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MNHN > SEC Filings for MNHN > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for MANHATTAN BANCORP


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 operations, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the audited financial statements contained within this Form 10-K, including the notes thereto. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Item 1A. Risk Factors" and elsewhere in this Form 10-K.

OVERVIEW

Accounting principles under GAAP require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Other factors also considered in this determination include composition of the Board of Directors and executive management of the combined company. Accordingly, the Merger was accounted for as a reverse acquisition whereby Professional Business Bank was treated as the acquirer for accounting and financial reporting purposes. Prior to the Merger, the balance sheet, statements of operations and statements of cash flows reflect that of only PBB. The assets and liabilities of Manhattan Bancorp were reported at fair value in a transaction that constituted a business combination subject to the acquisition method of accounting as detailed in Accounting Standards Codification ("ASC") 805, Business Combinations.

Earnings

The Company recorded net income attributable to common shareholders of $686 thousand for the year ended December 31, 2012, which translates to net earnings of $0.08 per basic share and fully-diluted share of common stock. This compares with a net loss of $(238) thousand for the year ended December 31, 2011, which translated to a net loss of $(0. 05) per basic and fully-diluted share of common stock.

The Company's $686 thousand net income attributable to common shareholders in 2012 was $925 thousand greater than its net loss in the prior year, due to a $22.0 million increase in non-interest income, a $1.5 million decrease in provision for loan losses, partially offset by a $23.2 million increase in non-interest expense.

The majority (96%) of the $22.0 million increase in non-interest income was generated by our mortgage division and, to a much lesser extent, our commercial banking business. Revenue generated by MCM contributed $6.0 million to this increase and our participation in the MIMS-1 limited partnership fund (see Note 8 in the Notes to Consolidated Financial Statements) contributed $399 thousand. The $23.2 million increase in non-interest expense was driven by growth in the Company's staffing levels and infrastructure as a result of the Merger and to further support expansions in our mortgage and commercial divisions. Increased expenses are also attributable to $1.2 million of acquisition costs and $1.4 million of severance costs related to the Merger. Additionally, expenses for MCM for the year ended 2012 totaled $6.1 million. The results of the mortgage division included in the operating results for the year ended December 31, 2012 only include operations following the Merger, as Professional Business Bank did not have a mortgage division. Similarly, the results of MCM included in the operating results for the year ended December 31, 2012 only include operations following the Merger through the effective time of the spinoff of MCM that occurred on November 9, 2012, or October 31, 2012.


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Financial Condition

Assets at December 31, 2012 totaled $465.4 million, up $226.0 million or 94% from December 31, 2011. The significant increase in our assets was driven almost entirely by the Merger and growth in our loan portfolios, primarily driven by our mortgage division.

Net loans totaled $371.0 million at December 31, 2012, up $204.7 million or 123% from December 31, 2011. Approximately 47% of this growth was generated by our mortgage division, as reflected by the $96.0 million increase in loans held for sale compared with no loans held for sale at December 31, 2011. Loans held for investment, which increased due to the Merger and generated by our commercial bank, grew by $108.7 million or 65% compared with December 31, 2011.

As a result of the Merger and loan growth, our investable balances (Federal funds sold, interest-bearing deposits and investment securities) decreased by $9.8 million, or 19%, to $42.4 million at December 31, 2012, compared with $52.2 million at December 31, 2011.

Our increased funding requirements were met primarily by generating an additional $182.2 million in deposits, which totaled $383.3 million at December 31, 2012, a 91% increase from December 31, 2011. Most of the increase in savings and money market deposits which grew by $83.4 million to $146.0 million at December 31, 2012, a 133% increase from December 31, 2011. Additionally, certificates of deposits ("CDs") grew by $39.1 million to $96.9 million, at December 31, 2012, a 68% increase from December 31, 2011. As previously noted, our increased funding requirements were due primarily to the increase in our mortgage loans held for sale which, in turn, typically are sold within 30 days. Therefore, in order to mitigate risk, we utilized wholesale deposit channels to generate additional short-term CDs, almost all of which had one-month maturities, thereby approximating a "matched-funding" strategy for our mortgage division. To this end, we increased our wholesale CDs by $30.2 million to $48.8 million at December 31, 2012, of which $24.9 million had one-month maturities. We also replaced $4.5 million in existing longer-term wholesale deposits with time deposits that had two-month maturities.

As of December 31, 2012, borrowings totaled $19.6 million, compared with no borrowings at December 31, 2011.

At December 31, 2012, the Company's allowance for loan losses totaled $2.4 million or 0.87% of gross loans held for investment, compared with $2.4 million or 1.4% of gross loans held for investment at December 31, 2011. There were no commercial loans past due 90 days or more that had not been placed on non-accrual at December 31, 2012. However, the Company had $1.8 million in non-accrual loans at year-end 2012 consisting of ten loans held for investment. There were no non-performing loans held for sale. The non-performing loans held for investment were current as of December 31, 2012, with the exception of one $535 thousand loan that is 75 days past due at that same date. The loans have been placed on non-accrual status and deemed to be credit impaired with no specific loan loss. As of December 31, 2011, the Bank had $2.4 million in non-accrual loans, $2.4 in troubled debt restructurings and $6.8 million of loans past due 90 days or more.

Stockholders' equity totaled $57.1 million at December 31, 2012, an increase of $24.6 million or 75.6% from December 31, 2011. This increase was due primarily to the Merger plus $686 thousand of net income in 2012.

Capital ratios for the Company and the Bank continue to exceed levels required by banking regulators to be considered "well-capitalized" (the highest level specified by regulators). As of December 31, 2012, the Bank's total risk-adjusted capital ratio, tier 1 risk-adjusted capital ratio, and tier 1 capital ratio were 13.01%, 12.21%, and 10.18%, respectively, well above the regulatory requirements of 10%, 6%, and 5%, respectively, to be considered "well-capitalized."


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RECENT DEVELOPMENTS

Acquisition of Professional Business Bank

On May 31, 2012, we completed our acquisition of Professional Business Bank through the merger of Professional Business Bank with and into Bank of Manhattan, with Bank of Manhattan as the surviving institution. Immediately prior to the Merger, Professional Business Bank completed a transaction in which its holding company, CGB Holdings, was merged into Professional Business Bank and accounted for using the historical balances as entities under common control.

In the Merger, we issued an aggregate of 8,195,469 shares of our common stock to the shareholders of Professional Business Bank, representing a ratio of 1.7991 shares of our common stock for each share of Professional Business Bank common stock outstanding at the effective time of the Merger. The shares of our common stock issued to the Professional Business Bank shareholders in the Merger constituted approximately 67.2% of the our outstanding common stock after giving effect to the Merger.

As a result of the Merger, we acquired four branches in central and east Pasadena, Montebello and Glendale, additional assets with an estimated fair value of $233.1 million and additional deposits with an estimated fair value of $200 million.

Sale of MBFS

On November 9, 2012, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with the Carpenter Lenders, which provided for (i) the sale of all of the shares of capital stock (the "MBFS Shares") of our wholly owned subsidiary, MBFS, and (ii) the assignment of our entire right in and to a promissory note dated as of July 25, 2011 (the "MCM Note"), made by MCM in favor of us in the aggregate principal amount of $5.0 million, in each case to the Carpenter Lenders for an aggregate purchase price of $5.0 million (the "Purchase Price"). The consummation of the transactions contemplated by the Purchase Agreement was completed simultaneously with the signing of the Purchase Agreement on November 9, 2012. Prior to the consummation of such transactions, we received an opinion from our financial advisor, Sandler O'Neill & Partners, L.P., confirming that the portion of the Purchase Price attributable to the sale of the MBFS Shares is fair, from a financial point of view, to us. The value of consideration received exceeded the carrying amount of the assets exchanged by $1.3 million, which was recognized as additional paid in capital.

Pursuant to the terms of the Purchase Agreement, we used a portion of the Purchase Price to repay $516,667 of accrued but unpaid interest and $4,283,333 of the outstanding principal balance of the loans outstanding under the Credit Agreement. In addition, and pursuant to and in accordance with the terms of the Credit Agreement, the Carpenter Lenders converted the remaining $716,667 of the outstanding principal balance of the loans outstanding under the Credit Agreement into an aggregate of 169,424 shares of our common stock. The number of shares of our common stock issued to the Carpenter Lenders was determined by dividing the sum of the unpaid principal balance by the book value per share of our common stock (as defined in the Merger Agreement), or $4.23 per share. As a result of the consummation of these transactions, the principal balance and all accrued interest under the Credit Agreement has been repaid in full.

Rights Offering

Beginning on December 20, 2012 we conducted an offering of up to 2,212,389 shares our common stock to the Company's shareholders. The holders of record of our common stock as of 5:00 p.m., Eastern Time, on November 28, 2012, referred to as the record date, received one nontransferable subscription right for every two shares of common stock owned on the record date. However, neither Carpenter Fund Manager GP, LLC, nor any of its affiliated investment funds (the "Carpenter Funds"), which collectively owned a total of 75.6% of our outstanding common stock as of the record date, received any subscription


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rights and was not entitled to purchase shares of common stock in the offering. Each subscription right entitled each shareholder of record to a basic subscription right and an over-subscription privilege. Under the basic subscription right, the shareholder was entitled to purchase one share of our common stock at a subscription price of $4.52 per share. Under the over-subscription privilege, upon exercise of all of their basic subscription rights, the shareholder was entitled to subscribe, at the same subscription price, for an unlimited number of additional shares of common stock, provided that (i) no shareholder could own more than 4.9% of our common stock, and
(ii) the aggregate subscription price of all shares of common stock purchased in the rights offering could not exceed $10 million.

The rights offering expired at 5:00 p.m. Eastern Time, on January 25, 2013. As a result of the offering, we received basic subscriptions for a total of 152,411 shares of common stock representing gross proceeds of $689 thousand. None of our shareholders exercised their over-subscription rights.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:

Investment Securities

Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts.

Investments not classified as held-to-maturity securities are classified as available-for-sale securities. Under the available-for-sale classification, securities can be sold in response to a variety of situations, including but not limited to changes in interest rates, fluctuations in deposit levels or loan demand, liquidity requirements, or the need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income (loss) and reported as an amount net of taxes as a separate component of accumulated other comprehensive income (loss) included in shareholders' equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method.

At each reporting date, investment securities are assessed to determine whether there is any other-than-temporary impairment. The classification of other-than-temporary impairment depends on whether the Company intends to sell the security before recovery of its cost basis, and on the nature of the impairment. If the Company intends to sell a security or it is more likely than not it will be required to sell a security prior to recovery of its cost basis, it would be required to record an other than temporary loss in an amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired but the Company does not intend to sell the security, only the credit component of impairment is recognized in earnings and the impairment associated with non-credit factors, such as market liquidity, is recognized in other comprehensive income, net of tax. The cost basis of any other-than-temporarily impaired security is written down by the amount of any impairment adjustment recognized in earnings.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable losses embedded in the Company's existing loan portfolios as of the measurement date. In order to determine the adequacy of our loan loss allowance to absorb future losses, management performs periodic credit reviews of the loan portfolio. In so doing, management considers current economic conditions, historical credit loss experiences and other factors. Although management uses the best information available to make these estimates, future


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adjustments to the allowance may be necessary due to changes in economic, operating, and regulatory conditions, most of which are beyond the Company's control. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. Loss estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the results of operations in the periods in which they become known. The allowance is increased by provisions for loan losses which, in turn, are charged to expense. The balance of a loan deemed uncollectible is charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

Commitments to extend credit, commercial letters of credit, and standby letters of credit are recorded in the financial statements when they become payable. The credit risk associated with these commitments, when indistinguishable from the underlying funded loan, is considered in our determination of the allowance for loan losses. Other liabilities in the balance sheet include the portion of the allowance which was distinguishable and related to undrawn commitments to extend credit.

The allowance consists of specific and general components. The specific component relates to individual loans that are classified as impaired on a case-by-case basis. The general component of the Company's allowance for loan losses, which covers potential losses for all non-impaired loans, typically is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company with consideration also given to peer bank loss experience. This historic loss experience is supplemented with the consideration of how current factors and trends might impact each portfolio segment. These factors and trends include the current levels of, and trends in:
delinquencies and impaired loans; charge-offs and recoveries; changes in underwriting standards; changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit and geographic concentrations.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and such agencies may require the Company to recognize additional provisions to the allowance based upon judgments that differ from those of management.

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Troubled debt restructurings ("TDRs"), which are described in more detail below, also are classified as impaired.

Commercial and commercial real estate loans classified as substandard or doubtful are individually evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, may collectively be evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.


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If a loan is classified impaired, a specific reserve is recorded for the loan equal to the difference between the loan's carrying value and the present value of estimated future cash flows using the loan's effective rate or at the fair value of collateral if repayment is expected solely from the collateral. TDRs are identified separately for impairment disclosures, as described in more detail below.

Troubled Debt Restructurings

A TDR is a loan for which the Company grants a concession to the borrower that the Company would not otherwise consider due to a borrower's financial difficulties. A loan's terms which may be modified or restructured due to a borrower's financial difficulty include, but are not limited to, a reduction in the loan's stated interest rate below the market rate for a borrower with similar credit characteristics, an extension of the loan's maturity, and/or a reduction in the face amount of the debt. The amount of a debt reduction, if any, is charged off at the time of restructuring. For other concessions, a specific reserve typically is recorded for the difference between the loan's book value and the present value of the TDR's expected future cash flows discounted at the current market rate for loans with similar terms, conditions, and credit characteristics. This specific reserve is accreted into interest income over the expected remaining life of the TDR using the interest method. TDRs typically are placed on non-accrual status until a sustained period of repayment performance, usually six months or longer. However, the borrower's performance prior to the restructuring, or other significant events at the time of restructuring, may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower's performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.

Subsequent to being restructured, a TDR may be classified "substandard" or "doubtful" based on the borrower's repayment performance as well as any other changes in the borrower's creditworthiness. Loans that were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance, usually six months or longer. TDRs are identified separately for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at the time of restructuring. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For any TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

Acquired Loans

Acquired loans are recorded at fair value at the date of acquisition and include both nonperforming loans with evidence of credit deterioration since their origination date and performing loans with no such credit deterioration. The Company is accounting for a significant majority of the loans, including loans with evidence of credit deterioration acquired in the Merger in accordance with Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In accordance with ASC 310-30, the Company has pooled performing loans at the date of purchase. The loans were aggregated into pools based on the common risk characteristics.

The difference between the undiscounted cash flows expected to be collected at acquisition and the investment in the loan, or the "accretable yield," is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the "nonaccretable difference," are not recognized as a yield adjustment, loss accrual or valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. If the Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired


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loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received).

The excess of cash flows expected to be collected over the initial fair value of acquired loans is referred to as accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. The acceptable yield will change due to:


Estimate of the remaining life of acquired loans which may change the amount of future interest income


Estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected
(the nonaccretable difference)


Indices for acquired loans with variable rates of interest


Improvement in the amount of expected cash flows

Acquired loans not accounted for under ASC 310-30 are subject to the provisions of ASC 310-20, Nonrefundable Fees and Costs. The cash flows associated with these loans determine the amount of the purchase discount that is to be accreted over the life of the loan using the effective interest method. Management periodically reassesses the net realizable value and in the event that credit losses inherent in the portfolio are higher than expectations, records an allowance for loan losses to the extent that the carrying value exceeds the amounts expected to be collected.

Gains From Mortgage Banking Activities

Mortgage banking activity income is recognized when the Company records a derivative asset upon the commitment to originate a loan with a borrower for the sale of the loan to an investor. This commitment asset is recognized at fair value, which reflects the fair value of the commitment after considering the contractual loan origination-related fees, estimated sale premiums, direct loan origination costs, estimated pull-through rate and the estimated fair value of the expected net future cash flows associated with servicing of loans. Also included in gains from mortgage division activities are changes to the fair value of loan commitments, forward sale commitments and loans held for sale that occur during their respective holding periods. Substantially all the gains or losses are recognized during the loan holding period as such loans are recorded at fair value. Mortgage servicing rights are recognized as assets based on the fair value upon the sale of loans when the servicing is retained by the Company.

The Company records an estimated liability for obligations associated with loans sold which it may be required to repurchase due to breaches of representations and warranties, early payment defaults or to indemnify an . . .

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