21% for the six months ended June 30, 2011 compared to the same period of the prior year. The decline in interest rate spread during both periods is primarily due to lower yields earned on interest-earning assets which outpaced declines in the rates paid on interest-bearing liabilities.
The net interest margin is computed based on net interest income expressed as a percentage of average total interest-earning assets. The net interest margin decreased to 3.72% during the second quarter of 2011 from 4.83% during the second quarter of 2010 and decreased to 3.93% during the first six months of 2011 from 4.39% during the first six months of 2010.
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 average 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 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
|
| Three Months Ended June 30, |
| ||||||||||||||
|
| 2011 |
| 2010 |
| ||||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
|
|
| Interest |
| Average |
|
|
| Interest |
| Average |
| ||||
|
| Average |
| Income/ |
| Rate |
| Average |
| Income/ |
| Rate |
| ||||
|
| Balance |
| Expense |
| Earned/Paid |
| Balance |
| Expense |
| Earned/Paid |
| ||||
|
| (unaudited) |
| ||||||||||||||
|
| (dollars in thousands) |
| ||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold/ interest-bearing demand funds |
| $ | 30,838 |
| $ | 18 |
| 0.23 | % | $ | 8,203 |
| $ | 5 |
| 0.24 | % |
Deposits with other financial institutions |
| 2,581 |
| 3 |
| 0.47 | % | 3,342 |
| 11 |
| 1.32 | % | ||||
Investments |
| 15,973 |
| 207 |
| 5.20 | % | 22,789 |
| 337 |
| 5.93 | % | ||||
Loans(1) |
| 82,561 |
| 1,239 |
| 6.02 | % | 83,167 |
| 1,306 |
| 6.30 | % | ||||
Total interest-earning assets |
| 131,953 |
| 1,467 |
| 4.46 | % | 117,501 |
| 1,659 |
| 5.66 | % | ||||
Non-interest-earning assets |
| 10,485 |
|
|
|
|
| 12,316 |
|
|
|
|
| ||||
Total assets |
| $ | 142,438 |
|
|
|
|
| $ | 129,817 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand |
| $ | 3,521 |
| — |
| 0.00 | % | $ | 2,964 |
| 1 |
| 0.14 | % | ||
Savings and money market |
| 24,699 |
| 43 |
| 0.70 | % | 22,686 |
| 50 |
| 0.88 | % | ||||
Certificates of deposit |
| 39,059 |
| 137 |
| 1.41 | % | 38,015 |
| 142 |
| 1.50 | % | ||||
FHLB advances and other borrowings |
| 5,552 |
| 63 |
| 4.55 | % | 4,504 |
| 50 |
| 4.45 | % | ||||
Total interest-bearing liabilities |
| 72,831 |
| 243 |
| 1.34 | % | 68,169 |
| 243 |
| 1.43 | % | ||||
Non-interest-bearing demand deposits |
| 45,919 |
|
|
|
|
| 22,793 |
|
|
|
|
| ||||
Total funding sources |
| 118,750 |
|
|
| 0.82 | % | 90,962 |
|
|
| 1.07 | % | ||||
Non-interest-bearing liabilities |
| 1,625 |
|
|
|
|
| 11,922 |
|
|
|
|
| ||||
Shareholders’ equity |
| 22,063 |
|
|
|
|
| 26,933 |
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 142,438 |
|
|
|
|
| $ | 129,817 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Excess of interest-earning assets over funding sources |
| $ | 13,203 |
|
|
|
|
| $ | 26,539 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 1,224 |
|
|
|
|
| $ | 1,416 |
|
|
| ||
Net interest rate spread |
|
|
|
|
| 3.64 | % |
|
|
|
| 4.59 | % | ||||
Net interest margin |
|
|
|
|
| 3.72 | % |
|
|
|
| 4.83 | % |
|
| Six Months Ended June 30, |
| ||||||||||||||
|
| 2011 |
| 2010 |
| ||||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| ||||
|
|
|
| Interest |
| Average |
|
|
| Interest |
| Average |
| ||||
|
| Average |
| Income/ |
| Rate |
| Average |
| Income/ |
| Rate |
| ||||
|
| Balance |
| Expense |
| Earned/Paid |
| Balance |
| Expense |
| Earned/Paid |
| ||||
|
| (unaudited) |
| ||||||||||||||
|
| (dollars in thousands) |
| ||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold/ interest-bearing demand funds |
| $ | 29,809 |
| $ | 35 |
| 0.24 | % | $ | 17,588 |
| $ | 20 |
| 0.23 | % |
Deposits with other financial institutions |
| 2,900 |
| 23 |
| 1.60 | % | 3,110 |
| 22 |
| 1.43 | % | ||||
Investments |
| 15,344 |
| 397 |
| 5.22 | % | 21,505 |
| 637 |
| 5.97 | % | ||||
Loans(1) |
| 80,628 |
| 2,510 |
| 6.28 | % | 81,880 |
| 2,555 |
| 6.29 | % | ||||
Total interest-earning assets |
| 128,681 |
| 2,965 |
| 4.65 | % | 124,083 |
| 3,234 |
| 5.26 | % | ||||
Non-interest-earning assets |
| 8,379 |
|
|
|
|
| 9,366 |
|
|
|
|
| ||||
Total assets |
| $ | 137,060 |
|
|
|
|
| $ | 133,449 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand |
| $ | 3,115 |
| $ | 1 |
| 0.06 | % | $ | 2,768 |
| $ | 1 |
| 0.07 | % |
Savings and money market |
| 25,256 |
| 86 |
| 0.69 | % | 23,749 |
| 115 |
| 0.98 | % | ||||
Certificates of deposit |
| 37,855 |
| 261 |
| 1.39 | % | 42,306 |
| 316 |
| 1.51 | % | ||||
FHLB advances and other borrowings |
| 5,029 |
| 112 |
| 4.49 | % | 4,626 |
| 99 |
| 4.32 | % | ||||
Total interest-bearing liabilities |
| 71,255 |
| 460 |
| 1.30 | % | 73,449 |
| 531 |
| 1.46 | % | ||||
Non-interest-bearing demand deposits |
| 41,659 |
|
|
|
|
| 28,269 |
|
|
|
|
| ||||
Total funding sources |
| 112,914 |
|
|
| 0.82 | % | 101,718 |
|
|
| 1.05 | % | ||||
Non-interest-bearing liabilities |
| 1,462 |
|
|
|
|
| 4,301 |
|
|
|
|
| ||||
Shareholders’ equity |
| 22,684 |
|
|
|
|
| 27,430 |
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 137,060 |
|
|
|
|
| $ | 133,449 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Excess of interest-earning assets over funding sources |
| $ | 15,767 |
|
|
|
|
| $ | 22,365 |
|
|
|
|
| ||
Net interest income |
|
|
| $ | 2,505 |
|
|
|
|
| $ | 2,703 |
|
|
| ||
Net interest rate spread |
|
|
|
|
| 3.83 | % |
|
|
|
| 4.21 | % | ||||
Net interest margin |
|
|
|
|
| 3.93 | % |
|
|
|
| 4.39 | % |
(1) The average balance of loans is calculated net of deferred loan fees/cost, but includes non-accrual loans, if any, with a zero yield. Loan fees net of amortized costs included in total net income were $(2) thousand and $24 thousand for the three months and six months ended June 30, 2011, respectively, and $30 thousand and $52 thousand for the three months and six months ended June 30, 2010.
The following volume and rate variance table sets forth the dollar differences of interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the periods indicated:
VOLUME/RATE ANALYSIS
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||||||||
|
| June 30, 2011 over 2010 |
| June 30, 2011 over 2010 |
| ||||||||||||||
|
| Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total |
| ||||||
|
| (unaudited) |
| ||||||||||||||||
|
| (in thousands) |
| ||||||||||||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal funds sold/ interest-bearing demand funds |
| $ | 14 |
| $ | (1 | ) | $ | 13 |
| $ | 14 |
| $ | — |
| $ | 14 |
|
Deposits with other financial institutions |
| (3 | ) | (5 | ) | (8 | ) | (2 | ) | 3 |
| 1 |
| ||||||
Investments |
| (101 | ) | (29 | ) | (130 | ) | (182 | ) | (58 | ) | (240 | ) | ||||||
Loans |
| (10 | ) | (57 | ) | (67 | ) | (39 | ) | (6 | ) | (45 | ) | ||||||
Net decrease |
| (100 | ) | (92 | ) | (192 | ) | (209 | ) | (61 | ) | (270 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest bearing demand |
| — |
| (1 | ) | (1 | ) | — |
| — |
| — |
| ||||||
Savings and money market |
| 4 |
| (11 | ) | (7 | ) | 7 |
| (37 | ) | (30 | ) | ||||||
Certificates of deposit |
| 4 |
| (9 | ) | (5 | ) | (33 | ) | (22 | ) | (55 | ) | ||||||
FHLB advances and other borrowings |
| 12 |
| 1 |
| 13 |
| 9 |
| 4 |
| 13 |
| ||||||
Net increase (decrease) |
| 20 |
| (20 | ) | — |
| (17 | ) | (55 | ) | (72 | ) | ||||||
Total net decrease |
| $ | (120 | ) | $ | (72 | ) | $ | (192 | ) | $ | (192 | ) | $ | (6 | ) | $ | (198 | ) |
The decreases in the volumes and rates of interest-earning assets during the second quarter and first six months of 2011 compared to the prior year periods were primarily the result of lower average investment balances. The rates earned on interest-earning assets decreased by 120 basis points during the second quarter of 2011 and decreased by 61 basis points during the first six months of 2011 compared to the same periods in the prior year.
The decrease in average loans to $82.6 million from $83.2 million during the second quarter of 2011 compared to the same period of the prior year and the decrease in average investments to $16.0 million from $22.8 million during the second quarter of 2011 compared to the same period of the prior year were due to payoffs and amortization. For the first six months of 2011, average loans decreased to $80.6 million from $81.9 million and average investments decreased to $15.3 million from $21.5 million also due to payoffs and amortization.
Interest expense remained unchanged during the second quarter of 2011 compared to the same quarter of 2010 because the impact the lower rates paid on interest-bearing liabilities was offset by higher average balances. Interest expense decreased by $72 thousand during the first six months of 2011 compared to the same period of 2010 due to lower average balances and lower rates paid. For additional information regarding the Company’s funding sources, see Deposits and Borrowed Funds.
Provision for Loan Losses
The Company reallocated $50 thousand from its loan loss allowance to a contingency reserve for unsold loans, which is included in other liabilities. In so doing, the Company recorded a $50 thousand provision for this contingency reserve and a negative loan loss provision of $50 thousand for the quarter and six months ended June 30, 2011. Provisions for loan losses of $208 thousand and $578 thousand were recorded during the three months and six months ended June 30, 2010, respectively. Loan loss provisions are 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
The following table reflects the major components of the Company’s non-interest income:
|
| For the Three Months Ended |
|
|
|
|
| |||||
|
| June 30, |
| Variance |
| |||||||
|
| 2011 |
| 2010 |
| Dollars |
| Percent |
| |||
|
| (unaudited) |
| |||||||||
|
| (dollars in thousands) |
| |||||||||
Service charges on deposit accounts |
| $ | 39 |
| $ | 30 |
| $ | 9 |
| 30.00 | % |
Other bank fees |
| 51 |
| 18 |
| 33 |
| 183.33 | % | |||
Mortgage-related fees |
| 549 |
| — |
| 549 |
| N/A |
| |||
Riskless trading income |
| 777 |
| 1,402 |
| (625 | ) | -44.58 | % | |||
Whole loan sales and warehouse lending fees |
| 254 |
| 66 |
| 188 |
| 284.85 | % | |||
Advisory income |
| 76 |
| 130 |
| (54 | ) | -41.54 | % | |||
Total non-interest income |
| $ | 1,746 |
| $ | 1,646 |
| $ | 100 |
| 6.08 | % |
|
| For the Six Months Ended |
|
|
|
|
| |||||
|
| June 30, |
| Variance |
| |||||||
|
| 2011 |
| 2010 |
| Dollars |
| Percent |
| |||
|
| (unaudited) |
| |||||||||
|
| (dollars in thousands) |
| |||||||||
Service charges on deposit accounts |
| $ | 73 |
| $ | 61 |
| $ | 12 |
| 19.67 | % |
Other bank fees |
| 68 |
| 57 |
| 11 |
| 19.30 | % | |||
Mortgage-related fees |
| 833 |
| — |
| 833 |
| N/A |
| |||
Riskless trading income |
| 1,937 |
| 2,389 |
| (452 | ) | -18.92 | % | |||
Whole loan sales and warehouse lending fees |
| 816 |
| 325 |
| 491 |
| 151.08 | % | |||
Advisory income |
| 128 |
| 559 |
| (431 | ) | -77.10 | % | |||
Total non-interest income |
| $ | 3,855 |
| $ | 3,391 |
| $ | 464 |
| 13.68 | % |
Non-interest income for the three month and six month periods ended June 30, 2011 consists of fees from two sources, MCM and the Bank.
Revenues from MCM come from three primary sources: trading income, facilitating trades in whole loans between institutional clients, and advisory services regarding the evaluation and packaging of other institutions’ bond portfolios. MCM revenues totaled $1.1 million for the second quarter and $2.9 million for the first six months of 2011 compared to $1.6 million and $3.3 million for the second quarter and first six months of 2010. The primary source of income to MCM is trading which decreased 45% during the second quarter and 19% during the first six months of 2011 from comparable periods in 2010.
Non-interest income earned by the Bank totaled $622 thousand for the second quarter and $957 thousand for the first six months of 2011 compared to $48 thousand and $118 thousand for the second quarter and first six months of 2010. The increase in non-interest income earned by the Bank is due to mortgage-related fees and income which increased substantially due to the Company’s efforts to originate loans for sale to other investors. Gain on sale of loans, the primary component of mortgage-related fees and income, was $400 thousand for the second quarter and $495 thousand for the first six months of 2011.
Typically, in order to mitigate interest rate risk, the Bank locks interest rates with borrowers prior to loan origination and simultaneously locks a price to sell the loan to other investors. According to the relevant accounting guidance, the rate lock commitment with the borrower is considered a derivative and must be valued on a fair value basis. A $147 thousand gain was recorded on rate lock commitments during the second quarter and first six months of 2011. The commitment to sell the loan to other investors is also considered a derivative if the commitment is made on a mandatory basis. A $28 thousand gain on mandatory forward sale commitments was recorded during the second quarter and first six months of 2011. There were no comparable amounts recorded in 2010.
Bank-related fee income includes service charges on deposit accounts, other bank fees and mortgage-related fees.
Non-Interest Expense
The following table sets forth the components of non-interest expense for the periods indicated :
|
| For the |
| For the |
|
|
|
|
| |||
|
| Quarter Ended |
| Quarter Ended |
| Variances |
| |||||
|
| June 30 , 2011 |
| June 30 , 2010 |
| Dollars |
| Percentage |
| |||
|
| (unaudited, dollars in thousands) |
| |||||||||
Compensation and benefits |
| $ | 3,276 |
| $ | 2,831 |
| $ | 445 |
| 15.7 | % |
Data processing |
| 361 |
| 221 |
| 140 |
| 63.3 | % | |||
Occupancy and equipment |
| 357 |
| 265 |
| 92 |
| 34.7 | % | |||
Legal services |
| 171 |
| 132 |
| 39 |
| 29.5 | % | |||
Marketing and business development |
| 134 |
| 67 |
| 67 |
| 100.0 | % | |||
Regulatory assessments |
| 63 |
| 85 |
| (22 | ) | -25.9 | % | |||
Communication |
| 58 |
| 123 |
| (65 | ) | -52.8 | % | |||
Audits and examination |
| 45 |
| 64 |
| (19 | ) | -29.7 | % | |||
Recruiting fees |
| 4 |
| 6 |
| (2 | ) | -33.3 | % | |||
Consulting fees |
| 3 |
| 42 |
| (39 | ) | -92.9 | % | |||
Administrative expenses |
| 80 |
| 53 |
| 27 |
| 50.9 | % | |||
Director fees |
| 63 |
| 52 |
| 11 |
| 21.2 | % | |||
Other professional services |
| 5 |
| 58 |
| (53 | ) | -91.4 | % | |||
Postage and Supplies |
| 39 |
| 30 |
| 9 |
| 30.0 | % | |||
Other non-interest expenses |
| 119 |
| 100 |
| 19 |
| 19.0 | % | |||
Total non-interest expenses |
| $ | 4,778 |
| $ | 4,129 |
| $ | 649 |
| 15.7 | % |
|
| For the |
| For the |
|
|
|
|
| |||
|
| Six Months Ended |
| Six Months Ended |
| Variances |
| |||||
|
| June 30 , 2011 |
| June 30 , 2010 |
| Dollars |
| Percentage |
| |||
|
| (unaudited, dollars in thousands) |
| |||||||||
Compensation and benefits |
| $ | 6,814 |
| $ | 5,406 |
| $ | 1,408 |
| 26.0 | % |
Data processing |
| 710 |
| 454 |
| 256 |
| 56.4 | % | |||
Occupancy and equipment |
| 657 |
| 538 |
| 119 |
| 22.1 | % | |||
Legal services |
| 263 |
| 221 |
| 42 |
| 19.0 | % | |||
Marketing and business development |
| 241 |
| 138 |
| 103 |
| 74.6 | % | |||
Regulatory assessments |
| 133 |
| 185 |
| (52 | ) | -28.1 | % | |||
Communication |
| 123 |
| 164 |
| (41 | ) | -25.0 | % | |||
Audits and examination |
| 148 |
| 136 |
| 12 |
| 8.8 | % | |||
Recruiting fees |
| 8 |
| 122 |
| (114 | ) | -93.4 | % | |||
Consulting fees |
| 23 |
| 106 |
| (83 | ) | -78.3 | % | |||
Administrative expenses |
| 138 |
| 67 |
| 71 |
| 106.0 | % | |||
Director fees |
| 124 |
| 111 |
| 13 |
| 11.7 | % | |||
Other professional services |
| 51 |
| 190 |
| (139 | ) | -73.2 | % | |||
Postage and Supplies |
| 82 |
| 51 |
| 31 |
| 60.8 | % | |||
Other non-interest expenses |
| 188 |
| 141 |
| 47 |
| 33.3 | % | |||
Total non-interest expenses |
| $ | 9,703 |
| $ | 8,030 |
| $ | 1,673 |
| 20.8 | % |
Compensation and Benefits
Compensation and Benefits represent the largest of the Company’s expense categories, comprising 69% and 70% of total non-interest expenses during the second quarter and first six months of 2011. Expenses in this category were significantly affected by growth in the Company’s mortgage loan employee base.
The following table sets forth changes in compensation and employee count for the Company’s operating segments for the periods indicated:
|
| Three Months Ended |
| Variance |
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
| $ |
| % |
| |||
|
| (unaudited, dollars in thousands) |
| |||||||||
Operating Segments |
|
|
|
|
|
|
|
|
| |||
MCM |
| $ | 1,164 |
| $ | 1,433 |
| $ | (269 | ) | -18.77 | % |
Bancorp |
| 113 |
| 514 |
| (401 | ) | -78.02 | % | |||
Bank including Mortgage Division |
| 1,999 |
| 884 |
| 1,115 |
| 126.13 | % | |||
Total |
| $ | 3,276 |
| $ | 2,831 |
| $ | 445 |
| 15.72 | % |
|
|
|
|
|
|
|
|
|
| |||
|
| Six Months Ended |
| Variance |
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
| $ |
| % |
| |||
|
| (unaudited, dollars in thousands) |
| |||||||||
Operating Segments |
|
|
|
|
|
|
|
|
| |||
MCM |
| $ | 2,717 |
| $ | 2,456 |
| $ | 261 |
| 10.63 | % |
Bancorp |
| 221 |
| 1,152 |
| (931 | ) | -80.82 | % | |||
Bank including Mortgage Division |
| 3,876 |
| 1,798 |
| 2,078 |
| 115.57 | % | |||
Total |
| $ | 6,814 |
| $ | 5,406 |
| $ | 1,408 |
| 26.05 | % |
|
|
|
|
|
|
|
|
|
| |||
|
| End of Period |
| Variance |
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
| # |
| % |
| |||
Operating Segments (# of Employees) |
|
|
|
|
|
|
|
|
| |||
MCM |
| 24 |
| 21 |
| 3 |
| 14.29 | % | |||
Bancorp |
| 3 |
| 6 |
| -3 |
| -50.00 | % | |||
Bank including Mortgage Division |
| 64 |
| 25 |
| 39 |
| 156.00 | % | |||
Total |
| 91 |
| 52 |
| 39 |
| 75.00 | % |
The increase in the Company’s compensation expense for the three months and six month periods ended June 30, 2011 is due to a 156% growth in the Bank’s employee count to 64 employees at June 30, 2011 from 25 employees at June 30, 2010, primarily due to an increase in employees associated with the Bank’s mortgage origination process. The number of mortgage-related Bank employees increased to 25 as of June 30, 2011 compared with none as of June 30, 2010.
Data Processing
Expenses related to the data processing needs of the Company increased by 63% during the second quarter of 2011 compared to the same of quarter last year and by 56% during the first six months of 2011 compared to the same period of last year. The increase in data processing costs reflect the overall increase in the Company’s employee count, primarily related to the mortgage lending division, and technology costs associated with the hiring of new employees.
Occupancy and Equipment
Occupancy and equipment costs increased 35% during the second quarter of 2011 compared to the same quarter of last year and by 22% during the first six months of 2011 compared to the same period of last year. Occupancy costs increased primarily due to the expenses associated with opening four new mortgage loan offices.
FINANCIAL CONDITION
Consolidated total assets decreased by 9% to $138.9 million at June 30, 2011 from $152.9 million at December 31, 2010. The decrease is related primarily to lower levels of cash and cash equivalents and a decrease in portfolio loans due to loan payoffs and amortizations. Partially offsetting these declines were increased securities available for sale, increased loans held for sale and increased property and equipment due to branch expansions. Additionally, the Bank invested $2.5 million in a limited partnership whose primary purpose is investing, reinvesting, and trading in private label and agency mortgage-backed and asset-backed securities. The investment objective of the partnership is to seek a high total return consisting of both current income and capital gains.
Investments
Total investments increased by $1.9 million from $15.4 million as of December 31, 2010 to $17.3 million as of June 30, 2011. The following schedule provides an overview of the types of investments in the Company’s portfolio at their carrying value on the dates indicated:
|
| June 30, 2011 |
| December 31, 2010 |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
|
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
|
| (unaudited) |
| ||||||||
|
| (in thousands) |
| ||||||||
Municipal obligations |
| $ | 499 |
| 2.9 | % | $ | 498 |
| 3.2 | % |
Non-mortgage-backed US Government Agency obligations |
| 1,493 |
| 8.7 | % | 1,449 |
| 9.4 | % | ||
Mortgage-backed securities |
| 8,769 |
| 50.7 | % | 4,585 |
| 29.8 | % | ||
Asset-backed securities |
| 6,499 |
| 37.7 | % | 8,842 |
| 57.5 | % | ||
Total investments |
| $ | 17,260 |
| 100.0 | % | $ | 15,374 |
| 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 June 30, 2011 is found in Note 4 of the Notes to the Consolidated Financial Statements.
Loans
Gross loans held for investment totaled $81.2 million as of June 30, 2011, a decrease of $8.1 million from $89.2 million at December 31, 2010. Outstanding loan balances decreased in all categories except “other” loans, which are primarily home equity line of credit loans. The largest monetary decline occurred in real estate construction loans. The Company experienced unusually high levels of early pay-offs along with decreased production of portfolio loans.
The table below sets forth the composition of the loan portfolio as of June 30, 2011 and December 31, 2010:
|
| June 30, 2011 |
| December 31, 2010 |
| ||||||
|
| Amount |
| Percentage of |
| Amount |
| Percentage of |
| ||
|
| Outstanding |
| Total |
| Outstanding |
| Total |
| ||
|
| (unaudited) |
| ||||||||
|
| (in thousands) |
| ||||||||
Commercial loans |
| $ | 26,196 |
| 32.3 | % | $ | 28,697 |
| 32.2 | % |
Commercial real estate loans |
| 42,417 |
| 52.2 | % | 48,115 |
| 53.9 | % | ||
Real estate - construction |
| 1,524 |
| 1.9 | % | 4,069 |
| 4.6 | % | ||
Other loans |
| 11,014 |
| 13.6 | % | 8,355 |
| 9.3 | % | ||
Total loans, including net loan costs |
| 81,151 |
| 100.0 | % | 89,236 |
| 100.0 | % | ||
Allowance for loan losses |
| (1,833 | ) |
|
| (1,877 | ) |
|
| ||
Net loans |
| $ | 79,318 |
|
|
| $ | 87,359 |
|
|
|
Of the Bank’s total loans outstanding as of June 30, 2011, 24% were due in one year or less, 21% were due in one to five years, and 55% 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 June 30, 2011
|
| Maturing |
|
|
| ||||||||
|
| After Five |
| One to Five |
| Within One |
|
|
| ||||
|
| Years |
| Years |
| Year |
| Total |
| ||||
|
| (unaudited) |
| ||||||||||
|
| (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Commercial |
| $ | 1,981 |
| $ | 8,905 |
| $ | 15,310 |
| 26,196 |
| |
Commercial real estate |
| 34,590 |
| 7,827 |
| — |
| 42,417 |
| ||||
Real estate-construction |
| — |
| 131 |
| 1,393 |
| 1,524 |
| ||||
Other Loans |
| 7,815 |
| 324 |
| 2,875 |
| 11,014 |
| ||||
Total |
| $ | 44,386 |
| $ | 17,187 |
| $ | 19,578 |
| $ | 81,151 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loans with pre-determined interest rates |
| $ | 5,430 |
| $ | 5,548 |
| $ | 679 |
| 11,657 |
| |
Loans with floating or adjustable rates |
| 38,956 |
| 11,639 |
| 18,899 |
| 69,494 |
| ||||
Total |
| $ | 44,386 |
| $ | 17,187 |
| $ | 19,578 |
| $ | 81,151 |
|
Of the gross loans outstanding as of June 30, 2011, approximately 85.6% had adjustable interest rates. Of these, 50.1% 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 adjustable rate loans is tied to other indices and subject to periodic adjustment prior to the contract maturity.
Commercial Loans
The Bank offers a variety of commercial loans, including secured and unsecured, term loans and revolving lines of credit, equipment loans and accounts receivable loans. As of June 30, 2011, approximately 94.5% of commercial loans had adjustable interest rates. Although the Bank underwrites secured term loans and revolving lines of credit primarily on the basis of a borrower’s cash flow and ability to service the debt, we also rely on the liquidation of the underlying collateral as a secondary payment source, where applicable. Should the borrower default and the Bank foreclose on the assets held as collateral, 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 properties, with a significant percentage in multi-family complexes. Approximately 77.5% of real estate loans have interest rates that are adjustable during the term of the loan. Approximately 78.7% of the real estate loans have a remaining maturity between five and ten years. As of June 30, 2011, the average original loan to value ratio was approximately 53%, with no individual loan to value ratio exceeding 79%. The weighted average debt service coverage ratio (DSCR) was 1.66. (DSCR is derived as cash available for debt servicing to principal and interest payments.)
Other Loans
The Bank offers other types of loans, which are primarily home equity lines of credit. A home equity line of credit has an adjustable interest rate and provides the borrower with a line of credit in an amount which does not exceed 77% 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. In both 2010 and 2011, these instruments had been limited to undisbursed commitments to extend credit to both businesses and individuals. To varying degrees, these instruments involve elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The outstanding balance was approximately $88 thousand as of June 30, 2011. Since all of these commitments were associated with loans, they were 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 secured an interest in 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. Undisbursed loan commitments as of June 30, 2011 were $25.5 million, a 3% decrease from $26.2 million at December 31, 2010. Management is not aware of any other off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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 a loan either through foreclosure or deed in lieu of foreclosure.
The Bank had four non-accrual loans totaling $2.0 million as of June 30, 2011, which were comprised of three commercial loans totaling $1.9 million and one personal loan of $119 thousand. Of these, one commercial loan of $59 thousand and the personal loan of $119 thousand were considered troubled debt restructurings. Although all four of these loans were current as of June 30, 2011, specific loan allowances of $472 thousand were established. As of June 30, 2011, the Company had no loans past due 90 days or more, nor did it have any Other Real Estate Owned (OREO).
As of December 31, 2010, the Company had no non-accrual loans, troubled debt restructurings, loans past due 90 days or more, or OREO.
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 pass 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 conducts an 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.
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 June 30, 2011 and December 31, 2010, and the net changes between the two periods.
|
| June 30, |
| December 31, |
| Variance |
| |||||
|
| 2011 |
| 2010 |
| Dollars |
| Percent |
| |||
|
| (unaudited) |
| |||||||||
|
| (dollars in thousands) |
| |||||||||
Deposit Classifications: |
|
|
|
|
|
|
|
|
| |||
Non-interest bearing deposits |
| $ | 42,995 |
| $ | 52,894 |
| $ | (9,899 | ) | -18.71 | % |
Interest bearing demand |
| 4,192 |
| 3,165 |
| 1,027 |
| 32.45 | % | |||
Savings and money market |
| 23,834 |
| 28,556 |
| (4,722 | ) | -16.54 | % | |||
Certificate of deposit $100,000 and over |
| 35,943 |
| 33,934 |
| 2,009 |
| 5.92 | % | |||
Certificate of deposit less than $100,000 |
| 3,133 |
| 3,696 |
| (563 | ) | -15.23 | % | |||
Total deposits |
| $ | 110,097 |
| $ | 122,245 |
| $ | (12,148 | ) | -9.94 | % |
As of June 30, 2011, 39.1% of the Company’s deposits were non-interest-bearing demand deposits, a decrease from 43.3% as of December 31, 2010. The decrease in non-interest bearing demand deposits is due to large deposits received just before the end of 2010 that flowed out during the first six months of 2011. At June 30, 2011, the Bank held no brokered funds, but held other wholesale funds in the amount of $21.9 million. At December 31, 2010, the Bank held no brokered funds, but held other wholesale funds in the amount of $18.6 million.
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 wholesale funding sources, including brokered deposits.
The Analysis of Net Interest Income table summarizes the distribution of the average deposit balances and the average rates paid on deposits during the comparative second quarters and six months ended June 30, 2011 and 2010.
The following table shows the maturities of the Bank’s time deposits as of June 30, 2011:
|
| Amounts as of |
| |
Maturities |
| June 30, 2011 |
| |
|
| (unaudited) |
| |
|
| (in thousands) |
| |
Three months or less |
| $ | 16,302 |
|
Over three and through twelve months |
| 10,253 |
| |
Over twelve months |
| 12,521 |
| |
Total |
| $ | 39,076 |
|
At both June 30, 2011 and December 31, 2010, borrowings from the FHLB totaled $4.5 million at a rate of 4.38%. The total line of credit with the FHLB at June 30, 2011 was $21.6 million which was collateralized by loans with principal balances totaling $38.1 million and available-for-sale securities with a market value of $9.5 million. In addition, the Bank has a $1.1 million mortgage payable on a future branch location with interest only payments at 5% until April 5, 2021.
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 June 30, 2011, the Company and the Bank exceeded all applicable capital adequacy requirements to be considered “well capitalized” under generally applicable regulatory guidelines.
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 June 30, 2011.
The following table sets forth the Bank’s regulatory capital ratios as of June 30, 2011:
|
|
|
|
|
| To Be Adequately |
| To Be Well |
| |||||||
|
| Actual |
| Capitalized |
| Capitalized |
| |||||||||
(unaudited) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (in thousands) |
| |||||||||||||
Company |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital (risk-weighted assets) |
| $ | 22,002 |
| 22.6 | % | $ | 7,775 |
| 8 | % | $ | 9,719 |
| 10 | % |
Tier 1 Capital (risk-weighted assets) |
| $ | 20,778 |
| 21.4 | % | $ | 3,887 |
| 4 | % | $ | 5,831 |
| 6 | % |
Tier 1 Capital (average assets) |
| $ | 20,778 |
| 14.6 | % | $ | 5,698 |
| 4 | % | $ | 7,122 |
| 5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital (risk-weighted assets) |
| $ | 20,357 |
| 21.3 | % | $ | 7,657 |
| 8 | % | $ | 9,571 |
| 10 | % |
Tier 1 Capital (risk-weighted assets) |
| $ | 19,152 |
| 20.0 | % | $ | 3,828 |
| 4 | % | $ | 5,743 |
| 6 | % |
Tier 1 Capital (average assets) |
| $ | 19,152 |
| 13.6 | % | $ | 5,625 |
| 4 | % | $ | 7,032 |
| 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 reasonably stable and low-cost source of funds has provided substantially all of the funding required since the Bank’s inception, along with the balances in stockholders’ equity.
We also have liquidity as a net seller of overnight funds at a level that would be expected to cushion unexpected increases in loan demand or decreases in funds deposited. During the three month and six month periods ended June 30, 2011, we had average federal funds balances of $30.8 million and $29.8 million, respectively, which represented 21.6% and 21.7% of our average assets for the second quarter and six months ended June 30, 2011, respectively.
In addition to federal funds, the Company maintains a portion of its liquid assets in cash deposits with other banks and investment securities. As of June 30, 2011, 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 30%. As of December 31, 2010, liquid assets as a percentage of the Company’s deposits were 45%.
While liquidity has been more than adequate during 2011 and 2010, management has established and is seeking to establish secondary sources of liquidity. The Bank maintains a $3 million line of credit with one correspondent bank for the purchase of overnight federal funds. The line is subject to the availability of funds and has restrictions as to the number of days used during defined periods of time. Another source of funds is through the acceptance of “brokered deposits” which allows us to attract large certificates of deposit at potentially higher interest rates. (Brokered deposits include not only deposits acquired using deposit brokers, but also deposits bearing effective yields far above prevailing local market rates.) The Bank had no “brokered deposits” as of June 30, 2011 or December 31, 2010.
Exhibit |
| Index to Exhibits |
|
|
|
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. |
|
|
|
101.INS |
| XBRL Instance Document.(xx) |
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document.(xx) |
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document.(xx) |
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document.(xx) |
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document.(xx) |
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document.(xx) |
(xx) |
| Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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.
|
| MANHATTAN BANCORP |
|
|
|
|
|
|
Date: | September 7, 2011 | /s/ Terry L. Robinson |
|
| Terry L. Robinson |
|
| President and Chief Executive Officer |
|
| (Principal Executive Officer) |
|
|
|
|
|
|
Date: | September 7, 2011 | /s/ Brian E. Côté |
|
| Brian E. Côté |
|
| Executive Vice President and Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |