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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2010 |
Commission File Number 000-54116
MANHATTAN BANCORP
(Exact name of registrant as specified in its charter)
California State or other jurisdiction of incorporation of organization |
20-5344927 I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes o No ý
Indicate by check mark whether the registrant (1) 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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K. o
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of June 30, 2010 was approximately $9,868,985.
As of March 24, 2011, there were 3,987,631 shares of the issuer's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement for the 2011 annual meeting of shareholders are incorporated by reference in Part III of this Annual Report.
Manhattan Bancorp
December 31, 2010
TABLE OF CONTENTS
This Annual Report on Form 10-K 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."
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.
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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 December 31, 2010 had $151 million in assets, $91 million in net loans receivable and $124 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 December 31, 2010 had $2 million in assets primarily in cash or cash equivalent balances. References throughout the remainder of this Annual Report on Form 10-K 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 Annual Report on Form 10-K to the "Company," "we" or "us" refers to Bancorp and its consolidated subsidiaries, the Bank and MBFS, and its subsidiary, MCM.
Banking Services
The Bank's primary goal is to operate and grow into a profitable community-oriented financial institution serving primarily entrepreneurs, small and medium-sized businesses, business service professionals and owners/owner-users of commercial, industrial, and multi-family properties in the Los Angeles County market area.
The Bank promotes relationship-based products and services to meet the banking needs of its defined customer base. It offers a full range of deposit products including non-interest bearing demand deposits and interest bearing checking accounts, savings accounts and certificates of deposit. Wire transfers, electronic bill payment, overdraft protection, and assorted retail banking services are offered to all customers, and the Bank offers cash management services to its commercial checking account customers.
The Bank originates loans based on specific underwriting guidelines. A large portion of these loans are secured by commercial real estate. However, the Bank does offer both secured and unsecured commercial term loans and lines of credit, and construction loans for individual and commercial properties. To a much lesser extent, the Bank has made home equity and other consumer loans. In October 2010, the Bank began to originate consumer mortgages with the intent to resell the majority of such loans to qualified investors. The Bank has not, nor does it intend, to originate loans that are deemed sub-prime credits.
The Bank offers Internet banking services, which allow customers to review their account information, issue stop payment orders, pay bills, transfer funds, order checks and inquire about credit products
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electronically. It also offers qualified customers the ability to process deposits through remote item capture from their place of business.
Capital Market Services
The Company offers mortgage related advisory and broker/dealer services through its indirect subsidiary MCM. MCM provides both fee and incentive based consulting services to banks, mortgage bankers and institutional investors. MCM's subsidiary, BOMC, trades mortgage loans and mortgage backed securities with institutional investors. BOMC is subject to regulatory supervision by the Financial Industry Regulatory Authority ("FINRA") and the U.S. Securities and Exchange Commission ("SEC"). Further, the Federal banking agencies expect banking organizations in their oversight role over functionally regulated subsidiaries, such as registered investment advisors, to assure appropriate controls are maintained that include establishing alternative sources of emergency support from the parent holding company, non-bank affiliates or external third parties, prior to seeking support from the bank; instituting effective policies and procedures for identifying potential circumstances triggering the need for financial support and the process for obtaining such support; implementing effective controls, including stress testing and compliance reviews; implementing policies and procedures to ensure compliance with disclosure and advertising requirements to clearly differentiate the investments in advised funds from obligations of the bank or insured deposits; and ensuring proper management, regulatory and financial reporting of contingent liabilities arising out of its investment advisory activities. The Company believes it has taken appropriate action to implement and audit compliance with these requirements.
Incentive based investment advisory services are provided through Manhattan Investment Management Services Inc. ("MIMS") an indirect wholly-owned subsidiary of MCM. MIMS currently has an application pending with the State of California to be a registered Investment Adviser and will be regulated by the State of California, if approved.
MCM also provides consulting services to others through its two other indirect wholly-owned subsidiaries Manhattan Advisor Services Inc, ("MASI"), which provides general consulting, and Manhattan Mortgage Warehouse Inc. ("MMW"), which specializes in mortgage warehouse lending consulting.
Competition and Geographic Market Area
The relevant geographical market for the Bank is Los Angeles County. Utilizing the El Segundo headquarters as the hub, the Bank's business development officers serve existing and solicit prospective customers from outlying areas, such as the South Bay, Westside, downtown Los Angeles, South Los Angeles and other surrounding communities. As a business-oriented bank, most of the day-to-day banking activity is conducted through the use of in branch banking services and remote deposit capture devices.
The banking business in California generally, and specifically in the market area which we serve, is highly competitive with respect to virtually all products and services and has become increasingly so in recent years. The industry continues to consolidate, directly affected by the more recent economic downturn, and strong, unregulated competitors continue to enter the banking markets with focused products targeted at highly profitable customer segments. Many generally unregulated competitors have been able to compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue. We compete for loans and deposits with other commercial banks, as well as with savings and loan associations, credit unions, thrift and loan companies, and other financial and non-financial institutions, including finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. With respect to commercial bank competitors, the business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These banks have, among other advantages, the ability to finance wide-ranging and effective advertising
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campaigns and to allocate their investment resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services which we do not offer directly (but some of which we offer through correspondent institutions). By virtue of their greater total capitalization, such banks also have substantially higher lending limits.
In recent years, increased competition has also developed from specialized finance and non-finance companies that offer money market and mutual funds, wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software. Strong competition for deposit and loan products affects the interest rates of those products as well as the other terms on which they are offered to customers. Mergers and acquisitions by and between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also intensified due to Federal and state interstate banking laws and failed bank receivership opportunities, which permit banking organizations to expand geographically.
Technological innovation has also resulted in increased competition in the financial services market as customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer online banking, ATMs, self-service branches, and/or in-store branches.
In order to compete effectively, we have created a sales and service culture that combines the experience of our senior officers, which includes the extensive sales orientation of larger financial institutions, with the commitment to service and a focus on the individual needs of our clients, which is found at the best community banks. We seek to provide a level of service and decision-making responsiveness not generally offered by larger institutions while at the same time providing management sophistication not universally found at local community banks.
As noted above, our primary service area consists of the County of Los Angeles, with a particular emphasis on the Westside, South Bay and Los Angeles airport areas. As in most major U.S. cities, large banks dominate the banking industry in Los Angeles County. However, rather than these large financial institutions, we believe our primary competitors for the small and medium-sized business customer are other community banks that can provide the service and responsiveness attractive to small and medium-sized business customers.
The Bank monitors concentrations of funds which are provided by a single investor or from a single related source on a monthly basis to assist in its assessment of liquidity. As of December 31, 2010 there were nine relationships representing approximately 42.5% of all Bank deposits.
Employees
As of December 31, 2010, the Company had 73 full-time employees. None of our employees are represented by a union or covered by a collective-bargaining agreement.
Economic Conditions and Legislative and Regulatory Developments
The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. These rates are highly sensitive to many factors that are beyond the Company's control and cannot be predicted, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on the Company cannot be predicted.
The Company's business is also influenced by the monetary and fiscal policies of the Federal government and the policies of regulatory agencies. The FRB implements national monetary policies (with objectives such as maintaining price stability and reducing unemployment) through its open-market operations in U.S. Government securities, by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target Federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the
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growth of bank loans, investments, and deposits and also affect interest earned on interest-earning assets and interest paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the Company cannot be predicted.
From time to time, Federal and state legislation is enacted that may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. In response to the economic downturn and financial industry instability, legislative and regulatory initiatives were, and are expected to continue to be, introduced and implemented, which substantially intensify the regulation of the financial services industry. Moreover, especially in the current economic environment, bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance and continuation of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")
Dodd-Frank represents landmark legislation, which followed other legislative and regulatory initiatives in 2008 and 2009 in response to the recent economic downturn and financial industry instability. Dodd-Frank impacts many aspects of the financial industry and, in many cases, will impact larger and smaller financial institutions and community banks differently over time. Dodd-Frank includes, among other things, the following: (i) the creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation; (ii) expanded FDIC resolution authority to conduct the orderly liquidation of certain systemically significant non-bank financial companies in addition to depository institutions; (iii) the establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment; (iv) enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading activities by banks; (v) requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries; (vi) the elimination and phase out of trust preferred securities from Tier 1 capital with certain exceptions; (vii) a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250 thousand and an extension of Federal deposit coverage until January 1, 2013 for the full net amount held by depositors in non-interesting bearing transaction accounts; (viii) authorization for financial institutions to pay interest on business checking accounts; (ix) changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be the institution's deposit base, but instead, will be its average consolidated total assets less its average tangible equity and increase the minimum reserve ratio for the Deposit Insurance Fund (the "DFI") from 1.15% to 1.35%; (x) the elimination of remaining barriers to de novo interstate branching by banks; (xi) expanded restrictions on transactions with affiliates and insiders and lending limits for derivative transactions, repurchase agreements and securities lending and borrowing transactions; (xii) the transfer of oversight of Federally chartered thrift institutions to the OCC and state-chartered savings banks to the FDIC, and the elimination of the Office of Thrift Supervision; (xiii) provisions that affect corporate governance and executive compensation at most United States publicly traded companies, including (1) stockholder advisory votes on executive compensation, (2) executive compensation "clawback" requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings, revenues, gains or other criteria, (3) enhanced independence requirements for compensation committee members, and (4) authority for the SEC to adopt proxy access rules which would permit stockholders of publicly traded companies to nominate candidates for election as director and have those nominees included in a company's proxy statement; and (xiv) the creation of a Consumer Financial Protection Bureau, which is authorized to promulgate and enforce consumer protection regulations relating to bank and non-bank financial products and examine and enforce these regulations on banks with more than $10 billion in assets.
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The Company cannot predict the extent to which the interpretations and implementation of this wide-ranging Federal legislation may affect it. Many of the requirements of Dodd-Frank will be implemented over time and most will be subject to regulations implemented over the course of several years. There can be no assurance that these or future reforms (such as possible new standards for commercial real estate lending or new stress testing guidance for all banks) arising out of studies and reports required by Dodd-Frank will not significantly increase the Company's compliance or other operating costs and earnings or otherwise have a significant impact on its business, financial condition and results of operations. Dodd-Frank is likely to impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect the Company's business. As a result of the changes required by Dodd-Frank, the profitability of the Company's business activities may be impacted and it may be required to make changes to certain of its business practices. These changes may also require the Company to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.
EESA and ARRA
Previous legislation enacted in response to the recent economic downturn and financial industry instability included the Emergency Economic Stabilization Act of 2008 ("EESA"), enacted on October 3, 2008, and the American Recovery and Reinvestment Act of 2009 ("ARRA"), enacted on February 17, 2009. Pursuant to EESA, the United States Department of the Treasury ("U.S. Treasury") was authorized to create the $700 billion Troubled Assets Relief Program ("TARP") to purchase, insure, hold and sell a wide variety of financial instruments, and, as implemented under the Capital Purchase Program ("CPP"), included authorization for up to $250 billion in senior preferred stock of qualifying United States banks and savings associations or their holding companies.
In order to participate in the CPP, financial institutions were required to adopt certain standards for executive compensation and corporate governance imposed by EESA. These standards generally applied to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers. The standards included (1) ensuring that incentive compensation for senior executives did not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that were later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500 thousand for each senior executive.
ARRA amended EESA and imposed certain new, more stringent executive compensation and corporate expenditure limits on all current and future TARP recipients. The executive compensation standards under ARRA include, but are not limited to, (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employee's total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by the U.S. Treasury to be inconsistent with the purposes of TARP or otherwise contrary to the public interest, (vi) required establishment of a companywide policy regarding "excessive or luxury expenditures," and (vii) inclusion in a participant's proxy statements for annual stockholder meetings of a non-binding "Say on Pay" stockholder vote on the compensation of executives.
The Company elected to participate in the CPP and in December 2008 issued $1.7 million worth of preferred stock to the Treasury Department pursuant to this program. Following the receipt of additional capital from a private placement, the Company sought and received permission to repurchase the $1.7 million worth of preferred stock form the Treasury Department in September 2009. Shortly thereafter,
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the Company reached an agreement regarding the value of the warrant issued in conjunction with the CPP with the redemption completed in October 2009. Certain reporting requirements associated with the Company's participation continued into 2010. The Company complied with all such requirements through August 31, 2010, the date on which it ceased being subject to such requirements.
International Capital and Liquidity Initiatives
The international Basel Committee on Banking Supervision (the "Basel Committee") is a committee of central banks and bank supervisors and regulators from the major industrialized countries. The Basel Committee develops broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply. In December 2009, the Basel Committee released two consultative documents proposing significant changes to bank capital, leverage and liquidity requirements, commonly referred to as "Basel III." The Group of Twenty Finance Ministers and Central Bank Governors (commonly referred to as the G-20), including the United States, endorsed the Basel III reform package and their proposed phase in timelines in November, 2010. Basel III provides for increases in the minimum Tier 1 common equity ratio and the minimum requirement for the Tier 1 capital ratio. Basel III additionally includes (i) a "capital conservation buffer" on top of the minimum requirement designed to absorb losses in periods of financial and economic distress, and (ii) an additional required countercyclical buffer percentage to be implemented according to a particular nation's circumstances. These capital requirements are further supplemented under Basel III by a non-risk-based leverage ratio. Basel III also reaffirms the Basel Committee's intention to introduce higher capital requirements on securitization and trading activities at the end of 2011.
The Basel III liquidity proposals have three main elements: (i) a "liquidity coverage ratio" designed to meet the bank's liquidity needs over a 30-day time horizon under an acute liquidity stress scenario, (ii) a "net stable funding ratio" designed to promote more medium and long-term funding over a one-year time horizon, and (iii) a set of monitoring tools that the Basel Committee indicates should be considered as the minimum types of information that banks should report to supervisors.
Implementation of Basel III in the United States will require implementing regulations and guidelines by United States banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee. It is unclear how United States banking regulators will define "well-capitalized" in their implementation of Basel III and to what extent and when smaller banking organizations in the United States will be subject to these regulations and guidelines. Basel III standards, if adopted, could lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios.
Dodd-Frank also includes provisions related to increased capital and liquidity requirements. Such provisions would establish minimum leverage and risk-based capital requirements on a consolidated basis for all depository institution holding companies and insured depository institutions that cannot be less than the strictest requirements in effect for depository institutions as of the date of enactment, July 21, 2010.
Federal Banking Agency Compensation Guidelines
Guidelines adopted by the Federal banking agencies pursuant to the Federal Deposit Insurance Act ("FDI Act") prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In June 2010, the Federal bank regulatory agencies jointly issued additional comprehensive guidance on incentive compensation policies (the "Incentive Compensation Guidance") intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a
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group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization's supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
On February 7, 2011, the Board of Directors of the FDIC approved a joint proposed rulemaking to implement Section 956 of Dodd-Frank for banks with $1 billion or more in assets. Section 956 prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses. The proposed rule would move the U.S. closer to aspects of international compensation standards by 1) requiring deferral of a substantial portion of incentive compensation for executive officers of particularly large institutions described above; 2) prohibiting incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excessive compensation; 3) prohibiting incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss; 4) requiring policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institution; and 5) requiring annual reports on incentive compensation structures to the institution's appropriate Federal regulator. A joint rule making proposal will be published for comment by all of the banking agencies and the SEC, among other agencies.
The scope, content and application of the U.S. banking regulators' policies on incentive compensation continue to evolve in the aftermath of the economic downturn. It cannot be determined at this time whether compliance with such policies will adversely affect the ability of the Company and the Bank to hire, retain and motivate key employees.
Supervision and Regulation
General
The Company, the Bank, MBFS and its subsidiary, MCM, are extensively regulated under both Federal and state law. Set forth below is a summary description of certain laws that relate to the regulation of the Company and the various affiliated companies. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
The Company
Bank Holding Company Regulation
As a bank holding company, Bancorp is subject to regulation and examination by the FRB under the Bank Holding Company Act of 1956, as amended ("BHCA"). Accordingly, Bancorp is subject to the FRB's regulations and its authority to:
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Subject to prior notice or FRB approval, bank holding companies may generally engage in, or acquire shares of companies engaged in, activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies which elect and retain "financial holding company" status pursuant to the Gramm-Leach-Bliley Act of 1999 ("GLBA") may engage in these nonbanking activities and broader securities, insurance, merchant banking and other activities that are determined to be "financial in nature" or are incidental or complementary to activities that are financial in nature without prior FRB approval. Pursuant to GLBA and Dodd-Frank, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the Community Reinvestment Act ("CRA"), which requires banks to help meet the credit needs of the communities in which they operate. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. Bancorp has not elected financial holding company status and neither Bancorp nor the Bank has engaged in any activities determined by the FRB to be financial in nature or incidental or complementary to activities that are financial in nature.
Securities Exchange Act of 1934
Bancorp is subject to the public reporting requirements of the Securities and Exchange Act of 1934, as amended, generally applicable to publicly held companies. Its securities are registered with the SEC under Section 12(g) of the Exchange Act, which requires the filing of periodic reports and proxy statements, as well as certain other reporting obligation.
Sarbanes-Oxley Act of 2002
Bancorp is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act's
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principal legislation and the derivative regulation and rule-making promulgated by the Securities and Exchange Commission include:
The Bank
The Bank, as a nationally chartered bank, is subject to primary supervision, periodic examination, and regulation by the OCC. To a lesser extent, the Bank is also subject to certain regulations promulgated by the FRB and the FDIC, as administrator of the DIF. The Federal bank regulatory agencies have extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution's capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits.
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Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If, as a result of an examination, the OCC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the OCC, and separately the FDIC as insurer of the Bank's deposits, have residual authority to:
Dividends
The ability of the Bank to pay dividends is subject to certain legal limitations. No national bank may pay dividends from its capital; all dividends must be paid out of net profits then on hand, after deducting for expenses including losses and bad debts. The payment of dividends out of net profits of a national bank is further limited by a limitation, which prohibits a bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock, or if the surplus fund does not equal the amount of capital stock, until one-tenth of the bank's net profits of the preceding half-year, in the case of quarterly or semi-annual dividends, or the preceding two consecutive half-year periods, in the case of annual dividends, are transferred to the surplus fund before each dividend is declared.
The approval of the OCC is required, if the total of all dividends declared by a national bank in any calendar year shall exceed the total of its net profits for that year combined with its net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The OCC has adopted guidelines, which set forth factors which are to be considered by a national bank in determining the payment of dividends. A national bank, in assessing the payment of dividends, is to evaluate the bank's capital position, its maintenance of an adequate allowance for loan and lease losses, and the need to review or develop a comprehensive capital plan, complete with financial projections, budgets and dividend guidelines. Therefore, the payment of dividends by a national bank is also governed by its ability to maintain minimum required capital levels and an adequate allowance for loan and lease losses. Additionally, the OCC may prohibit the payment of any dividend that would constitute an unsafe and unsound banking practice.
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The ability of Bancorp and any non-bank subsidiary to pay dividends may also be limited by applicable state law. For example, the California General Corporation Law prohibits Bancorp from paying dividends on our common stock unless: (i) retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend the sum of Bancorp's assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities and the current assets of Bancorp would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense of the two preceding fiscal years was less than the average of its interest expense of the two preceding fiscal years, at least equal to 125% of its current liabilities.
Shareholders are entitled to receive dividends only when and if declared by Bancorp's Board of Directors. Bancorp presently intends to follow a policy of retaining earnings, if any, for the purpose of increasing its net worth and reserves. Accordingly, it is anticipated that no cash dividends will be declared in the foreseeable future, and no assurance can be given that Bancorp's earnings will permit the payment of dividends of any kind in the future. The future dividend policy of Bancorp will be subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity, and general business conditions.
Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and Federal banking agencies. Increased capital requirements are expected as a result of expanded authority set forth in Dodd-Frank and the Basel III international supervisory developments discussed above. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. At December 31, 2010, Bancorp's and the Bank's capital ratios exceeded the minimum percentage requirements to be deemed "well capitalized" for regulatory purposes
The current risk-based capital guidelines for bank holding companies and banks adopted by the Federal banking agencies are expected to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank holding companies and banks engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards. As of December 31, 2009 and December 31, 2010, the Bank's Total Risk-Based Capital Ratio was 27.0% and 22.4% respectively, and its Tier 1 Risked-Based Capital Ratio was 25.8% and 21.2% respectively.
Qualifying capital is classified depending on the type of capital:
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$500 million in assets could issue new trust preferred securities that could still qualify as Tier 1, however the market for any new trust preferred capital raises is uncertain.
Under the current capital guidelines, there are three fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio. To be deemed "well capitalized" a bank must have a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively.
In addition to the requirements of Dodd-Frank and Basel III, the Federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized, in which case institutions may no longer be deemed well capitalized and may therefore be subject to restrictions on taking brokered deposits.
Bancorp and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to Federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. Federal regulators may, however, set higher capital requirements when a bank's particular circumstances warrant. As of December 31, 2010, the Bank's leverage capital ratio was 16.6%, and the Company's leverage capital ratio was 18.1%, both ratios exceeding regulatory minimums.
Prompt Corrective Action Provisions
The FDI Act provides a framework for regulation of depository institutions and their affiliates, including parent holding companies, by their Federal banking regulators. Among other things, it requires the relevant Federal banking regulator to take "prompt corrective action" with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate Federal banking regulator under the prompt corrective action rules generally depend upon an institution's classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio.
A depository institution's capital tier under the prompt corrective action regulations will depend upon how its capital levels compare with various relevant capital measures and the other factors established by the regulations. A bank will be: (i) "well capitalized" if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if the institution has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not "well capitalized"; (iii) "undercapitalized" if the institution has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%; (iv) "significantly undercapitalized" if the institution has a total risk-based
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capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) "critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" institutions are subject to growth limitations and are required to submit a capital restoration plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution's total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator.
The appropriate Federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDI Act provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
Deposit Insurance
The FDIC is an independent Federal agency that insures deposits, up to prescribed statutory limits, of Federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount has been permanently increased to $250 thousand and all non-interest-bearing transaction accounts are insured through December 31, 2012. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Due to the greatly increased number of bank failures and losses incurred by DIF, as well as the recent extraordinary programs in which the FDIC has been involved to support the banking industry generally, the FDIC's DIF was substantially depleted and the FDIC has incurred substantially increased operating costs. In November 2009, the FDIC adopted a requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. The Bank prepaid its assessments based on the calculations of the projected assessments at that time.
As required by Dodd-Frank, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other things, the plan: (1) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35 percent (from the former minimum of 1.15 percent) and removes
15
the upper limit on the designated reserve ratio (which was formerly capped at 1.5 percent) and consequently on the size of the fund; (2) requires that the fund reserve ratio reach 1.35 percent by 2020; (3) eliminates the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35 percent and 1.5 percent; and (4) continues the FDIC's authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5 percent, but grants the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends. The FDI Act continues to require that the FDIC's Board of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio, engage in notice-and-comment rulemaking before the beginning of the calendar year. The FDIC has set a long-term goal of getting its reserve ratio up to 2% of insured deposits by 2027. In connection with these changes, the Company expects its FDIC deposit insurance premiums to increase.
On February 7, 2011, the FDIC approved a final rule, as mandated by Dodd-Frank, changing the deposit insurance assessment system from one that is based on total domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the final rule creates a scorecard-based assessment system for larger banks (those with more than $10 billion in assets) and suspends dividend payments if the DIF reserve ratio exceeds 1.5 percent, but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. Larger insured depository institutions will likely pay higher assessments to the DIF than under the old system. Additionally, the final rule includes a new adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis points on every dollar of long-term, unsecured debt held as an asset that was issued by another insured depository institution, excluding debt guaranteed under the Temporary Liquidity Guarantee Program (the "TLGP"), to the extent that all such debt exceeds 3 percent of the other insured depository institution's Tier 1 capital. The new rule is expected to take effect for the quarter beginning April 1, 2011.
The Bank's FDIC insurance expense totaled $190 thousand for 2010. FDIC insurance expense includes deposit insurance assessments and Financing Corporation ("FICO") assessments related to outstanding FICO bonds to fund interest payments on bonds to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017. Total FICO assessments totaled $10 thousand for 2010.
The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums may have a material and adverse affect on the Company's earnings and could have a material adverse effect on the value of, or market for, Bancorp's common stock.
The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank's depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank's charter by the OCC.
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, as amended by Dodd-Frank, bank holding companies and banks generally have the ability to acquire or merge with banks in other states, and banks may also acquire or establish new branches to the same extent as banks established in any other state and provided they satisfy supervisory requirements for such expansion. Interstate branches are subject to certain laws of the states in which they are located. The Bank presently has no interstate branches.
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Operations and Consumer Compliance Laws
The Bank must comply with numerous Federal anti-money laundering, data security, privacy and consumer protection statutes and implementing regulations, including the USA PATRIOT Act of 2001, the Bank Secrecy Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various Federal and state privacy protection laws. Noncompliance with these laws could subject the Bank to lawsuits and could also result in administrative penalties, including, fines and reimbursements. The Bank and Bancorp are also subject to Federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition.
These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.
In addition to the other information on the risks the Company faces and our management of risk contained in this annual report or in our regulatory filings, the following are the most significant risks which may adversely affect our business and operations. Events or circumstances arising from one or more of these risks could adversely affect the Company's business, financial condition, operating results and prospects, and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face, and additional risk may also impair our business operations and results. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. This discussion of risk factors may include forward-looking statements. For cautions about relying on such forward-looking statements, please see the initial page of this Report on Form 10-K.
WE DO NOT HAVE A HISTORY OF PROFITABILITY.
The Company has incurred net losses of $4.7 million, $5.0 million, $4.4 million and $2.2 million for the years ended December 31, 2010, 2009, 2008 and 2007, respectively. The losses that occurred during the current year were, to some degree, the results of anticipated costs associated with developing our operating infrastructure. There were also unanticipated costs associated with executive management transitions. The effects of the current economic downturn may continue to adversely impact the Company's overall financial performance and results of operations. There can be no assurance that the Company will achieve profitability in the future.
DIFFICULT MARKET CONDITIONS HAVE ADVERSELY AFFECTED OUR INDUSTRY.
Declines in the housing market over the past several years, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by many financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have significantly reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer
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delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally.
A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on the Company and others in the banking industry. In particular, the Company may face the following risks in connection with these events:
Overall, during the past several years, the general business environment has had an adverse effect on business in our market area and there is no assurance that the environment will improve in the near future. Until conditions improve, we expect that our business, financial condition and results of operations will be negatively impacted.
POOR ECONOMIC CONDITIONS IN THE SOUTHERN CALIFORNIA REAL ESTATE MARKET MAY CAUSE US TO SUFFER HIGHER DEFAULT RATES ON OUR LOANS AND DECREASED VALUE OF THE ASSETS WE HOLD AS COLLATERAL.
A substantial majority of our assets and deposits have been and will be generated in Southern California, and at December 31, 2010, approximately 59% of the Company's loans were real estate loans, most of which are secured by real property in Southern California. During 2010, the real estate market in Southern California continued to deteriorate significantly, as evidenced by declining prices, reduced transaction volume, and increased foreclosure rates, and this deterioration may be expected to result in an increase in the level of the Company's nonperforming loans, particularly commercial real estate loans. When real estate prices decline, the value of real estate collateral securing the Company's loans is reduced. As a result, the Company may experience greater charge-offs and, similarly, its ability to recover on defaulted loans by foreclosing and selling the real estate collateral may be diminished and as a result the Company is more likely to suffer losses on defaulted loans. If this real estate trend in the Company's market areas continues or worsens, the result could be reduced income, increased expenses, and less cash available for lending and other activities, which could have a material and adverse effect on the Company's financial condition and results of operations.
WE MAY SUFFER LOSSES IN OUR LOAN PORTFOLIO DESPITE STRICT ADHERENCE TO UNDERWRITING PRACTICES.
The Company attempts to mitigate the risks inherent in extending credit by adhering to specific underwriting practices, managed by credit professionals. These practices include analysis of a borrower's prior credit history, financial statements, tax returns, and cash flow projections, valuations of collateral
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based on reports of independent appraisers and verifications of liquid assets. Although we believe that our underwriting criteria is appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in the Bank's allowance for loan losses. If the Company's underwriting practices prove to be ineffective, the Company may incur losses in its loan portfolio, which could have a material and adverse effect on our financial condition and results of operations.
Bank regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. This is also the practice of the Company's independent auditors. A review of the Bank's loans was completed as recently as October 2010 by a third party loan review, where all recommendations regarding the risk weighting of bank credits were implemented. While we believe that our allowance for loan losses is adequate to cover potential losses, we cannot guarantee that future increases to the allowance for loan losses may not be required by regulators or other third party loan review or financial audits. Any of these occurrences could materially and adversely affect our financial condition and results of operations.
WE COULD BE AT A DISADVANTAGE WHEN COMPETING FOR DEPOSITS AND LOANS WITH LARGER INSTITUTIONS THAT HAVE LARGER LENDING LIMITS AND ESTABLISHED CUSTOMER CONTACTS.
Within the Los Angeles metropolitan area, the Company faces intense competition for loans, deposits, and other financial products and services. Increased competition within the Company's pricing market may result in reduced loan originations and deposits. Ultimately, the Company may not be able to compete successfully against current and future competitors.
Many competitors offer the types of loans and banking services that the Company offers. These competitors include national banks, regional banks and other independent banks. The Company also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, mortgage banks and other financial intermediaries. In particular, the Company's competitors include financial institutions whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. These institutions may be able to offer the same loan products and services the Company offers at more competitive rates and prices.
If the Company is unable to attract and retain banking customers, it may be unable to maintain its loan portfolio and deposit levels, and its financial condition and results of operations may be materially and adversely affected.
WE ARE DEPENDENT ON KEY PERSONNEL AND THE LOSS OF ONE OR MORE OF THOSE KEY PERSONNEL MAY MATERIALLY AND ADVERSELY AFFECT OUR PROSPECTS.
Competition for qualified employees in the banking industry is intense, and there are limited numbers of qualified persons with knowledge of, and experience in, the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. The Company's success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, finance, administrative, marketing and business development, and technical personnel, and upon the continued contributions of our management and personnel. In particular, our progress towards profitability had been and continues to be highly dependent upon the abilities of key executives and certain other employees. There have been several changes in key executive positions since the Company's inception and there is no guarantee that other changes may not occur. If the Company fails to attract and retain the necessary personnel, the Company's financial condition and results of operations may be materially and adversely affected.
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WE FACE LIMITS ON OUR ABILITY TO LEND.
The Bank's legal lending limit as of December 31, 2010 was approximately $3.4 million. Accordingly, the size of the loans which we can offer to potential customers is less than the size of loans which many of our competitors with larger lending limits can offer. The Bank's lending limit affects our ability to seek relationships with the area's larger and more established businesses. We cannot be assured of any success in attracting or retaining customers seeking larger loans or that we can engage in participations of those loans on terms favorable to us. Moreover, to the extent that the Company incurs losses and does not obtain additional capital, the Company's lending limit, which depends upon the amount of its capital, will decrease, which could have a material and adverse effect on the Company's financial condition and results of operations.
INTEREST RATE FLUCTUATIONS AND OTHER CONDITIONS WHICH ARE OUT OF OUR CONTROL COULD HARM PROFITABILITY.
Our net interest income before provision for loan losses and net income depends to a great extent on "rate differentials," i.e., the difference between the income we receive from our loans, securities and other earning assets, and the interest expense we pay on our deposits and other liabilities. These rates will be highly sensitive to many factors which will be beyond our control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest the Company receives on its loans and investment securities and the amount of interest it pays on deposits, it will also affect the Company's ability to originate loans and obtain deposits and its costs in doing so. It is impossible to predict the nature or extent of the effect on our operations of monetary policy changes or other economic trends over which we have no control, such as unemployment and inflation. In addition, factors like natural resource prices, international conflicts and terrorist attacks and other factors beyond our control may adversely affect our business. If the rate of interest the Company pays on its deposits and other borrowings increases more than the rate of interest it earns on its loans and other investments, the Company's net interest income, and therefore its financial condition and results of operations, could be materially and adversely affected. Similarly, the Company's financial condition and results of operations could be materially and adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other borrowings.
WE RELY ON COMMUNICATIONS, INFORMATION, OPERATING AND FINANCIAL CONTROL SYSTEMS TECHNOLOGY FROM THIRD-PARTY SERVICE PROVIDERS.
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relations management, general ledger, and loan servicing and loan origination systems. Any failure or interruption or breach in security of these systems could result in a material adverse effect on our ability to operate efficiently and expose the Company to regulatory, legal and reputation risks.
OUR INABILITY TO PROPERLY MANAGE LIQUIDITY RISKS MAY IMPAIR OUR OPERATIONS AND JEOPARDIZE OUR FINANCIAL CONDITION.
Liquidity is an essential component of our business. An inability to raise funds at reasonable costs, whether through deposits, borrowings, the sale of loans, or other sources may have a material and adverse effect on our liquidity, financial condition and results of operation. Lack of access to funding sources may at times affect our entire industry or may specially relate to our Company, such as a result of adverse regulatory actions against us, or a deterioration of the confidence of customers and potential customers in the ability of our Company to meet their financial needs.
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FINANCIAL SERVICES LEGISLATION AND REGULATORY REFORMS MAY HAVE A SIGNIFICANT IMPACT ON OUR BUSINESSES AND RESULTS OF OPERATIONS.
The Dodd-Frank Act was signed into law on July 21, 2010, and many of its provisions have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities as well as require multiple studies to be conducted. The Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, could limit our ability to pursue business opportunities we might otherwise consider engaging in, impose additional costs on us, result in significant loss of revenue, impact the value of assets we hold, or otherwise significantly adversely affect our businesses. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:
Further, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may have a material and adverse impact results of operations and financial condition.
UNPRECEDENTED MARKET VOLATILITY
The capital and credit markets have been experiencing volatility and disruption for more than two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the Company will not experience an adverse effect, which may be material, on the Company's ability to access capital and on its financial condition and results of operations.
Several factors could cause the price of Bancorp's common stock to fluctuate substantially in the future, including:
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WE MAY NOT HAVE THE ABILITY TO ATTRACT CAPITAL NECESSARY TO MAINTAIN REGULATORY RATIOS AND FUND GROWTH.
The Company may need to raise additional capital in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. The Company's ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of its control, and its financial performance. Economic conditions and the loss of confidence in financial institutions may increase the Company's cost of funding and limit access to certain customary sources of capital.
The Company cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on the Company's financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
The Company has entered into a lease, which commenced on July 1, 2007, for the Company's main office and our corporate headquarters located at 2141 Rosecrans Avenue, Suite 1160, in the city of El Segundo, California. The lease is for a term of seven years, with one option to renew for five years. Under the lease, we occupy approximately 7,600 square feet on the ground floor of a six-story multi-tenant building complex known as The Plaza at Continental Park. The current base rent is $20,996 per month, with annual increases of 3% per year as of July 1 each year.
The Company has also entered into a lease agreement for satellite office of its mortgage division, which commenced on November 1, 2010. The property is located at 11975 El Camino Real Suite 103, in the city of San Diego, California. The lease is for a term of 26 months, with one option to renew for three years. Under the lease, the company occupy's 2,511 square feet on the ground floor of the three story building. The current base rent is $6,403.05 per month, with an increase of approximately 3% at the beginning of the 13th and 25th month respectively.
For the use of MCM and its subsidiaries the Company entered into a lease on June 1, 2010, with a term of 24 months. The lease provides the Company with the option to terminate the lease at the end of twelve months. If the Company exercises this option to terminate the lease early, a fee in the amount of $6,996 must be paid by the Company to the lessor. The property is located at 5023 Parkway Calabasas, in the city of Calabasas, California. The current rent is $14,513 per month.
The Company has two other month-to-month leases for temporary locations in El Segundo ($3,000 per month) and New York ($5,361 per month). Total occupancy expense for the year ended December 31, 2010 was $733 thousand compared to $459 thousand for the year ended December 31, 2009.
To the best of our knowledge, there are no pending legal proceedings to which the Company is a party and which may have a materially adverse effect upon the Company's property, business or results of operations.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On September 4, 2007, shares of Bancorp's common stock began quotations on the Over the Counter Bulletin Board ("OTCBB") under the symbol "MNHN.OB." Bancorp stock is not listed on any exchange. The OTCBB is a regulated quotation service that displays real-time bid and ask prices and volume information in over-the-counter equity securities. Unlike the NASDAQ however, the OTCBB does not impose listing standards and does not provide automated trade executions. Any investment in Bancorp common stock should be considered a long-term investment as there is currently no active trading market for the Company's stock.
The information in the following table indicates the highest and lowest trade and volume of trading for Bancorp's common stock for each calendar quarter during each of the two most recent fiscal years, and is based upon information provided by the OTCBB. The information does not include transactions for which no public records are available. These prices are based upon the actual prices of stock transactions.
Period/Calender Quarter Ended
|
High | Low | Approximate Trading Volume |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
March 31, 2009 |
$ | 8.00 | $ | 3.95 | 207,500 | |||||
June 30, 2009 |
$ | 7.25 | $ | 4.75 | 137,300 | |||||
September 30, 2009 |
$ | 7.00 | $ | 6.00 | 22,900 | |||||
December 31, 2009 |
$ | 7.00 | $ | 5.50 | 54,200 | |||||
March 31, 2010 |
$ | 7.00 | $ | 5.45 | 47,100 | |||||
June 30, 2010 |
$ | 6.50 | $ | 4.75 | 37,600 | |||||
September 30, 2010 |
$ | 4.95 | $ | 4.25 | 85,300 | |||||
December 31, 2010 |
$ | 5.50 | $ | 4.55 | 138,900 |
Shareholders
As of March 10, 2011, we have approximately 177 shareholders of record. There are no other classes of equity securities outstanding.
Dividends
To date, we have not paid any cash dividends. As a bank holding company that currently has no significant assets other than its equity interest in the Bank and MBFS, the Company's ability to declare dividends depends primarily upon dividends it receives from its subsidiaries. The dividend practice of the Bank and MBFS, like the Company's dividend practice, will depend upon its earnings, financial position, current and anticipated cash requirements and other factors deemed relevant by the subsidiaries' Board of Directors at the time.
Shareholders are entitled to receive dividends only when and if declared by the Company's Board of Directors. The Company presently intends to follow a policy of retaining earnings, if any, for the purpose of increasing the net worth and reserves of the Company. Accordingly, it is anticipated that no cash dividends will be declared in the foreseeable future, and no assurance can be given that the Company's earnings will permit the payment of dividends of any kind in the future. The future dividend policy of the Company will be subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, liquidity, and general business conditions.
Please see Item 1, "BusinessSupervision and RegulationDividends" for additional discussion of dividends and the statutes and regulations that restrict the Company's ability to pay dividends.
23
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2010 with respect to the shares of our common stock that may be issued under existing equity compensation plans.
Plan Category
|
Number of Securities to be Issued Upon Exercise of Outstanding Options |
Weighted-Average Exercise Price of Outstanding Options |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the Second Column) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity compensation approved by security holders |
564,491 | $ | 8.81 | 318,117 | ||||||
Equity compensation not approved by security holders |
| | | |||||||
Total |
564,491 | $ | 8.81 | 318,117 | ||||||
24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our statistical information as of and for the years ended December 31, 2010, December 31, 2009 and December 31, 2008. Also included is statistical information as of December 31, 2007 and for the period from August 15, 2007 (the date the Bank commenced operations) until December 31, 2007. The data should be read in conjunction with the Company's audited statements and related notes included in Item 8 of this Annual Report on Form 10-K. All averages for 2007 are calculated based upon the initial operating period noted above. Amounts are in thousands, except for per share figures.
|
As of or for the period ended December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2008 | 2007 | ||||||||||
|
(Audited) |
(Audited) |
(Audited) |
(Audited) |
||||||||||
Statements of Operations: |
||||||||||||||
Interest income |
$ | 6,518 | $ | 4,601 | $ | 3,074 | $ | 611 | ||||||
Interest expense |
1,002 | 846 | 828 | 102 | ||||||||||
Net interest income |
5,516 |
3,755 |
2,246 |
509 |
||||||||||
Provision for loan losses |
727 | 1,180 | 706 | 269 | ||||||||||
Net interest income after provision |
4,789 |
2,575 |
1,540 |
240 |
||||||||||
Non-interest income |
7,749 |
1,019 |
53 |
1 |
||||||||||
Non-interest expense |
17,231 | 8,639 | 6,010 | 2,454 | ||||||||||
Net loss from operations, excluding minority interest |
$ |
(4,693 |
) |
$ |
(5,045 |
) |
$ |
(4,419 |
) |
$ |
(2,213 |
) |
||
Per Share and Other Data: |
||||||||||||||
Basic and diluted loss per share |
$ | (1.16 | ) | $ | (1.26 | ) | $ | (1.72 | ) | $ | (0.91 | ) | ||
Book value per common share- period end |
$ | 6.05 | $ | 7.05 | $ | 8.60 | $ | 8.52 | ||||||
Weighted average shares outstanding basic and diluted |
3,988 | 3,988 | 2,567 | 2,425 | ||||||||||
Balance Sheet Data: |
||||||||||||||
Investments and fed funds sold |
$ | 55,491 | $ | 67,558 | $ | 12,602 | $ | 18,087 | ||||||
Loans, net |
$ | 87,359 | $ | 78,914 | $ | 56,467 | $ | 17,930 | ||||||
Assets |
$ | 152,948 | $ | 152,315 | $ | 92,040 | $ | 39,367 | ||||||
Deposits |
$ | 122,245 | $ | 110,920 | $ | 47,991 | $ | 17,862 | ||||||
Shareholders' equity |
$ | 24,127 | $ | 28,111 | $ | 34,288 | $ | 21,189 | ||||||
Selected Financial Ratios |
||||||||||||||
Net loss as a percentage of average assets |
(3.51 | )% | (5.10 | )% | (7.16 | )% | (16.86 | )% | ||||||
Net loss as a percentage of average equity |
(17.43 | )% | (15.87 | )% | (21.81 | )% | (24.62 | )% | ||||||
Dividend payout ratio |
| | | | ||||||||||
Equity to asset ratio |
15.91 | % | 18.65 | % | 37.25 | % | 53.82 | % | ||||||
Net interest margin |
4.46 | % | 4.00 | % | 3.89 | % | 4.28 | % | ||||||
Credit Quality |
||||||||||||||
Allowance for loan losses |
$ | 1,877 | $ | 1,202 | $ | 975 | $ | 269 | ||||||
Allowance /total loans |
2.02 | % | 1.50 | % | 1.70 | % | 1.48 | % | ||||||
Non-performing loans |
$ | | $ | | $ | | $ | | ||||||
Net (recoveries) charge-offs |
$ | 52 | $ | 952 | $ | | $ | |
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Management's discussion and analysis of financial condition and results of operation is intended to provide a better understanding of the significant changes in trends relating to the Company's financial condition, results of operation, liquidity and interest rate sensitivity. The following discussion and analysis should be read in conjunction with the audited financial statements contained within this report 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 Report.
OVERVIEW
The Company recorded a net loss of $4.7 million ($1.16 basic and fully-diluted loss per share) for the year ended December 31, 2010 as compared to a net loss of $5.0 million ($1.26 basic and fully diluted loss per share) for the year ended December 31, 2009, a 7.9% decrease. The decrease in the net loss between these two full-year operating periods is primarily due to:
These benefits were offset by the following:
The improvement in the net interest income after provisions for loan losses was sufficient to diminish much of the effect of the increase in net non-interest in expense between annual periods.
The following provides a summary of operating results for the year ended December 31, 2010:
26
December 31, 2009. For the year ended December 31, 2010 the net interest margin was 4.46%, which compares favorably to 4.00% for the year ended December 31, 2009, representing an improvement of 46 basis points. For a more detailed discussion regarding net interest income, please see "Net-Interest Income" below.
The following provides a summary of significant annual changes in the financial condition of the Company as of December 31, 2010 compared to December 31, 2009:
27
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 that 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:
Allowance for loan losses
The Company maintains an allowance for loan losses ("ALL") 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 and 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 ALL necessarily includes estimates by management applied to known loan portfolio elements. We employ a 10-point loan grading system in an effort to more accurately track the inherent quality of the loan portfolio. The 10-point system assigns a value of "1" or "2" to loans that are substantially risk free. Modest, average and acceptable risk loans are assigned point values of "3", "4", and "5", respectively. Loans on the watch list are assigned a point value of "6." Point values of "7," "8," "9" and "10" are assigned respectively to loans classified as special mention, substandard, doubtful and loss. Using these risk factors, management continues the analysis of the general reserves by 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.
Investment Securities
The Company has both investment securities classified as held-to-maturity and available-for-sale. The held-to-maturity classification requires that securities be recorded at cost, adjusted for amortization of premiums and accretion of discounts over the estimated period to maturity, or to an earlier call date, if appropriate, on an effective interest yield basis. These securities would include those that management has the intent and the ability to hold into the foreseeable future.
Under the available-for-sale classification, securities can be sold in response to certain conditions, such as changes in interest rates, fluctuations in deposit levels or loan demand or need to restructure the portfolio to better match the maturity of 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 and reported as an amount net of taxes as a separate component of accumulated other comprehensive income (or loss) included in shareholders' equity.
At each reporting date, investment securities are assessed to determine whether there is other-than-temporary impairment. If it is probable that the Company will be unable to collect all amounts due to the contractual terms of a debt security not impaired at acquisition, other-than-temporary impairment shall be considered to have occurred. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of shareholders' equity. Realized gains and losses on sales are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. For mortgage-backed securities, the amortization or accretion is based upon estimated average lives of the securities. The lives of the securities can fluctuate based upon the amount of prepayments received on the assets.
28
Goodwill
When the Company acquired its interest in MCM, the business had been in operation prior to the date when the acquisition occurred. The Company paid a premium on this acquisition, and said premium is recorded as an intangible asset in the form of goodwill.
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. In accordance with current accounting practice, goodwill is not amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill for impairment. The assessment of the impairment occurred on August 31, 2010 and reflected no impairment at that time. Accordingly, the carrying value of the Goodwill was $297,391 as of both December 31, 2010 and December 31, 2009.
Intangible assets with definite useful lives are amortized over their estimated useful lives to the estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company's balance sheet.
Deferred Tax Assets
As discussed in Note 12 of the Consolidated Financial Statements, the realization of any benefit from the deferred tax asset is dependent on an estimation of future earnings. Due to the Company's net loss position, all tax benefits that apply to this operating loss, as well as losses from pre-opening expenses, have been offset with a tax valuation allowance of equal amount. The ability to recognize any benefit from operating losses is directly related to the Company's demonstrated ability to record profits within the foreseeable future. While we believe that we will become profitable, it is more likely than not that we will not generate sufficient taxable income in the near future to significantly or fully use the tax benefits currently available. In this case, we are required to establish a valuation reserve to cover the potential loss of these benefits. As noted, at present the valuation allowance fully offsets any potential benefit. If future income should prove to be nonexistent or less than the amount of the deferred tax assets within the tax years to which it applies, the asset many not be realized and no benefit will result.
RESULTS OF OPERATIONS
Net Loss
The Company reported a net loss of $4.7 million for the year ended December 31, 2010 compared to a net loss of $5.0 million for the year ended December 31, 2009. The Company's net loss for the year ended December 31, 2010 was primarily due to costs associated with the expansion of Company's infrastructure to better position itself to expand its products and services, coupled with costs associated with the executive management transitions. Since its inception, the Company's earnings have been largely dependent on net interest income, although the benefits from the Company's diversification into fee-based non-interest income was evident in 2010 and is discussed in detail in the Non-Interest Income section below. Certain costs associated with the generation of the fee income have initial fixed components that must be bridged by levels of production before the benefit from the fee income has a positive effect on the Company's net income. Please see "Business Segment Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operation.
In addition to the initial challenge of building the Company's interest-bearing assets to a level which would support ongoing profitability, the financial industry in general, and the Bank specifically, was negatively affected by the decline in credit-worthy customers, reducing the traditional primary source of income for a community bank, the loan portfolio. The alternatives in the investment area were also negatively impacted with historically low returns on interest-bearing assets. The cost of funding assets has decreased since the Bank's inception but the fluctuations in both asset and liability mixes have resulted in an inconsistent pattern in net interest margins over the eight (8) quarters covered by this discussion.
29
Net Interest Income
The Company's ability to produce earnings is directly tied to the net interest income, which is the difference between what we earn on loans and other interest-earning assets and the interest we pay on deposits and borrowed funds. Total interest income can fluctuate based upon the mix of earning assets among 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 and non-interest bearing liabilities and the related rates associated with their balances. The net number between the interest income and the 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 interest-bearing liabilities.
Net interest margin is net interest income expressed as a percentage of average total interest-earning assets. Net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes in the relative amounts of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Interest rates earned and paid are affected principally by our competition, general economic conditions and other factors beyond the Company's control such as Federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters and the actions of the FRB.
The following table sets forth interest income, interest expense, net interest income before provision for loan losses and net interest margin for the periods presented:
|
Year Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, | |
|
||||||||||
|
Dollar Change |
Percent Change |
|||||||||||
|
2010 | 2009 | |||||||||||
|
(Dollars in Thousands) |
||||||||||||
Interest income |
$ | 6,518 | $ | 4,601 | $ | 1,917 | 41.66 | % | |||||
Interest expense |
1,002 | 846 | 156 | 18.44 | % | ||||||||
Net interest income before provision for loan losses |
$ | 5,516 | $ | 3,755 | $ | 1,761 | 46.90 | % | |||||
Net interest margin |
4.46 | % | 4.00 | % | 11.50 | % |
The reported net interest margin for each of the annual periods ended December 31, 2010 and December 31, 2009 was 4.46% and 4.00% respectively. However, the quarterly net interest margin during 2009 and 2010 has fluctuated between a low of 3.60% in the first quarter of 2009 and a high of 4.84% for the second quarter of 2010. The significant quarterly fluctuations were primarily the result of the rapid changes in the asset and liability mix.
The following table presents the weighted average yield on each specific category of interest-earning assets, the weighted average rate paid on each specific category of interest-bearing liabilities, and the resulting interest rate spread and net interest margin for the period indicated.
30
ANALYSIS OF NET INTEREST INCOME
|
Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Balance |
Interest Income/ Expense |
Weighted Average Rate Earned/Paid |
Average Balance |
Interest Income/ Expense |
Weighted Average Rate Earned/Paid |
|||||||||||||||
|
(Dollars in Thousands) |
(Dollars in Thousands) |
|||||||||||||||||||
Interest-earning assets: |
|||||||||||||||||||||
Federal funds sold/Interest-bearing demand funds |
$ | 16,532 | $ | 39 | 0.24 | % | $ | 14,223 | $ | 38 | 0.27 | % | |||||||||
Deposits with other financial institutions |
3,420 | 52 | 1.52 | % | 5,161 | 108 | 2.09 | % | |||||||||||||
Investments(1) |
20,054 | 1,168 | 5.82 | % | 8,033 | 457 | 5.69 | % | |||||||||||||
Loans(2) |
83,734 | 5,260 | 6.28 | % | 66,432 | 3,998 | 6.02 | % | |||||||||||||
Total interest-earning assets |
123,740 | 6,518 | 5.27 | % | 93,849 | 4,601 | 4.90 | % | |||||||||||||
Non-interest-earning assets |
7,799 | 4,959 | |||||||||||||||||||
Total assets |
$ | 131,539 | $ | 98,808 | |||||||||||||||||
Interest-bearing liabilities: |
|||||||||||||||||||||
Demand |
$ | 3,018 | $ | 3 | 0.10 | % | $ | 2,334 | $ | 2 | 0.10 | % | |||||||||
Savings and money market |
25,271 | 225 | 0.89 | % | 14,001 | 161 | 1.15 | % | |||||||||||||
Certificates of deposit |
40,010 | 574 | 1.43 | % | 26,610 | 483 | 1.82 | % | |||||||||||||
FHLB advances |
4,563 | 200 | 4.32 | % | 4,592 | 200 | 4.30 | % | |||||||||||||
Total interest-bearing liabilities |
72,862 | 1,002 | 1.38 | % | 47,537 | 846 | 1.78 | % | |||||||||||||
Non-interest-bearing demand deposits |
24,641 | 18,669 | |||||||||||||||||||
Total funding sources |
97,503 | 1.03 | % | 66,206 | 1.28 | % | |||||||||||||||
Non-interest-bearing liabilities |
8,238 | 863 | |||||||||||||||||||
Shareholders' equity |
25,798 | 31,739 | |||||||||||||||||||
Total liabilities and shareholders' equity |
$ | 131,539 | $ | 98,808 | |||||||||||||||||
Excess of interest-earning assets over funding sources |
$ | 26,237 | $ | 27,643 | |||||||||||||||||
Net interest income |
$ | 5,516 | $ | 3,755 | |||||||||||||||||
Net interest rate spread |
3.89 | % | 3.12 | % | |||||||||||||||||
Net interest margin |
4.46 | % | 4.00 | % |
31
The table below sets forth changes for the comparable annual periods ended December 31, 2010 and December 31, 2009 for average earning assets, average interest-bearing liabilities, and their respective rates:
|
VARIANCE IN BALANCES AND RATES (Dollars in Thousands) |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Average Balance for the year ended |
|
|
Average Yield/Rate for the year ended |
|
|||||||||||||||||
|
Variance | |
||||||||||||||||||||
|
December 31, 2010 |
December 31, 2009 |
December 31, 2010 |
December 31, 2009 |
|
|||||||||||||||||
|
dollar | percent | Variance | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||
Federal funds sold/Interest-bearing demand funds |
$ | 16,532 | $ | 14,223 | $ | 2,309 | 16.23 | % | 0.24 | % | 0.27 | % | (0.03 | )% | ||||||||
Deposits with other financial institutions |
3,420 | $ | 5,161 | (1,741 | ) | (33.73 | )% | 1.52 | % | 2.09 | % | (0.57 | )% | |||||||||
Investments |
20,054 | $ | 8,033 | 12,021 | 149.65 | % | 5.82 | % | 5.69 | % | 0.13 | % | ||||||||||
Loans |
83,734 | $ | 66,432 | 17,302 | 26.04 | % | 6.28 | % | 6.02 | % | 0.26 | % | ||||||||||
Total interest-earning assets |
$ | 123,740 | $ | 93,849 | $ | 29,891 | 31.85 | % | 5.27 | % | 4.90 | % | 0.37 | % | ||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||
Interest-bearing demand |
$ | 3,018 | $ | 2,334 | $ | 684 | 29.31 | % | 0.10 | % | 0.10 | % | 0.00 | % | ||||||||
Savings and money market |
25,271 | 14,001 | 11,270 | 80.49 | % | 0.89 | % | 1.15 | % | (0.26 | )% | |||||||||||
Certificates of deposit |
40,010 | 26,610 | 13,400 | 50.36 | % | 1.43 | % | 1.82 | % | (0.39 | )% | |||||||||||
FHLB advances |
4,563 | 4,592 | (29 | ) | (0.63 | )% | 4.32 | % | 4.30 | % | 0.02 | % | ||||||||||
Total interest-bearing liabilities |
$ | 72,862 | $ | 47,537 | $ | 25,325 | 53.27 | % | 1.38 | % | 1.78 | % | (0.40 | )% | ||||||||
A volume and rate variance table is provided below which sets forth the dollar differences in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the comparable periods indicated:
|
For the year ended December 31, 2010 over December 31, 2009 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Volume | Rate | Total | ||||||||
|
(Dollars in Thousands) |
||||||||||
Interest income: |
|||||||||||
Federal funds sold/Interest-bearing demand funds |
$ | 6 | $ | (5 | ) | $ | 1 | ||||
Deposits with other financial instituions |
(36 | ) | (20 | ) | (56 | ) | |||||
Investments |
684 | 27 | 711 | ||||||||
Loans |
1,040 | 221 | 1,261 | ||||||||
Net increase (decrease) |
1,694 | 223 | 1,917 | ||||||||
Interest expense: |
|||||||||||
Interest bearing demand |
1 | | 1 | ||||||||
Savings and money market |
130 | (66 | ) | 64 | |||||||
Certificates of deposit |
243 | (152 | ) | 91 | |||||||
FHLB advances |
(1 | ) | 1 | | |||||||
Net increase (decrease) |
373 | (217 | ) | 156 | |||||||
Total net increase |
$ | 1,321 | $ | 440 | $ | 1,761 | |||||
32
A review of the above tables shows that the overall increase in net interest income of approximately $1.7 million between the two consecutive years ending at December 31, 2010 is the result of several factors.
Among the most significant factors was the overall increase in earning assets, up approximately $29.9 million or 31.9% between December 31, 2010 and December 31, 2009. The primary source of the growth noted in earning assets stems from the growth in non-brokered wholesale funding, which averaged approximately $14.9 for the year 2010 but only approximately $2.2 million for the year 2009. This source was augmented by increases in both average savings and money market funds of $11.3 million and average interest-free deposits of $6.0 million.
The Company benefitted from the growth of earning assets with substantially all that growth in the higher-yielding categories. This resulted in a positive volume variance of $1.7 million. This positive volume variance was augmented by an overall positive rate variance of $233 thousand bringing the total interest income variance to 1.9 million, or 31.9% between comparable annual periods.
Interest expense increased by a modest $156 thousand from the year ended December 31, 2010 compared to the year ended December 31, 2009, with the reduction in effective interest rates significantly countering the effects of the volume variance due to the increase in average outstanding interest-bearing liabilities.
Provision for Loan Losses
The Company made provisions for loan losses of $727 thousand for the year ended December 31, 2010 compared to $1.2 million for the year ended December 31, 2009, a decrease of 38.4%. However, the growth of loans outstanding between the end of 2010 and the end of 2009 of approximately $9.1 million would have required an increase to maintain the allowance at a similar level as of December 31, 2009. The amount that would have been required due solely to the increase in outstanding loans would approximate $137 thousand. Any additional provisions would relate to the inherent credit risk in the Company's loan portfolio as determined by the periodic review of the adequacy of the loan loss allowance by management and by the need to replenish the allowance for net charge-offs.
The allowance is reduced by net charge-offs. For the year ended December 31, 2009, the net charge-offs were approximately $952 thousand. For the year ending in December 31, 2010, the net charge-offs declined to only $52 thousand, a reduction of $900 thousand. Accordingly, the percentage of the allowance for loan losses to loans outstanding increased between the two comparable annual periods at a level determined to cover the inherent credit risks while the actual provision between the two comparable annual periods decreased by $453 thousand.
Non-Interest Income
The following table reflects the major components of the Company's non-interest income (dollars in thousands):
|
For the Year Ended |
For the Year Ended |
||||||
---|---|---|---|---|---|---|---|---|
|
December 31, | |||||||
|
2010 | 2009 | ||||||
Trading income |
$ | 4,972 | $ | 133 | ||||
Whole-loan trading income |
1,652 | 745 | ||||||
Advisory fees |
732 | | ||||||
Bank-related fees |
239 | 141 | ||||||
Mortgage-related fees |
154 | | ||||||
Total non-interest income |
$ | 7,749 | $ | 1,019 | ||||
33
Non-interest income for the year ended December 31, 2010 includes fee-based income from the Bank of $239 thousand, an increase of 69.6% resulting primarily from fee income associated with deposit account activity. The income from the initial three months of mortgage related activity was approximately $154 thousand for which there is no comparative amount for 2009.
Also included is the income related to activity of MCM since October of 2009, when the Company acquired a majority interest in MCM. The recorded gross income of approximately $878 thousand for this three-month period was almost sufficient to offset the operating expenses for the three months of operations, leaving a combined loss of approximately $30 thousand for 2009. For the full year of 2010, MCM generated approximately $7.4 million, which covered most of MCM's operating expenses of $7.7 million. Please see "Business Segment Results" in this Management's Discussion and Analysis of Financial Condition and Results of Operation.
Non-Interest Expense
The following table lists the major components of the Company's non-interest expense (dollars in thousands):
|
|
|
Variances | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
For the Year Ended December 31, 2010 |
For the Year Ended December 31, 2009 |
||||||||||||
|
dollars | percentage | ||||||||||||
Compensation and benefits |
$ | 11,770 | $ | 5,223 | $ | 6,547 | 125.3 | % | ||||||
Data processing |
1,122 | 611 | 511 | 83.6 | % | |||||||||
Occupancy and equipment |
1,110 | 776 | 334 | 43.0 | % | |||||||||
Legal services |
473 | 434 | 39 | 9.0 | % | |||||||||
Marketing and business development |
365 | 301 | 64 | 21.3 | % | |||||||||
Regulatory assessments |
314 | 235 | 79 | 33.6 | % | |||||||||
Communication |
295 | 105 | 190 | 181.0 | % | |||||||||
Audits and examination |
271 | 207 | 64 | 30.9 | % | |||||||||
Recruiting fees |
271 | | 271 | 0.0 | % | |||||||||
Education and Dues |
211 | 77 | 134 | 174.0 | % | |||||||||
Consulting fees |
207 | 151 | 56 | 37.1 | % | |||||||||
Administrative expenses |
206 | 43 | 163 | 379.1 | % | |||||||||
Director fees |
202 | | 202 | 0.0 | % | |||||||||
Other professional services |
198 | 267 | (69 | ) | (25.8 | )% | ||||||||
Postage and Supplies |
115 | 72 | 43 | 59.7 | % | |||||||||
Other non-interest expenses |
101 | 137 | (36 | ) | (26.3 | )% | ||||||||
Total non-interest expenses |
$ | 17,231 | $ | 8,639 | $ | 8,592 | 99.5 | % | ||||||
Compensation and Benefits
Compensation and Benefits represent the largest of the Company's non-interest expense categories, totaling $11.8 million for the year ended December 31, 2010 and represent approximately 68% of the $17.2 million of total non-interest expense. Expenses in this category were significantly affected by the growth in the Company-wide employee base, which grew from 48 at the end of December 31, 2009 to 73 at the end of December 31, 2010, a 52.1% increase.
The compensation expense related to MCM and its subsidiaries for the year 2009 reflects just the amount for the three-month period that this subsidiary was a part of the Company. The expense from MCM for the initial three-month period in 2009 was approximately $580 thousand compared to the expense from MCM for the full year ended December 31, 2010, which was approximately $5.8 million, ten times larger than the prior period.
34
The compensation expense related to Bancorp for the full year ended December 31, 2009 was approximately $739 thousand compared $1.9 million for the full year ended December 31, 2010, an increase of approximately 165.8%. The increase is the result of several factors explained in detail under Segment Reporting.
The compensation expense related to the Bank for the full year ended December 31, 2009 was approximately $3.9 million, essentially the same for the full year ended December 31, 2010. Certain non-recurring fee compensation expenses associated with management transition were fully offset by cancelled incentive expenses associated with the departure of certain Bank employees. Temporary costs associated with key Bank positions were filled by consultants and are not reflected in Compensation and Benefits.
Data Processing
Expenses related to the Data Processing needs of the Company increased from approximately $611 thousand for the year ended December 31, 2009 to approximately $1.1 million for the year ended December 31, 2010, an increase of 83.6%.
The increase noted in Data Processing is related primarily to the difference in reporting periods for MCM, whose operations were reported only from the acquisition date of October 1, 2009 for 2009. The amount for the shortened period compared to the amount for the full year ended December 31, 2010 accounts for essentially all of the total increase noted above.
Occupancy and Equipment
Occupancy and Equipment expenses increased by approximately $334 thousand, or 43% between the years ended December 31, 2009 and December 31, 2010. In October of 2009, in conjunction with the acquisition of MCM and the employment of Bancorp's Executive Director, the Company expanded the number of locations from one to three. Two additional locations were added during 2010. That expansion increased the occupancy cost of Bancorp from approximately $84 thousand for the full year ended December 31, 2009 to approximately $154 thousand for 2010, or an 82.6% increase. Similarly the occupancy expense for MCM, which began in October of 2009, was approximately $73 thousand for 2009 and increased to approximately $284 thousand, or 290.4% for the year ended December 31, 2010. The combined increase from Bancorp and MCM accounts for 84.3% of the total increase of approximately $334 thousand in Occupancy and Equipment.
Recruiting Fees
During the year ended December 31, 2010, the Company engaged professional recruiting firms to assist in the selection of people for key positions within the organization. The total expense for such services was approximately $271 thousand. There was no corresponding expenditure during the year ended December 31, 2009.
Directors Fees
During the year ended December 31, 2010, the Company elected to compensate the Company's directors for the time and effort spent providing oversight and establishing directions for the various companies under their fiduciary responsibility. Director Fees for the year ended December 31, 2010 was $202 thousand. There was no corresponding expenditure during the year ended December 31, 2009.
Segment Information
There are current accounting rules which require additional financial disclosure when operating business segments exceed certain thresholds. During the year ended December 31, 2010, MCM revenue
35
exceeded 10% of the total revenue of the Company, one of the criteria for segment reporting. Accordingly, we are providing the following discussion.
The Company segregates its operations into three primary segments: The Banking Operations (Bank of Manhattan, N.A.), the Non-Bank Financial Operations (MCM and its subsidiaries) and Other Operations, which includes Manhattan Bancorp and MBFS and eliminates intercompany transactions. Operating segment information is presented in the following discussion and in Note 18 of the Notes to the Consolidated Financial Statements. The accounting policies of the individual segments are the same as those of the Company. The Company allocates centrally-provided services and costs to the business segments based upon estimated or actual usage of those services and costs.
The Banking Operation
The Bank, as described more fully in Part I of this Annual Report on Form 10-K, presently operates at one location in El Segundo, California as a full-service bank. As of November 2010, the Bank established a Loan/Deposit Productions Office in San Diego to facilitate the generation of single-family mortgages. The Bank had 46 employees as of December 31, 2010.
BANK
|
Year Ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(Dollars in Thousands) |
2010 | 2009 | |||||
CONDENSED INCOME STATEMENT |
|||||||
Net interest income, including loan fees |
$ | 5,486 | 3,755 | ||||
Less: Provision for loan losses |
727 | 1,180 | |||||
Non-interest income |
394 | 141 | |||||
Net revenue (expense) |
5,153 | 2,716 | |||||
Non-interest expense |
6,818 | 6,017 | |||||
Income (loss) before income taxes |
$ | (1,665 | ) | $ | (3,301 | ) | |
YEAR-END BALANCE SHEET DATA |
|||||||
Total assets |
$ | 150,923 | $ | 151,506 | |||
Total securities |
$ | 55,491 | $ | 67,587 | |||
Net loans, including loans held for sale |
$ | 90,872 | $ | 78,914 | |||
Allowance for loan losses |
$ | 1,877 | $ | 1,202 | |||
Other assets |
$ | 6,437 | $ | 6,207 | |||
Non-interest bearing demand funds |
$ | 54,997 | $ | 34,883 | |||
Total deposits |
$ | 124,349 | $ | 116,156 | |||
Borrowed funds |
$ | 4,500 | $ | 12,000 | |||
Other liabilities |
$ | 768 | $ | 700 | |||
Equity |
$ | 21,306 | $ | 22,650 |
Substantially all of the components of net interest income and the provision for loan losses for the Company are related to the Bank only. Please see "Results of Operation" above in this Management's Discussion and Analysis of Financial Condition and Results of Operation for a more detailed discussion of these components.
The increase in non-interest income of approximately $253 thousand is primarily the results of the mortgage division fees generated since the division began operations in the last months of the year, accounting for 61% of the increase.
36
The increase in non-interest expense of approximately $801 thousand is primarily the result of professional expenses such as recruiting and consulting fees associated with transitions in executive management, approximately 59% of the increase. Other areas reflecting increases year over year were, in order of significance, directors' fees, occupancy costs and regulatory assessments.
The decline in the net loss was approximately $1.6 million or approximately 49.6%.
The assets of the Bank as reported at December 31, 2010 and December 31, 2009 were essentially flat.
Non-Bank Financial Operations
MCM and its subsidiaries, as described more fully in Part I of this Annual Report on Form 10-K, presently operate primarily at one location in Calabasas, California. As of October 2010, MCM established a satellite office in New York, New York to facilitate its access to the east-coast financial markets. MCM had 22 employees as of December 31, 2010.
MCM
|
Year Ended December 31, |
Acquisition to December 31, |
|||||
---|---|---|---|---|---|---|---|
(Dollars in Thousands) |
2010 | 2009 | |||||
CONDENSED INCOME STATEMENT |
|||||||
Net interest income, including loan fees |
$ | 30 | | ||||
Less: Provision for loan losses |
| | |||||
Non-interest income |
7,397 | 893 | |||||
Net revenue (expense) |
7,427 | 893 | |||||
Non-interest expense |
7,717 | 923 | |||||
Income (loss) before income taxes |
$ | (290 | ) | $ | (30 | ) | |
YEAR-END BALANCE SHEET DATA |
|||||||
Total assets |
$ | 2,225 | $ | 1,340 | |||
Total securities |
$ | | $ | | |||
Net loans, including loans held for sale |
$ | | $ | | |||
Allowance for loan losses |
$ | | $ | | |||
Other assets |
$ | 2,225 | $ | 1,340 | |||
Non-interest bearing demand funds |
$ | | $ | | |||
Total deposits |
$ | | $ | | |||
Borrowed funds |
$ | | $ | 210 | |||
Other liabilities |
$ | 1,071 | $ | 160 | |||
Equity |
$ | 1,154 | $ | 970 |
MCM's total gross revenues of approximately $7.4 million (after elimination of intercompany transactions) represent approximately 51.8% of the approximately $14.3 total gross revenues of the Company. As reported elsewhere in this report, the Company acquired its interest in MCM on October 1, 2009. Accordingly the comparability of the results of the two unequal operating periods is limited at best. The most significant source of such revenue for the year ended December 31, 2010 was from riskless trading in securities, accounting for approximately $5.0 million or 67.6% of the total revenue generated by MCM.
There were two other primary sources of revenue for the year 2010. Income from riskless trading in whole loans generated approximately $1.7 million and fees for providing advisory services to other financial institutions accounted for approximately $732 thousand. Once again, the comparability is limited due to the short operating period during 2009.
37
The most significant component of non-interest expense for MCM is Compensation and Benefits which, at approximately $5.9 million, represented approximately 76.2% of total non-interest expenses of the Company. Approximately 53.2% of the total compensation is related to commissions and incentives.
Two other categories reflect significant costs for the year 2010. The first is Technology and Communications, approximately $779 thousand centered in programs required to conduct daily business, and secondarily Professional Expense, approximately $454 thousand centered in accounting resources.
The nature of MCM's current businesses does not require a significant investment in assets. As of December 31, 2009, the assets were approximately $1.3 million centered in cash or cash-equivalent assets, which were partially funded by a loan from the Bancorp of $210 thousand. As of December 31, 2010, the assets increased to approximately $2.2 million as of December 31, 2010, again centered in cash or cash-equivalent assets. MCM equity was augmented by $500 thousand with the issuance of preferred membership units to MBFS. The liabilities noted reflect current operating payables and pending year-end commissions.
Other Operations
The OTHER segment includes MBFS, BANCORP and the intercompany elimination entries. Accordingly the presentation is best understood in relationship to the other operating entities.
OTHER
|
Year Ended December 31, |
||||||
---|---|---|---|---|---|---|---|
(Dollars in Thousands) |
2010 | 2009 | |||||
CONDENSED INCOME STATEMENT |
|||||||
Net interest income, including loan fees |
$ | | | ||||
Less: Provision for loan losses |
| | |||||
Non-interest income |
(42 | ) | (15 | ) | |||
Net revenue (expense) |
(42 | ) | (15 | ) | |||
Non-interest expense |
2,696 | 1,700 | |||||
Income (loss) before income taxes |
$ | (2,738 | ) | $ | (1,715 | ) | |
YEAR-END BALANCE SHEET DATA |
|||||||
Total assets |
$ | (200 | ) | $ | (531 | ) | |
Total securities |
$ | | $ | | |||
Net loans, including loans held for sale |
$ | | $ | | |||
Allowance for loan losses |
$ | | $ | | |||
Other assets |
$ | (200 | ) | $ | (531 | ) | |
Non-interest bearing demand funds |
$ | (2,104 | ) | $ | (5,236 | ) | |
Total deposits |
$ | | $ | | |||
Borrowed funds |
$ | | $ | (210 | ) | ||
Other liabilities |
$ | 34 | $ | 133 | |||
Equity |
$ | (1,870 | ) | $ | (4,782 | ) |
As neither MBFS nor Bancorp have material independent income sources or are eliminated for the most part in the consolidation process, the entries in the table above related to eliminations between the Bank and one of the other operating entities.
The non-interest expense of approximately $2.7 million in the year ended December 31, 2010 reflect an increase of approximate $1.0 million over the amount reflected for the year ended December 31, 2009, or 58.6%. These expenses are substantially those of the Bancorp and therefore, a comparison can be made between both years.
38
The most significant component of the Bancorp non-interest expense was Compensation and Benefits, which increased from approximately $739 thousand for the year ended December 31, 2009 to approximately $1.9 million for the year ended December 31, 2010, or 165.8%. While the actual number of employees did increase from an average of just over one full time employee for 2009 to approximately six for 2010, there were significant transition costs associated with the change in executive management positions, (approximately $225 thousand assumed by the Bancorp), stock option expenses recorded in 2010 over those recorded in 2009 (approximately $118 thousand), and intercompany transfers to recognize where the costs where related to where the benefit might occur in the future. One of the most significant of these transfers related to the evaluation and implementation of the mortgage process now incorporated with the bank since August, but where the costs to develop the mortgage process were incurred by the Bancorp and approximated $319 thousand.
Another significant increase in non-interest expenses for the year ended December 31, 2010 was the payment of directors' fees which approximate $118 thousand and for which there was no comparable amount in the year ended December 31, 2009.
Other notable increases between the year ended December 31, 2010 and the year ended December 31, 2009 were reported in expenditures for meals and travel, up approximately $79 thousand between periods and primarily associated with increased activity in the pre-bank mortgage division executive and director travel and housing costs.
FINANCIAL CONDITION
Time Deposits and Investment Securities
The Bank invests in time deposits with other financial institutions and investment securities principally to (1) generate interest income pending the ability to deploy those funds in loans meeting our lending strategies; (2) increase net interest income where the rates earned on such investments exceed the related cost of funds, consistent with the management of interest rate risk; and (3) provide sufficient liquidity in order to maintain cash flow adequate to fund the Bank's operations and meet obligations and other commitments on a timely and cost efficient basis.
Our time deposit investments generally have terms of less than two years and are placed with financial institutions in amounts that provide full coverage from the FDIC. As of December 31, 2010, the weighted average yield for the time deposits was 1.4% with an average weighted remaining life of approximately six months. As of December 31, 2009, the weighted average yield for the time deposits was 1.8% with the weighted average life of approximately three months.
The Bank's current investment portfolio consists of U.S. Government Agencies securities, mortgage-backed securities, taxable-municipal bonds and asset-backed securities with an expected weighted average life of approximately less than 7 years.
The present strategy is to stagger the maturities of our time deposits and investment securities to meet our overall liquidity requirements. Additional information regarding the composition, maturities and yields of the security portfolios as of December 31, 2010 is found in Note 3 to the Company's financial statement in Item 8 of this document.
Loans
The loan portfolio reflects growth in all categories when comparing the end of period amounts as of December 31, 2010 and December 31, 2009. Loan growth is attributable primarily to marketing efforts with credit extended primarily in the Bank's defined market area.
39
The following table sets forth the composition of the Bank's loan portfolio at the following dates:
|
December 31, 2010 | December 31, 2009 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount Outstanding |
Percentage of Total |
Amount Outstanding |
Percentage of Total |
|||||||||
|
(Dollars in Thousands) |
(Dollars in Thousands) |
|||||||||||
Commercial loans |
$ | 28,662 | 32.0 | % | $ | 26,520 | 33.0 | % | |||||
Real estate loans |
43,682 | 48.8 | % | 40,566 | 50.5 | % | |||||||
Real estateconstruction |
8,753 | 9.8 | % | 5,656 | 7.0 | % | |||||||
Other loans |
8,333 | 9.3 | % | 7,516 | 9.4 | % | |||||||
Total Loans |
89,430 | 100.0 | % | 80,258 | 100.0 | % | |||||||
Add: Purchase Premium |
19 | 30 | |||||||||||
Add: Unamortized Costs |
96 | 81 | |||||||||||
Less: Purchase Discount |
(127 | ) | | ||||||||||
Less: Deferred Fees |
(182 | ) | (253 | ) | |||||||||
LessAllowance for loan losses |
(1,877 | ) | (1,202 | ) | |||||||||
Net loans |
87,359 | 78,914 | |||||||||||
Of the Bank's total loans outstanding at December 31, 2010, 33.2% were due in one year or less, 25.4% were due in 1 to 5 years and 41.4% were due after 5 years. As is customary in the banking industry, loans can be renewed by mutual agreement between 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 December 31, 2010
|
Within One Year |
Maturing One to Five Years |
After Five Year |
Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Thousands) |
|
|||||||||||
Commercial |
$ | 20,079 | $ | 6,475 | $ | 2,108 | $ | 28,662 | |||||
Real Estate |
| 14,706 | 28,976 | 43,682 | |||||||||
Real EstateConstruction |
8,753 | | | 8,753 | |||||||||
Other Loans |
853 | 1,575 | 5,905 | 8,333 | |||||||||
Total |
$ | 29,685 | $ | 22,756 | $ | 36,989 | $ | 89,430 | |||||
Loans with pre-determined interest rates |
$ | 1,777 | $ | 8,822 | $ | 5,487 | $ | 16,086 | |||||
Loans with floating or adjustable rates |
27,908 | 13,934 | 31,502 | 73,344 | |||||||||
Total |
$ | 29,685 | $ | 22,756 | $ | 36,989 | $ | 89,430 | |||||
Of the gross loans outstanding as of December 31, 2010, approximately 82% of the outstanding loan dollars had adjustable rates. The adjustable-rate loans generally have interest rates tied to the prime rate and would adjust with changes in the rate on a daily basis.
Commercial Loans. The Bank offers a variety of commercial loans, including secured and unsecured term and revolving lines of credit, equipment loans, accounts receivable loans and SBA loans. Approximately 86% of the outstanding loan dollars of the commercial loans have adjustable rates. The Bank underwrites secured term loans and revolving lines of credit primarily on the basis of a borrower's cash flow and the ability to service the debt, although we rely on the liquidation of the underlying collateral
40
as a secondary payment source, where applicable. Should the borrower default and the Bank forecloses on the assets, we may not be able to recover the full amount of the loan.
Real Estate Loans. The Bank's real estate loans are secured primarily by commercial property. Approximately 76% of the loan dollars outstanding are adjustable during the term of the loan. Approximately 55% of the total real estate loans have a remaining maturity between five and ten years. As of December 31, 2010, the weighted average ratio of the current loan extension to the underlying value of the property was approximately 45%. No individual loan-to-value ratio exceeded 79%.
Other Loans. The Bank offers other types of loans, including home equity lines of credit. Home equity lines of credit have adjustable rates and provide the borrower with a line of credit in an amount which does not exceed 76% 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 or 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 2009, these were essentially limited to undisbursed commitments to extend credit to both businesses and individuals. These commitments were associated with loans and were therefore subject to the same credit underwriting policies and practices as other on-balance sheet obligations. When deemed advisable, the Bank obtains collateral to support such commitments.
Commitments to extend credit are agreements to lend up to a specific amount to a customer as long as there is no violation of any condition in the commitments. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. Since we expect some commitments to expire without being drawn upon, the total commitment amounts do not necessarily represent future loans. There were $26.2 million and $26.0 million in undisbursed loan commitments as of December 31, 2010 and 2009 respectively.
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. OREO is comprised of real estate acquired in satisfaction of a loan either through foreclosure or deed in lieu of foreclosure.
The Bank had no non-performing assets at December 31, 2010 or December 31, 2009.
Allowance for Loan Losses
The analysis of the allowance for loan losses is comprised of three components: specific credit allocations, general portfolio allocations, and subjective risk factors which are applied to determined allocations. The Bank accounts for problem loans in accordance with ASCTopic 310 "Receivables." These pronouncements provide that when it is probable that a creditor will be unable to collect all amounts due in accordance with the terms of the loan that such loan is deemed impaired. Impaired loans are accounted for differently in that the amount of the impairment is measured and reflected in the records of the creditor. The allowance for credit losses related to loans that are identified for evaluation in accordance with SFAS No. 114 is based on the discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. The general portfolio allocation consists of an assigned reserve percentage based upon the credit rating of the loan. The subjective portion is determined based upon the Bank's evaluation of various factors including current
41
economic conditions and trends in the portfolios including delinquencies and impairment, as well as changes in the composition of the portfolio and economic market trends.
The allowance for loan losses is based on estimates, and ultimately losses will vary from current estimates. These estimates are reviewed monthly by the Board of Directors of the Bank, and reflect the adjustments, either positive or negative, from management or from the Bank Board's Loan Committee with the corresponding increase or decrease in the provision for loan losses. The methodology used to determine the adequacy of the allowance for possible loan losses has been applied consistently and has been evaluated during the year 2010 by regulators and external auditing firms for appropriateness.
During the year ended December 31, 2010, the Bank recognized net charge-offs of approximately $52 thousand, representing approximately .06% of the Bank's average gross loan portfolio for 2010.
During the year ended December 31, 2009, the Bank recognized net charge-offs of approximately $952 thousand, representing approximately 1.41% of the Bank's average gross loan portfolio for 2009.
The allowance for loan losses as a percentage of total gross loans at December 31, 2010 and 2009 was 2.10% and 1.50% respectively.
Deposits and Borrowed Funds
Deposits are the Bank's primary source of funds. We offer a number of deposit products. Deposits increased by approximately $11.3 million, 10% over the balance as of December 31, 2009 of approximately $110.9 million ending the year of 2010 at approximately $122.2 million. As of December 31, 2010, 43% of the Company's deposits were non-interest bearing demand deposits up from 26.7% as of December 31, 2009. The non-interest bearing demand deposits were favorably affected by large year-end deposits which were short-term in nature. Average non-interest bearing demand deposits, however, while reflecting a growth of approximately $6.0 million year over year, experienced a decline in the percentage of total non-interest earning funds to total funding from all sources, from 43% to 36%. At December 31, 2009, the Company had $16.5 million in short-term CDARS deposits, or 15% of total deposits. At December 31, 2010, the Company had no brokered deposits, but held other wholesaling funds in the amount of approximately $18.6 million.
The following table shows the remaining maturity of the Bank's time deposits as of December 31, 2010:
Maturities of Time Deposits of $100,000 or More
|
Amount | |||
---|---|---|---|---|
|
(Dollars in Thousands) |
|||
Three months or less |
$ | 6,544 | ||
Over three and through six months |
4,760 | |||
Over six and through twelve months |
13,822 | |||
Over twelve months |
8,808 | |||
Total |
$ | 33,934 | ||
The Bank has established borrowing lines with the FHLB during 2009 and 2010. At December 31, 2010, the Bank had borrowed from the FHLB $4.5 million that was collateralized by securities. At December 31, 2009, the Bank had borrowed from the FHLB $12.0 million that was collateralized by both loans and securities. The average rate that was paid on FHLB borrowings for the years ended December 31, 2010 and December 31, 2009 was 4.32% and 4.30%, respectively. See Note 8 of the Consolidated Financial Statements filed on this Form 10-K for additional information related to the Bank's borrowing from the FHLB.
42
Regulatory Capital
Under regulatory capital adequacy guidelines, capital adequacy is measured (1) as a percentage of risk-adjusted assets in which risk percentages are applied to assets on the balance sheet as well as off-balance sheet, such as unused loan commitments and standby letters of credit, and (2) as a percentage of the most recent quarter's average tangible assets. The guidelines require that a portion of total capital be core, or Tier 1, capital consisting of common shareholder's equity after removing the effects of unrealized gain or loss on available-for-sale securities. Total capital consists of other elements, primarily allowance for loan losses.
As discussed in Note 14 to the Consolidated Financial Statements, our capital exceeded the minimum regulatory requirements and exceeded the regulatory definition required to be "well capitalized" as defined in the regulations issued by our regulatory agencies.
Liquidity and Liquidity Management
Liquidity management for banks requires that funds always be available to pay anticipated deposit withdrawals, fund loan commitments, and to meet other commitments on a timely and cost effective basis. The acquisition of deposits is our primary source of funds. This relatively stable and low-cost source of funds has, along with the initial balances in stockholders' equity, provided 100% of the funding for the initial operating period in 2007.
During 2008, the Company's funding sources were expanded to included advances from the FHLB. Under the line of credit, the Bank may borrow against certain percentages of eligible collateral as established by agreement but not more than 15% of the Bank's total assets. As of December 31, 2009, the line of credit was approximately $16.5 million and was fully advanced. As of December 31, 2010 the line of credit was $21.5 million against which the Bank had borrowed $4.5 million.
During 2009, the Company accessed available short-term funds from the CDARS' one-way buy program to augment Company's asset totals as needed. During 2010, the Company discontinued the active use of the CDARS' one-way buy program, having readily available other wholesale funding sources, including advances from the FHLB and deposits placed directly with the Company by other financial institutions.
The Company's liquidity is reflected in its position as a net seller of overnight Federal funds sold, including interest-bearing non-reserve balances held at the FRB, at a level that would cushion any unexpected increase in demand for funds or decrease in funds deposited. During 2010, we had an average balance of $16.5 million in such funds representing 13% of our average assets. During 2009, we had an average balance of approximately $14.2 million in such available funds representing 14% of our average assets. Both ratios were far above the minimum of 3% established in the Company's liquidity policy.
To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, Federal funds and investment securities. As of December 31, 2010 and 2009, liquid assets (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 Company's deposits were 42% and 57%, respectively.
43
While liquidity has not been a major concern in either 2010 or 2009, management has established secondary sources of liquidity. At present, the Bank maintains a line of credit totaling $3 million with a correspondent bank for the purchase of overnight Federal funds. The line is subject to availability of funds and has restrictions as to the number of days used during the month. Another method that the Bank currently has available for acquiring additional deposits is through the acceptance of "brokered deposits" (defined to include not only deposits acquired with deposit brokers but also deposits bearing interest rates far above the local market rates), typically attracting large certificates of deposit at high interest rates. The Company has no amount of "reciprocal brokered deposits" through the CDARS program as of December 31, 2010 or December 31, 2009. As noted, the Bank elected to augment its year-end asset total as of December 31, 2009 by the purchase of short-term one-way funds totaling $16.5 million at rates between 21 and 25 basis points. There was no similar purchase as of December 31, 2010.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
Manhattan Bancorp and Subsidiaries
El Segundo, California
We have audited the accompanying consolidated balance sheets of Manhattan Bancorp and Subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 2010 and 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Manhattan Bancorp and Subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with U.S. generally accepted accounting principles.
/s/
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
March 30, 2011
46
Manhattan Bancorp and Subsidiaries
Consolidated Balance Sheets
|
December 31, 2010 | December 31, 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
Assets |
||||||||||
Cash and due from banks |
$ | 1,845,808 | $ | 1,213,837 | ||||||
Federal funds sold/interest-bearing demand funds |
37,249,872 | 50,241,455 | ||||||||
Total cash and cash equivalents |
39,095,680 | 51,455,292 | ||||||||
Time deposits-other financial institutions |
2,868,000 | 3,462,000 | ||||||||
Investments securities-available for sale |
14,875,814 | 13,360,750 | ||||||||
Investments securities-held to maturity |
497,521 |
493,942 |
||||||||
Loans held for sale |
3,512,417 |
|
||||||||
Loans |
89,236,265 |
80,116,019 |
||||||||
Allowance for loan losses |
(1,877,133 | ) | (1,202,494 | ) | ||||||
Net loans |
87,359,132 | 78,913,525 | ||||||||
Premises and equipment, net |
1,259,457 | 1,281,940 | ||||||||
Nonmarketable securities |
1,580,600 | 1,699,650 | ||||||||
Accrued interest receivable and other assets including goodwill |
1,899,602 | 1,647,744 | ||||||||
Total assets |
$ | 152,948,223 | $ | 152,314,843 | ||||||
Liabilities and Stockholders' Equity |
||||||||||
Deposits: |
||||||||||
Non-interest bearing demand |
$ | 52,893,770 | $ | 29,647,199 | ||||||
Interest bearing: |
||||||||||
Demand |
3,165,267 | 4,026,157 | ||||||||
Savings and money market |
28,556,155 | 17,899,434 | ||||||||
Certificates of deposit equal to or greater than $100,000 |
33,934,109 | 54,351,901 | ||||||||
Certificates of deposit less than $100,000 |
3,696,069 | 4,995,301 | ||||||||
Total deposits |
122,245,370 | 110,919,992 | ||||||||
FHLB advances |
4,500,000 | 12,000,000 | ||||||||
Accrued interest payable and other liabilities |
1,872,820 | 992,648 | ||||||||
Total liabilities |
128,618,190 | 123,912,640 | ||||||||
Commitments and contingenciesnote 13 |
|
|
||||||||
Stockholders' equity |
||||||||||
Manhattan Bancorp stockholders' equity: |
||||||||||
Serial preferred stock-no par value; 10,000,000 shares authorized: issued and outstanding, none in 2010 and 2009 |
| | ||||||||
Common stock-no par value; 10,000,000 shares authorized; |
38,977,282 | 38,977,282 | ||||||||
Additional paid in capital |
2,162,124 | 1,566,396 | ||||||||
Unrealized gain on available-for-sale securities |
334,773 | 305,152 | ||||||||
Accumulated deficit |
(17,347,612 | ) | (12,737,537 | ) | ||||||
Total Manhattan Bancorp stockholders' equity |
24,126,567 | 28,111,293 | ||||||||
Noncontrolling interest |
203,466 | 290,910 | ||||||||
Total equity |
24,330,033 | 28,402,203 | ||||||||
Total liabilities and stockholders' equity |
$ | 152,948,223 | $ | 152,314,843 | ||||||
The accompanying notes are an integral part of this financial statement.
47
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Operations
|
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Interest income |
|||||||||
Interest and fees on loans |
$ | 5,259,952 | $ | 3,998,578 | |||||
Interest on investment securities |
1,167,534 | 456,725 | |||||||
Interest on time deposits-other financial institutions |
51,992 | 107,691 | |||||||
Interest on federal funds sold/interest-bearing demand balances |
38,606 | 38,153 | |||||||
Total interest income |
6,518,084 | 4,601,147 | |||||||
Interest expense |
|||||||||
Interest on NOW, money market and savings |
228,626 | 163,579 | |||||||
Interest on time deposits |
573,714 | 482,340 | |||||||
Interest on FHLB advances |
199,873 | 199,933 | |||||||
Total interest expense |
1,002,213 | 845,852 | |||||||
Net interest income |
5,515,871 | 3,755,295 | |||||||
Provision for loan losses |
727,230 |
1,179,788 |
|||||||
Net interest income after provision for loan losses |
4,788,641 | 2,575,507 | |||||||
Other income |
|||||||||
Trading income |
4,972,413 | 132,500 | |||||||
Whole loan trading income |
1,652,186 | 745,493 | |||||||
Advisory fees |
731,902 | | |||||||
Bank-related service charges |
238,929 | 140,877 | |||||||
Mortgage-related income |
153,984 | | |||||||
Non-interest Income |
7,749,414 | 1,018,870 | |||||||
Non-interest expense |
|||||||||
Compensation and benefits |
11,770,519 | 5,223,358 | |||||||
Professional expenses |
1,420,780 | 1,059,042 | |||||||
Technology and communication |
1,417,203 | 715,752 | |||||||
Occupancy and equipment |
1,109,607 | 776,289 | |||||||
Administrative expenses |
721,844 | 277,615 | |||||||
Other non-interest expenses |
791,493 | 586,997 | |||||||
Total non-interest expenses |
17,231,446 | 8,639,053 | |||||||
Loss before income taxes |
(4,693,391 | ) | (5,044,676 | ) | |||||
Provision for income taxes |
4,128 |
1,600 |
|||||||
Net loss |
(4,697,519 | ) | (5,046,276 | ) | |||||
Less: Net loss attributatble to the noncontrolling interest. |
(87,444 | ) | (9,090 | ) | |||||
Net loss attributable to Manhattan Bancorp |
(4,610,075 | ) | (5,037,186 | ) | |||||
Weighted average number of shares outstanding (basic and diluted) |
3,987,631 | 3,987,631 | |||||||
Basic and diluted loss per share attributable to Manhattan Bancorp common stockholders |
$ | (1.16 | ) | $ | (1.26 | ) | |||
The accompanying notes are an integral part of this financial statement.
48
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
|
|
Common Stock | |
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Preferred Stock |
Common Stock Warrant |
Additional Paid-in Capital |
Comprehensive Income (Loss) |
Accumulated Deficit |
Noncontrolling Interest |
|
||||||||||||||||||||||||
|
Shares | Amount | Total | ||||||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 1,558,517 | 3,987,631 | $ | 38,977,282 | $ | 120,417 | $ | 957,825 | $ | (7,634,001 | ) | $ | 307,488 | | $ | 34,287,528 | ||||||||||||||
Accretion of preferred stock discount |
18,063 | (18,063 | ) | | |||||||||||||||||||||||||||
Reduction due to repurchase of preferred stock |
(1,576,580 | ) | (102,354 | ) | (21,066 | ) | (1,700,000 | ) | |||||||||||||||||||||||
Dividend on preferred stock |
(66,349 | ) | (66,349 | ) | |||||||||||||||||||||||||||
Reduction due to redemption of warrant |
(63,364 | ) | (63,364 | ) | |||||||||||||||||||||||||||
Capital contribution by minority interest |
210,000 | 210,000 | |||||||||||||||||||||||||||||
Capital contribution to minority interest by parent |
(90,000 | ) | 90,000 | | |||||||||||||||||||||||||||
Share-based compensation expense |
783,001 | 783,001 | |||||||||||||||||||||||||||||
Unrealized loss on investment securities |
$ | (2,336 | ) | (2,336 | ) | | (2,336 | ) | |||||||||||||||||||||||
Net loss |
(5,037,187 | ) | (5,037,187 | ) | (9,090 | ) | (5,046,277 | ) | |||||||||||||||||||||||
Total comprehensive loss |
$ | (5,039,523 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2009 |
| 3,987,631 | 38,977,282 | | 1,566,396 | (12,737,537 | ) | 305,152 | 290,910 | 28,402,203 | |||||||||||||||||||||
Share-based compensation expense |
595,728 | 595,728 | |||||||||||||||||||||||||||||
Unrealized gain on investment securities |
$ | 29,621 | 29,621 | 29,621 | |||||||||||||||||||||||||||
Net loss |
(4,610,075 | ) | $ | (4,610,075 | ) | $ | (87,444 | ) | (4,697,519 | ) | |||||||||||||||||||||
Total comprehensive loss |
$ | (4,580,454 | ) | ||||||||||||||||||||||||||||
Balance at December 31, 2010 |
$ | | 3,987,631 | $ | 38,977,282 | $ | | $ | 2,162,124 | $ | (17,347,612 | ) | $ | 334,773 | $ | 203,466 | $ | 24,330,033 | |||||||||||||
The accompanying notes are an integral part of this financial statement.
49
Manhattan Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
|
For the Year Ended December 31, 2010 |
For the Year Ended December 31, 2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Cash Flows from Operating Activities |
|||||||||||
Net loss |
$ | (4,697,519 | ) | $ | (5,046,276 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|||||||||||
Net amortization of discounts and premiums on securities |
(388,953 | ) | (31,996 | ) | |||||||
Depreciation and amortization |
393,841 | 336,462 | |||||||||
Provision for loan losses |
727,230 | 1,179,788 | |||||||||
Share-based compensation |
595,728 | 783,001 | |||||||||
(Increase) in accrued interest receivable and other assets |
(251,858 | ) | (1,189,903 | ) | |||||||
(Decrease) increase in accrued interest payable and other liabilities |
880,172 | 731,331 | |||||||||
Net cash used in operating activities |
(2,741,359 | ) | (3,237,593 | ) | |||||||
Cash Flows from Investing Activities |
|||||||||||
Net (increase) in loans |
(12,733,378 | ) | (23,664,378 | ) | |||||||
Allowance for loan and lease loss recoveries |
48,124 | 38,002 | |||||||||
Net (increase) decrease in time deposits-other financial institutions |
594,000 | 736,000 | |||||||||
Proceeds from repayment and maturities from investments securities |
14,214,729 | 3,141,664 | |||||||||
Purchase of available-for-sale securities |
(15,314,798 | ) | (8,562,341 | ) | |||||||
Purchase of premises and equipment |
(371,358 | ) | (261,126 | ) | |||||||
Capital contribution to minority interest |
| (90,000 | ) | ||||||||
Redemption of stock in other financial institutions |
119,050 | (254,600 | ) | ||||||||
Net cash used in investing activities |
(13,443,631 | ) | (28,916,779 | ) | |||||||
Cash Flows from Financing Activities |
|||||||||||
Net increase(decrease) in: |
|||||||||||
Demand deposits |
23,246,571 | 14,267,941 | |||||||||
NOW, savings and money market |
9,795,831 | 11,964,192 | |||||||||
Certificates of deposits equal to or greater than $100,000 |
(20,417,792 | ) | 36,207,546 | ||||||||
Certificates of deposits less than $100,000 |
(1,299,232 | ) | 489,463 | ||||||||
Increase (decrease) in borrowings |
(7,500,000 | ) | 2,500,000 | ||||||||
Net cash provided by financing activities |
3,825,378 | 63,899,429 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(12,359,612 | ) | 31,745,057 | ||||||||
Cash and Cash Equivalents at Beginning of Period |
51,455,292 |
19,710,235 |
|||||||||
Cash and Cash Equivalents at End of Period |
$ | 39,095,680 | $ | 51,455,292 | |||||||
Supplementary Information: Cash Paid during the Year on: |
|||||||||||
Interest |
$ | 1,013,453 | $ | 841,250 | |||||||
Income taxes |
$ | 4,128 | $ | 1,600 | |||||||
The accompanying notes are an integral part of this financial statement.
50
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying 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-K and Article 8 of Regulation S-X. On July 30, 2010, while maintaining its 70% interest in Banc of Manhattan Capital ("BOMC"), MBFS acquired a 70% interest in a newly-formed LLC, Manhattan Capital Markets ("MCM"). In the anticipated complete reorganization, the existing 70% partnership interests of MBFS in BOMC was transferred to MCM, which then acquired 100% of the partnership interest in BOMC. This occurred on November 30, 2010.
Nature of Operations
Manhattan Bancorp (the "Company") is a California corporation incorporated on August 8, 2006 for the purpose of becoming a bank holding company and owning all of the stock of the Bank which is located in El Segundo, California. The Bank operates as a community bank, offering general commercial banking services to small and medium-sized businesses and professionals in the South Bay, the Westside and the Los Angeles airport areas of Los Angeles County. The Bank commenced its operations on August 15, 2007 after receiving approval from the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation (FDIC).
On October 1, 2009, the Company, through its wholly-owned subsidiary, MFBS acquired a 70% interest in BOM Capital LLC, a full-service mortgage centric broker/dealer ("BOMC"). On November 30, 2010, through a re-organization the Company's 70% interest was transferred to Manhattan Capital Markets LLC, ("MCM"). MCM is a holding company for multiple wholly-owned subsidiaries, including BOMC.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. In the opinion of Management, all adjustments considered necessary for a fair presentation of results for the interim periods presented have been included.
Use of Estimates
The preparation of consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America 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 in consolidation.
Reclassifications
Certain amounts in prior presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on shareholders' equity, net loss or loss per share amounts.
51
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash, non-interest deposits at other financial institutions Federal funds sold including interest-bearing deposits held at the Federal Reserve Bank for and in behalf of the Bank. Cash on hand or on deposit with the Federal Reserve Bank are used to the regulatory reserve and clearing requirements.
Cash and Due from Banks
Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The reserve required to be maintained at the Federal Reserve Bank was $665 thousand and $510 thousand at December 31, 2010 and 2009, respectively. The Bank maintains deposits with other financial institutions in amounts that exceed Federal deposit insurance coverage. Federal funds sold are similar to uncollateralized loans. Management regularly evaluates the credit risk of these transactions and believes that the Company is not exposed to any significant credit risk on cash or cash equivalents.
Interest-earning Deposits at Other Financial Institutions
Interest-earning deposits in other financial institutions represent short term deposits that mature over a period of no more than 12 months and earn a higher rate of interest over that Bank's investment in Federal funds sold. Investment balances are maintained under the Federal deposit insurance level.
Investment Securities
Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
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 certain conditions, such as changes in interest rates, fluctuations in deposit levels or loan demand, or 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 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. Realized gains or losses on sales of held-to-maturity and available-for-sale securities are recorded using the specific identification method. For mortgage-backed securities, the amortization or accretion is based on the estimated average lives of the securities. The lives of these securities can fluctuate based upon the amount of prepayments received on the underlying collateral of the securities.
At each reporting date, investment securities are assessed to determine whether there is anything other-than-temporary impairment. Prior to January 1, 2009, any declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that were other-than-temporary, would have resulted in write-downs of the individual securities to their fair value and included in earnings as
52
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
realized losses. The Company did not record any such write-downs in 2008. In estimating other-than-temporary impairment losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer and 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.
In April 2009, accounting standards were revised to provide expanded guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available for sale or held to maturity to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. These rules require an entity to recognize the credit component of any other-than-temporary impairment of a debt security in earnings and the noncredit component in other comprehensive income when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. These new rules also require expanded disclosures. The guidance does not change the recognition of other-than-temporary impairment for equity securities.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans and Interest on Loans
The Company currently extends credit to its customers in the form of commercial, commercial and residential real estate and consumer loans. Loans are reported at the principal amount outstanding, net of unearned income. Unearned income, which includes deferred fees and deferred loan origination costs, is amortized and included in interest income over the life of the loan using the interest method whenever possible.
Interest income is recognized on an accrual basis daily and credited to income based upon the principal amount outstanding.
The accrual of interest on loans is discontinued at the time the loan becomes 90-days delinquent unless the credit is well-secured and in the process of collection. In some cases, loans can be placed on a non-accrual status or be charged-off at an earlier date if collection of principal or interest is considered doubtful.
For all interest income that has been accrued but not yet collected, if a loan is either placed on a non-accrual status or has been charged-off, the unpaid accrued interest receivable is reversed against interest income. Subsequently, interest income is recognized only to the extent of cash payments received.
The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to
53
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of collateral. The entire change in the present value of expected cash flows is reported as either a provision for credit losses in the same manner in which impairment initially was recognized, or as a reduction in the amount of provision for credit losses that otherwise would be reported. The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans.
Concentration of Credit Risk
Most of the Company's loan activity is with customers located within the South Bay area of Los Angeles County. Accordingly, the Company's exposure to credit risk is significantly affected by changes in the economy of this area. The Company has no significant industry concentrations.
Allowance for Loan Losses
The allowance for loan losses is based upon estimates and ultimate losses may vary from current estimates. These 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 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.
Management performs periodic credit reviews of the loan portfolio and considers current economic conditions, historical credit loss experiences and other factors in determining the adequacy of the allowance. Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be 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.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
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. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
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.
54
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The general component covers non-impaired loans and 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 over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other 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 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.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and Equipment
Furniture and equipment are stated at cost less accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which ranges from three to seven years for furniture and equipment. Leasehold improvements are amortized over the estimated useful lives of the improvements but not more than the remaining lease term with extensions, whichever is shorter. The straight-line method of depreciation is followed for financial reporting purposes, while both accelerated and straight-line methods are followed for income tax purposes. Expenditures for improvements and major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Nonmarketable Securities
Regulatory requirements may require that the Company invest in the stock of certain organizations. Such stocks are considered restricted equity securities. Other investments, such as stock in bankers' banks, may offer cash and non-cash benefits to its shareholders although no market quotations exist. Such holdings have been recorded at cost in the Company's balance sheets. Both cash and stock dividends are recorded as income.
55
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
When the Company acquired its interest in MCM, the business had been in operation prior to the date when the acquisition occurred. The Company paid a premium on this acquisition, and said premium is recorded as an intangible asset in the form of goodwill.
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired. In accordance with current accounting practice, goodwill is not amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill for impairment. The assessment of the impairment occurred on August 31, 2010 and reflected no impairment at that time. Accordingly, the carrying value of the Goodwill was $279,391 as of both December 31, 2010 and December 31, 2009.
Intangible assets with definite useful lives are amortized over their estimated useful lives to the estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company's balance sheet.
Other Real Estate Owned
It is the Company's policy that all real estate properties that would be acquired through, or in lieu of, loan foreclosure would be initially recorded at the lower of fair value or cost, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations would be periodically performed by management and the real estate would be carried at the lower of cost or fair value minus costs to sell. Revenue and expenses from operations and additions to the valuation allowance would be included in other expenses. The Company does not have any Other Real Estate Owned at December 31, 2010 or December 31, 2009.
Commitments and Letters of Credit
In the ordinary course of business, the Company may enter into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments 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.
Income Taxes
The Company has adopted the most current accounting guidance that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by taxing authorities. Management believes that all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial statements. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
56
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Deferred income taxes are recognized for estimated future tax effects attributable to income tax carry forwards as well as temporary differences between income tax and financial reporting purposes. Valuation allowances are established when necessary to reduce the deferred tax asset to the amount expected to be realized. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes.
Advertising Costs
Advertising costs are expensed as incurred.
Other Comprehensive Income (Loss)
The Company has adopted current accounting guidance which requires the disclosure of comprehensive income (loss) and its components. Changes in unrealized gain (loss) on available-for-sale securities are the only component of Accumulated Other Comprehensive Income (Loss) for the Company.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Earnings (Loss) Per Share
Basic earnings (loss) per share represents income available (loss reported) to common stock divided by the weighted average number of common shares outstanding during the period reported on the Statements of Operations. Diluted earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. There were no dilutive potential common shares outstanding at December 31, 2010 or December 31, 2009. The weighted average number of shares used to calculate loss per share for the years ended December 31, 2010 and December 31, 2009 was 3,987,631.
Equity Compensation Plans/Share-Based Compensation
The Company's 2007 Stock Option Plan ("2007 Plan") provided for the issuance of up to 732,789 shares of the Company's common stock upon the exercise of incentive and non-qualified options. The Plan was approved on August 10, 2007 by the Company's Board of Directors and the then existing shareholders and was terminated when the Company's Board of Directors approved the Manhattan Bancorp 2010 Equity Incentive Plan ("2010 Plan") on March 25, 2010, subject to the approval of the Company's shareholders. Options granted and still outstanding as of December 31, 2010 were 438,260.
The 2010 Plan provides for the issuance of up to 444,348 shares of the Company's authorized and unissued common stock upon the exercise of incentive and non-qualified options and expires on March 25, 2020.
57
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has adopted the current accounting practice that generally requires entities to recognize the cost of recipient service received in exchange for awards of stock options, or other equity instruments in the statements of income based upon the grant date's fair values for the award.
The Plan provides that each option must have an exercise price not less than the fair market value of the stock at the date of grant, have a term no longer than ten years, and can vest as determined by the Board of Directors of the Company. The cost is recognized over the period which the recipient is required to provide services in exchange for the award, generally the vesting period. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for restricted stock awards.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments
The Company has currently three operating segments, the Bank, the Bancorp and the operations of MCM. Internal financial information is available to report the position and operating results of each of these entities and is disclosed in a separate footnote.
New Accounting Pronouncements
EXPANDED DISCLOSURE ON CREDIT QUALITY: In July 2010, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. To achieve those objectives, ASU 2010-20 requires additional disclosures that facilitate the evaluation of the nature of credit risk inherent in the entity's portfolio of financing receivables, enhance the understanding of how that risk is analyzed and assessed in arriving at the allowance for credit losses, and discuss the changes and reasons for those changes in the allowance for credit losses. A reporting entity should provide disclosures on a disaggregated basis, including portfolio segment and class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. Classes of financing receivables generally are a disaggregation of portfolio segment. For public entities, including the Company, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Since ASU 2010-20 affects only disclosure requirements for credit quality and the allowance for loan and lease losses, the adoption of this update is not expected to have a material impact on the Company's results of operations or financial position.
58
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOAN MODIFICATION-EFFECT ON SINGLE ASSET POOLS: In April 2010, the FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. ASU No. 2010-18 provides guidance on the accounting for loan modifications when the loan is part of a pool of loans accounted for as a single asset, such as acquired loans that have evidence of credit deterioration upon acquisition and are accounted for under the guidance in The FASB Accounting Standards Codification ("ASC") 310-30. ASU No. 2010-18 addresses diversity in practice on whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool upon a modification that would constitute a troubled debt restructuring, or should remain in the pool after modification. ASU No. 2010-18 clarifies that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if the expected cash flows for the pool change. The amendments in this update do not require any additional disclosures and are effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of ASU 2010-18 for the third quarter of 2010 did not have a material impact on the Company's results of operations, financial position or disclosures.
SUBSEQUENT EVENTSAMENDMENT: In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements. Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company. This ASU became effective upon issuance.
FAIR VALUE MEASUREMENTS: In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update added disclosure requirements for significant transfers into and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation techniques was required for recurring and nonrecurring Level 2 and 3 fair value measurements. The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company's statements of income and condition. An additional requirement of this ASU is that activity within Level 3, including purchases, sales, issuances, and settlements, be presented on a gross basis rather than as a net number as currently permitted. This provision of the ASU is effective for the Company's reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company's statements of income and condition.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: In June 2009, the Financial Accounting Standards Board ("FASB") issued an accounting standard regarding The FASB Accounting Standards Codification ("Codification" or "ASC") that will become the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of Federal securities laws are also sources of authoritative GAAP for SEC registrants. On the
59
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
effective date of this standard, all interim and annual reporting periods ending after September 15, 2009, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. The adoption of this standard did not have a material impact on the Company's financial statements.
CONSOLIDATION-VARIABLE INTEREST ENTITIES: In June 2009, the FASB issued an accounting standard, incorporated into ASC topic 810 "Consolidation," that seeks to improve financial reporting by companies involved with variable interest entities. Also addressed under this standard are concerns about the application of certain key provisions, including those in which the accounting and disclosures do not always provide timely and useful information about a company's involvement in a variable interest entity. The standard requires a company to perform analyses to determine if its variable interest(s) give it a controlling financial interest in a variable interest entity. These analyses identify the primary beneficiary of the a variable interest entity as the company that has both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly impact the company's economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This standard is effective for all annual and interim reporting periods beginning after November 15, 2009 with earlier application prohibited. The adoption of this standard is not expected to have a material impact on the Company's financial statements.
SUBSEQUENT EVENTS: In May 2009, the FASB issued an accounting standard which was incorporated into ASC topic 855 "Subsequent Events." This standard sets forth principles and requirements for disclosing and recognizing subsequent events in the financial statements. This standard also outlines circumstances under which an entity shall recognize those events or transactions occurring after the balance sheet date. The Company is required to adopt this standard for all interim and annual reporting periods after June 15, 2009, prospectively. The Company's adoption of this standard did not have a material impact on its financial statements.
BUSINESS COMBINATIONS: Effective January 1, 2009, the Company adopted the new accounting guidance that applies to all transactions and other events in which one entity obtains control over one or more other businesses. The guidance requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under old accounting literature whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case. Accounting for costs associated with exit or disposal activities would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria delineated in the FASB statement related to accounting for contingencies. Subsequent accounting literature released
60
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
during 2009 amends the new accounting guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated, removes subsequent accounting guidance for assets and liabilities arising from contingencies and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. It also eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date.
OTHER-THAN-TEMORARY IMPAIRMENT: In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company elected to early-adopt this guidance as of January 1, 2009. The adoption of this guidance had no affect on previously reported financial results of the Company.
Note 2. Interest-Earning Assets with Other Financial Institutions
At December 31, 2010, the Company had interest-earning deposits with other financial institutions of $2.9 million with a weighted average yield of 1.36%, and an average weighted remaining life of approximately 5.2 months. At December 31, 2009, the Company had interest-earning deposits with other financial institutions of $3.5 million with a weighted average yield of 1.81%, and an average weighted remaining life of approximately 3.4 months.
61
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 3. Investment Securities
Investment securities have been classified in the balance sheet according to management's intent. The following is a summary of the investment securities at their amortized cost and estimated fair value with gross unrealized gains and losses at December 31, 2010 and 2009:
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars 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 | |||||||
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Thousands) |
||||||||||||||
December 31, 2009 |
|||||||||||||||
Available-for-sale securities: |
|||||||||||||||
U.S. government and agency securities |
$ | 2,647 | $ | | $ | 21 | $ | 2,626 | |||||||
Mortgage-backed securities |
7,009 | 320 | 1 | 7,328 | |||||||||||
Asset-backed securities |
3,399 | 8 | 54 | 3,353 | |||||||||||
Total available-for-sale securities |
$ | 13,055 | $ | 328 | $ | 76 | $ | 13,307 | |||||||
Held-to-maturity securities: |
|||||||||||||||
State and municipal securities |
$ | 494 | $ | 4 | $ | | $ | 498 | |||||||
The fair value of these securities is based upon quoted market prices. At December 31, 2010 and December 31, 2009, there were no holdings of securities of any one issuer in an amount greater than 10% of shareholders' equity.
The realized gains for the year ended December 31, 2010 were $19,528 and there were no realized losses. There were no realized gains or losses for the year ended December 31, 2009.
The net unrealized gain on available-for sale as of December 31, 2010 was $334,773 with the net increase of $29,621 included in accumulated other comprehensive income for the year ended December 31, 2010. The net unrealized gain on available-for-sale securities included in accumulated other comprehensive income for the year ended December 31, 2009 was $305,152, after reflecting a reduction in the aggregate gain by $2,336.
62
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 3. Investment Securities (Continued)
Securities with a fair market value of $4,996,000 at December 31, 2010 were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB"). Securities with a fair market value of $5,109,000 at December 31, 2009 were pledged to secure borrowings from the FHLB.
Management does not believe that any of the Company's investment securities are impaired due to reasons of credit quality. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary losses, management considers among other things (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Accordingly, as of December 31, 2010 and 2009, management believes that the gross unrealized losses detailed in the table above are temporary and no impairment loss should be realized in the Company's Statement of Operations.
At December 31, 2010 and 2009, the Company had no securities with unrealized losses which were in a continual loss position for greater than 12 months.
Unrealized losses and fair value, aggregated by investment categories that individual securities have been in an unrealized loss position for a period of less than 12 months are summaries as follows:
|
At December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||||||||
|
Less than 12 Months | Less than 12 Months | ||||||||||||
|
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||
|
(Dollars in Thousands) |
|||||||||||||
Securities available for sale: |
||||||||||||||
U.S. Government and agency securities |
$ | 1,500 | $ | 51 | $ | 2,627 | $ | 21 | ||||||
Mortgage-backed securities |
| | 198 | 1 | ||||||||||
Other securities |
4,348 | 77 | 1,775 | 54 | ||||||||||
Securities held to maturity |
||||||||||||||
State and municipal securities |
| | | | ||||||||||
Total impaired securities |
$ | 5,848 | $ | 128 | $ | 4,600 | $ | 76 | ||||||
The amortized cost, estimated fair value and average yield of debt securities at December 31, 2010 are shown below. In the case of securities available for sale, the average yields are based on effective rates of book balances at year end. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost. Mortgage-backed securities are classified in
63
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 3. Investment Securities (Continued)
accordance with estimated lives. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations.
|
Available-for-Sale Securities | Held-to Maturity Securities | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost |
Fair Value |
Weighted Average Yield |
Amortized Cost |
Fair Value |
Weighted Average Yield |
|||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||||
Due in One Year or Less |
$ | 4,103 | $ | 4,179 | 3.85 | % | $ | | $ | | | ||||||||
Due from One Year to Five Years |
4,646 | 4,715 | 3.84 | % | 498 | 504 | 4.55 | % | |||||||||||
Due from Five Years to Ten Years |
1,785 | 1,886 | 7.10 | % | | | | ||||||||||||
Due after Ten Years |
4,007 | 4,096 | 4.35 | % | | | | ||||||||||||
|
$ | 14,541 | $ | 14,876 | 4.38 | % | $ | 498 | $ | 504 | 4.55 | % | |||||||
Note 4. Loans and Allowance for Loan Losses
Loans are summarized as follows
|
December 31, 2010 | December 31, 2009 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Thousands) |
(Dollars in Thousands) |
|||||||||||
|
Amount Outstanding |
Percentage of Total |
Amount Outstanding |
Percentage of Total |
|||||||||
Commercial loans |
$ | 28,697 | 32.2 | % | $ | 26,531 | 33.1 | % | |||||
Real estate loans |
52,184 | 58.5 | % | 46,055 | 57.5 | % | |||||||
Other loans |
8,355 | 9.4 | % | 7,530 | 9.4 | % | |||||||
Total Loans, including net loan costs |
89,236 | 100.0 | % | 80,116 | 100.0 | % | |||||||
LessAllowance for loan losses |
(1,877 | ) | (1,202 | ) | |||||||||
Net loans |
$ | 87,359 | $ | 78,914 | |||||||||
The Company's lending strategy is to attract entrepreneurs and small to mid-sized business borrowers by offering a variety of commercial and real estate loan products and a full range of other banking services coupled with highly personalized services. The Company offers secured and unsecured commercial term loans and lines of credit, construction loans for individual homes and commercial and multifamily properties, accounts receivable and equipment loans, and home equity lines of credit. The amount of collateral, if deemed necessary, is determined in accordance with the Company's underwriting criteria. The Company's primary lending occurs within the Greater Los Angeles area.
At December 31, 2010, qualified loans with an outstanding balance of $40.9 million were pledged to secure advances at the FHLB. At December 31, 2009, qualified loans with an outstanding balance of $37.9 million were pledged to secure advances at the FHLB.
As of December 31, 2010, the Company had no impaired or non-accrual loans and there was a single loan which was 30 days past due in the amount of approximately $1.4 million. The loan was paid-in-full by the end of the following month.
The Company had no impaired or non-accrual loans and there were no loans past due 30 days or more in either interest or principal at December 31, 2009.
64
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 4. Loans and Allowance for Loan Losses (Continued)
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, these potential weaknesses 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 jeopardize the liquidation of the debt. They are characterized by the 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. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
(Dollars in Thousands)
|
Pass | Special Mention |
Substandard | Doubtful | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Commercial loans |
$ | 25,065 | $ | 2,000 | $ | 1,632 | $ | | |||||
Commericial real estate |
41,547 | 1,884 | | | |||||||||
Construction |
8,753 | | | | |||||||||
Other loans |
8,110 | | 245 | | |||||||||
Total Loans |
$ | 83,475 | $ | 3,884 | $ | 1,877 | $ | | |||||
The following table presents an analysis of changes in the allowance for loan losses during the period indicated:
|
Year Ended December 31, 2010 |
Year Ended December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
|
(Dollars in Thousands) |
|||||||
Allowance balance at beginning of period |
$ | 1,202 | $ | 975 | ||||
Additions to the allowance charged to expense |
727 | 1,179 | ||||||
Recoveries |
48 | 38 | ||||||
|
1,977 | 2,192 | ||||||
Less: loans charged-off |
100 | 990 | ||||||
Allowance balance at end of period |
$ | 1,877 | $ | 1,202 | ||||
65
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 4. Loans and Allowance for Loan Losses (Continued)
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 December 31, 2010:
(Dollars in Thousands)
|
General Allowance |
|||
---|---|---|---|---|
Commercial loans |
$ | 553 | ||
Commericial real estate |
1,059 | |||
Construction |
131 | |||
Other loans |
134 | |||
Total Loans |
$ | 1,877 | ||
Note 5. Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:
Level 1Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2Significant 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 3Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors.
66
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 5. Fair Value of Financial Instruments (Continued)
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:
Description of Assets/Liabiltity
|
December 31, 2010 |
Quoted Price in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Dollars in Thousands) (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available-for-sale securities |
$ | 14,876 | $ | | $ | 14,876 | $ | | |||||
|
December 31, 2009 |
|
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available-for-sale securities |
$ | 13,361 | $ | | $ | 13,361 | $ | | |||||
Assets measured at fair value on a non-recurring basis are summarized below:
Description of Assets/Liabiltity
|
December 31, 2010 |
Quoted Price in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Dollars in Thousands) (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Loans held for sale |
$ | 3,512 | $ | 3,512 | $ | | $ | | |||||
Current account practice defines the fair value of a financial instrument as the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based upon relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Financial Assets
The carrying amount of cash and short-term investments are considered to approximate fair value. Short-term investments include Federal funds sold and interest bearing deposits with other financial institutions. The fair value of investment securities are generally based upon quoted market prices. The
67
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 5. Fair Value of Financial Instruments (Continued)
fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amount of deposit liabilities payable on demand are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is based upon rates currently available to the Company for debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material.
The estimated fair value of financial instruments at December 31, 2010 and 2009 is summarized as follows (dollar amount in thousands):
|
December 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||||||||
|
Carrying Value |
Estimated Fair Value |
Carrying Value |
Estimated Fair Value |
||||||||||
Financial Assets: |
||||||||||||||
Cash and due from banks |
$ | 1,846 | $ | 1,846 | $ | 1,214 | $ | 1,214 | ||||||
Federal funds sold |
37,250 | 37,250 | 50,241 | 50,241 | ||||||||||
Time deposits-other financial institutions |
2,868 | 2,868 | 3,462 | 3,642 | ||||||||||
Investment Securities |
15,373 | 14,876 | 13,855 | 13,859 | ||||||||||
Loans, net |
87,359 | 92,023 | 78,914 | 84,389 | ||||||||||
Non-marketable securities |
1,581 | 1,581 | 1,700 | 1,700 | ||||||||||
Accrued interest receivable |
419 | 419 | 398 | 398 | ||||||||||
Financial Liabilities: |
||||||||||||||
Non-interest bearing deposits |
52,894 | 52,894 | 29,647 | 29,647 | ||||||||||
Interest-bearing deposits |
69,352 | 69,200 | 81,273 | 80,759 | ||||||||||
Accrued interest payable |
30 | 30 | 41 | 41 | ||||||||||
FHLB advances |
4,500 | 4,492 | 12,000 | 11,965 |
68
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 6. Premises and Equipment
Premises and equipment consisted of the following:
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
|
(Dollars in Thousands) |
||||||
Leasehold improvements |
$ | 884 | $ | 866 | |||
Furniture, fixtures and equipment |
1,537 | 1,155 | |||||
|
2,421 | 2,021 | |||||
Less: accumulated depreciation & amortization |
(1,162 | ) | (739 | ) | |||
|
$ | 1,259 | $ | 1,282 | |||
Total depreciation and amortization expense for the year ended December 31, 2010 was $393,841 compared to $336,462 for the year ended December 31, 2009.
The Company has entered into a lease for an office facility for the banking operation. The lease agreement is for a term of seven (7) years commencing on July 1, 2007 with one renewal option of five years. The Company has entered into a lease for an office facility of the MCM group of companies. The lease agreement is for a term of two (2) years commencing on June 1, 2011. The following is a schedule of the minimum lease payment associated with these two (2) term leases before considering renewal options that generally are present:
Year
|
(Dollars in Thousands) | |||
---|---|---|---|---|
2011 |
$ | 457 | ||
2012 |
364 | |||
2013 |
279 | |||
2014 |
142 | |||
|
$ | 1,242 | ||
The Company had several month-to-month leases covering spaces in both California and New York.
Total occupancy expense for the year ended December 31, 2010 was $733 thousand compared to $459 thousand for the year ended December 31, 2009.
Note 7. Deposits
As of December 31, 2010 the scheduled maturities of the Company time deposits (in thousands) were as follows:
2011 |
$ | 28,612 | ||
2012 |
6,546 | |||
2013 |
2,222 | |||
2014 |
250 | |||
2015 |
| |||
|
$ | 37,630 | ||
69
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 8. Borrowing Arrangements
Overnight borrowing: The Bank has an established borrowing line totaling $3,000,000 on an unsecured basis from one of its correspondent banks. As of December 31, 2010, no amounts were outstanding under this arrangement.
Federal Home Loan Bank Line of Credit: Since 2008, the Bank has maintained a line of credit with FHLB. The maximum amount the Bank my borrow under this agreement is limited to the lesser of a percentage of eligible collateral as established by agreement or 15% of the Bank's total assets. At December 31, 2010 remaining financing availability from the FHLB was $ 15.4 million. FHLB advances are collateralized by loans and securities with a remaining borrowing capacity with existing collateral of approximately $ 18.3 million secured by loans and securities. The Bank has pledged approximately $5.0 million in securities and $40.9 million in loans to the FHLB as of December 31, 2010.
At December 31, 2010, the scheduled maturity of FHLB advance is as follows:
|
Interest | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Amount | Rate | Type | Maturity Date | |||||||
(Dollars in Thousands) |
|
|
|
|||||||
$ | 4,500 | 4.38 | % | Fixed | 6/27/2013 | |||||
$ | 4,500 | |||||||||
Note 9. Employee Benefits Plans
The Company has a 401(k) Profit Sharing Plan for all employees and permits voluntary contributions of their compensation on a pre-tax basis. The Company's Board of Directors made a contribution for both 2010 and 2009 matching 100% of the employee's contribution up to the first 3% of the employee's total compensation and matching 50% of the employee's contribution up to the next 2% of the employee's total compensation. The Company's expense relating to the contributions made to the 401(k) was approximately $295 thousand for the year ended December 31, 2010 and approximately $122 thousand for the year ended December 31, 2009.
Participants are 100% vested in their own voluntary contributions. The Company's matching contribution was made using "Safe Harbor" guidelines. "Safe Harbor" contributions are immediately vested.
Note 10. Stock-Based Compensation
At December 31, 2010, the Company had shares-based compensation awards outstanding under two share-based compensation plans, which are described below.
The "2007 Stock Option Plan".
The 2007 Plan of the Company authorized the granting of both 'nonqualified" and "incentive" stock options to the employees of the Company and its subsidiaries and "nonqualified" stock options to the Company's directors. The Plan provided for options to purchase 732,789 shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant. The Plan provided for accelerated vesting if there is a change of control, as defined by the Plan. The plan was terminated during
70
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 10. Stock-Based Compensation (Continued)
2010 in conjunction with the establishment of the 2010 plan described below. The termination of the 2007 Plan did not cancel options grants outstanding as of the termination date, but cancel all unissued options and disallowed any future grants. At the date of the 2007 Plan termination, there were 726,942 shares outstanding and no options had been exercised.
The "2010 Equity Incentive Plan".
On March 25, 2010, the Board of Directors approved and adopted the Manhattan Bancorp 2010 Equity Incentive Plan (the "2010 Plan"), subject to the approval of the Company's shareholders. The 2010 Plan provides for the issuance of both "incentive" and "nonqualified" stock options to officers and employees, and of "nonqualified" stock options to non-employee directors, of the Company and its subsidiaries. The tax consequences of both types of options are described below. The 2010 Plan also provides for the issuance of restricted stock awards and other types of equity-based compensation awards to these same classes of eligible participants, which awards may be granted on such terms and conditions as are established by the Board of Directors in its discretion, or by a committee designated by the Board.
During the year ended December 31, 2010, the Company recorded $596 thousand of stock-based compensation expense. During the year ended December 31, 2009, the Company recorded $783 thousand of stock-based compensation expense. At December 31, 2010, unrecorded compensation expense related to non-vested stock option grants totaled $192 thousand and is expected to be recognized as follows:
Year
|
Share-Based Compensation Expense |
|||
---|---|---|---|---|
|
(Dollars in Thousands) |
|||
2011 | $ | 134 | ||
2012 | 39 | |||
2013 | 19 | |||
Total | $ | 192 | ||
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. If grants were to occur, the Company would estimate 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.
71
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 10. Stock-Based Compensation (Continued)
The following table summarizes the weighted average assumptions utilized for stock options granted for the periods presented:
|
Period Ended December 31, |
|||
---|---|---|---|---|
|
2010 | 2009 | ||
Risk-free rate |
2.31% | 2.24% | ||
Expected term |
6 years | 6 years | ||
Expected volatility |
28.08% | 26.16% | ||
Dividend yield |
0.00% | 0.00% | ||
Fair value per share |
$1.25 | $0.74 |
The following table summarizes the stock option activity under both plans for the years ended December 31:
|
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 |
||||||||||||||
Outstanding at December 31, 2008 |
657,480 | $ | 9.99 | |||||||||||
Granted |
42,250 | $ | 8.25 | |||||||||||
Exercised |
| | ||||||||||||
Expired |
| | ||||||||||||
Forfeited |
12,788 | $ | 9.96 | |||||||||||
Outstanding at December 31, 2009 |
686,942 | $ | 9.42 | 8.06 | $ | | ||||||||
Options exercisable at December 31, 2009 |
366,898 | $ | 9.69 | 7.84 | $ | | ||||||||
Options unvested at December 31, 2009 |
302,044 | $ | 9.10 | 8.27 | $ | | ||||||||
2010 |
||||||||||||||
Outstanding at December 31, 2009 |
686,942 | $ | 9.42 | |||||||||||
Granted |
303,681 | $ | 6.60 | |||||||||||
Exercised |
| | ||||||||||||
Expired |
| | ||||||||||||
Forfeited |
426,132 | $ | 8.22 | |||||||||||
Outstanding at December 31, 2010 |
564,491 | $ | 8.81 | 7.56 | $ | | ||||||||
Options exercisable at December 31, 2010 |
411,522 | $ | 9.45 | 7.02 | $ | | ||||||||
Options unvested at December 31, 2010 |
152,969 | $ | 7.07 | 9.00 | $ | | ||||||||
There have been no options exercised since the plan was approved.
72
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 11. Stockholders' Equity
The Company had authorized 10,000,000 shares of common stock and 10,000,000 shares of serial preferred stock as of December 31, 2009. The shareholders of the Company approved an amendment to the Articles of Incorporation authorizing an increase of the number of authorized shares of common stock from 10,000,000 to 30,000,000 shares.
The Company elected to participate in the U.S. Treasury's Capital Purchase Program ("CPP"). On December 5, 2008 the Treasury purchased 1,700 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Preferred Stock") at a liquidation amount of $1,000 per share providing the Company with $1,678,934 net of related expenses of $21,066. The Preferred Stock paid a cumulative dividend at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year.
In conjunction with this purchase, the Company granted the Treasury a warrant (the "Warrant") to purchase 29,480 additional shares of the Company's common stock at $8.65 per share subject to the standard terms and conditions of CPP. The warrant was immediately exercisable and would have expired on December 5, 2018.
With the receipt of funds from the private placement in late December 2008, and with the increasing requirements associated with the funds associated with the CPP, the Company sought permission to repurchase the 1,700 shares of the Company's Preferred Stock. Following necessary regulatory approval, the Company paid $1,707,319 to redeem the Preferred Stock, which included the final accrued dividend of $7,319 on September 16, 2009.
On October 9, 2009, the Company was notified by the United States Department of the Treasury of its acceptance of the Company's offer to redeem the outstanding Warrant for the 29,480 additional shares of the Company's common stock at a total price of $63,364. The redemption of the Warrant occurred on October 14, 2009.
Note 12. Income Taxes
For the year ended December 31, 2010, the Company and its subsidiaries recorded tax expense of $4,128, which consists of penalties of $128 and the state franchise minimum tax of $800 for five corporations. Other than the minimum state franchise tax of $800 per organization, the Company and its subsidiaries had no other income tax expense or benefit for the year ended December 31, 2010. This was the result of net operating losses, with net deferred tax assets remaining unrecognized, since their realization is dependent on probable future taxable income. The Company has established a 100% valuation allowance against the deferred tax assets. Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. At December 31, 2010, the Bank had Federal net operating loss carry-forward of approximately $12.3 million that begin expiring in 2026 and a state net operating loss carry-forward of approximately $12.0 million that begin expiring in 2017.
73
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 12. Income Taxes (Continued)
The following is a summary of the components of the net deferred tax asset account at December 31:
|
2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
Deferred tax assets: |
||||||||
Organizational costs |
$ | 292,000 | $ | 343,000 | ||||
Start-up costs |
47,000 | 55,000 | ||||||
Operating loss carryforward |
5,055,000 | 3,725,000 | ||||||
Non-employee stock-based compensation |
672,000 | 500,000 | ||||||
Allowance for loan losses due to tax differences |
631,000 | 356,000 | ||||||
Depreciation differences |
112,000 | 33,000 | ||||||
Conversion of accrual basis to reporting |
63,000 | 97,000 | ||||||
Other |
48,000 | 19,000 | ||||||
|
6,920,000 | 5,128,000 | ||||||
Valuation allowance |
(6,881,000 |
) |
(5,094,000 |
) |
||||
Deferred tax liability: |
||||||||
Conversion of accrual basis to reporting |
| | ||||||
Deferred loan costs |
(39,000 | ) | (34,000 | ) | ||||
Net deferred tax assets |
$ | | $ | | ||||
Note 13. Commitments and Contingencies
As of December 31, 2010 and 2009, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:
|
2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in Thousands) |
(Dollars in Thousands) |
|||||
Commitment to extend credit |
$ | 26,150 | $ | 25,835 | |||
Standby letters of credit |
88 | 120 | |||||
|
$ | 26,238 | $ | 25,955 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition in the loan contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the Company expects some commitments to expire without being drawn upon, the total commitment amount does not necessarily represent future loans.
The Company is currently not involved in any legal proceeding.
74
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 14. 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 classification are also subject to qualitative judgments by the regulators about 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 (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to average assets (as defined). As of December 31, 2010, the Company and the Bank exceeded all applicable capital adequacy requirements.
Under the Federal Reserve Board's guidelines, Manhattan 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 maintains levels of capital on a consolidated basis which qualify it as "well capitalized."
The following table sets forth the Company's and the Bank's regulatory capital ratios as of December 31, 2010 and 2009:
|
Actual | To Be Adequately Capitalized |
To Be Well Capitalized |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010
|
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||||
Company |
|||||||||||||||||||
Total Capital (risk-weighted assets) |
$ | 25,254 | 25.3 | % | $ | 8,001 | 8 | % | $ | 10,001 | 10 | % | |||||||
Tier 1 Capital (risk-weighted assets) |
$ | 23,995 | 24.0 | % | $ | 4,000 | 4 | % | $ | 6,001 | 6 | % | |||||||
Tier 1 Capital (average assets) |
$ | 23,995 | 18.1 | % | $ | 5,291 | 4 | % | $ | 6,613 | 5 | % | |||||||
Bank |
|||||||||||||||||||
Total Capital (risk-weighted assets) |
$ | 22,218 | 22.4 | % | $ | 7,922 | 8 | % | $ | 9,903 | 10 | % | |||||||
Tier 1 Capital (risk-weighted assets) |
$ | 20,971 | 21.2 | % | $ | 3,961 | 4 | % | $ | 5,942 | 6 | % | |||||||
Tier 1 Capital (average assets) |
$ | 20,971 | 16.6 | % | $ | 5,053 | 4 | % | $ | 6,317 | 5 | % |
75
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 14. Regulatory Capital (Continued)
|
Actual | To Be Adequately Capitalized |
To Be Well Capitalized |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009
|
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
|
(Dollars in Thousands) |
||||||||||||||||||
Company |
|||||||||||||||||||
Total Capital (risk-weighted assets) |
$ | 29,182 | 33.7 | % | $ | 6,931 | 8 | % | $ | 8,664 | 10 | % | |||||||
Tier 1 Capital (risk-weighted assets) |
$ | 28,097 | 32.4 | % | $ | 3,465 | 4 | % | $ | 5,198 | 6 | % | |||||||
Tier 1 Capital (average assets) |
$ | 28,097 | 23.5 | % | $ | 4,788 | 4 | % | $ | 5,985 | 5 | % | |||||||
Bank |
|||||||||||||||||||
Total Capital (risk-weighted assets) |
$ | 22,430 | 27.0 | % | $ | 6,931 | 8 | % | $ | 8,664 | 10 | % | |||||||
Tier 1 Capital (risk-weighted assets) |
$ | 22,345 | 25.8 | % | $ | 3,465 | 4 | % | $ | 5,198 | 6 | % | |||||||
Tier 1 Capital (average assets) |
$ | 22,345 | 18.9 | % | $ | 4,731 | 4 | % | $ | 5,913 | 5 | % |
Note 15. Related Party Transactions
In the ordinary course of business, the Bank may grant loans to certain officers and directors and the companies with which they are associated. Management believes that all loans and loan commitments to such parties will be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transaction with other persons.
A summary of the activity in these loans follows:
|
2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Balance at beginning of the year |
$ | 1,879,115 | $ | 2,236,115 | |||
Credit granted including renewals |
755,800 | 294,000 | |||||
Repayments |
1,365,000 | 651,000 | |||||
Balance at end of year |
$ | 1,269,915 | $ | 1,879,115 | |||
Deposits from related parties held by the Bank at December 31, 2010 and 2009 amounted to $3,042 thousand and $1,471 thousand respectively.
76
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 16. Parent Company Only Condensed Financial Statements
The condensed parent company financial statements of Manhattan Bancorp follow:
Condensed Balance Sheets
|
December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||||
Assets: |
|||||||||
Cash |
$ | 1,831,164 | $ | 4,608,715 | |||||
Investment in subsidiary |
21,306,338 | 22,650,490 | |||||||
Investment in MBFS Holdings Inc |
1,248,850 | 1,055,080 | |||||||
Loan to affiliate |
| 210,000 | |||||||
Prepaid expenses & other assets |
25,781 | 41,664 | |||||||
Total assets |
$ | 24,412,133 | $ | 28,565,949 | |||||
Liabilities and Stockholders' Equity: |
|||||||||
Accrued expenses |
$ | 82,100 | $ | 163,746 | |||||
Stockholders' equity-Manhattan Bancorp |
24,126,567 |
28,111,293 |
|||||||
Noncontrolling interest |
203,466 | 290,910 | |||||||
Total equity |
24,330,033 | 28,402,203 | |||||||
Total liabilities and stockholders' equity |
$ | 24,412,133 | $ | 28,565,949 | |||||
77
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 16. Parent Company Only Condensed Financial Statements (Continued)
Condensed Statements of Operations
|
For the Year ended December 31, 2010 |
For the Year ended December 31, 2009 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Interest income |
|||||||||
Interest from loan to affiliate |
$ | 2,256 | $ | 2,397 | |||||
Total interest income |
2,256 | 2,397 | |||||||
Non-interest expenses |
|||||||||
Compensation and benefits |
1,964,138 | 739,082 | |||||||
Legal and professional fees |
315,366 |
815,077 |
|||||||
General and administrative including taxes |
293,448 |
64,061 |
|||||||
Occupancy and equipment |
154,315 |
84,492 |
|||||||
Total non-interest expenses |
2,727,267 | 1,702,712 | |||||||
Loss before equity in undistributed loss of subsidiary |
(2,725,011 | ) | (1,700,315 | ) | |||||
Loss in equityBank of Manhattan |
(1,666,277 |
) |
(3,301,041 |
) |
|||||
Loss in equityBMFS Holdings, Inc |
(306,231 | ) | (44,920 | ) | |||||
Net loss |
(4,697,519 | ) | (5,046,276 | ) | |||||
Less: Net gain (loss) attributable to noncontrolling interest |
(87,444 | ) | (9,090 | ) | |||||
Net loss attributable to Manhattan Bancorp |
$ | (4,610,075 | ) | $ | (5,037,186 | ) | |||
78
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 16. Parent Company Only Condensed Financial Statements (Continued)
Condensed Statements of Cash Flows
|
For the Year Ended December 31, 2010 |
For the Year Ended December 31, 2009 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Cash Flows from Operating Activities |
|||||||||||
Net loss |
$ | (4,697,519 | ) | $ | (5,046,278 | ) | |||||
Adjustments to reconcile net loss to net cash provided by/ (used in) used in operating activities: |
|||||||||||
Net change in: |
|||||||||||
Equity in undistributed loss of subsidiary |
1,373,773 | 2,703,230 | |||||||||
Investment in MBFS Holdings Inc |
306,230 | 44,920 | |||||||||
Share-based compensation expense |
595,728 | 783,001 | |||||||||
(Increase) decrease in accrued interest receivable and other assets |
15,883 | (41,663 | ) | ||||||||
Increase (decrease) in accrued interest payable and other liabilities |
(81,646 | ) | 158,233 | ||||||||
Net cash used in operating activities |
(2,487,551 | ) | (1,398,557 | ) | |||||||
Cash Flows from Investing Activities |
|||||||||||
Net decrease (increase) in loans |
210,000 | (210,000 | ) | ||||||||
Investment in Subsidiary |
(500,000 | ) | (1,100,000 | ) | |||||||
Capital contribution to minority interest |
| (90,000 | ) | ||||||||
Net cash used in investing activities |
(290,000 | ) | (1,400,000 | ) | |||||||
Cash Flows from Financing Activities |
|||||||||||
Cash dividend paid on preferred stock |
| (66,349 | ) | ||||||||
Proceeds from issuance of common stock, net of selling costs |
| | |||||||||
Repurchase of preferred stock |
| (1,700,000 | ) | ||||||||
Redemption of stock |
| (63,364 | ) | ||||||||
Capital contribution from minority interest |
| 300,000 | |||||||||
Proceeds from issuance of preferred stock, net of selling costs and discount |
| | |||||||||
Issuance of common stock warrants |
| | |||||||||
Net cash provided by financing activities |
| (1,529,713 | ) | ||||||||
Net increase in cash and cash equivalents |
(2,777,551 | ) | (4,328,270 | ) | |||||||
Cash and Cash Equivalents at Beginning of Period |
4,608,715 | 8,936,985 | |||||||||
Cash and Cash Equivalents at End of Year |
$ | 1,831,164 | $ | 4,608,715 | |||||||
79
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 17. Business Combinations
On October 1, 2009, Manhattan Bancorp, through its wholly owned subsidiary, MBFS Holdings, Inc., acquired a 70% interest in Banc of Manhattan Capital, LLC, a full-service mortgage-centric broker/dealer through a purchase of 700 thousand membership units for a price of $790 thousand. The excess of the purchase price over the estimated fair value of the net assets acquired resulting in the recording of $279,391 in goodwill. During 2010, the Company, through its wholly owned subsidiary, MBFS Holdings, Inc., transferred its majority interest from Banc of Manhattan Capital, LLC to Manhattan Capital Markets LLC. Manhattan Capital Markets LLC is a holding company for multiple wholly-owned subsidiaries, including BOM Capital LLC, a full service mortgage-centric broker/dealer.
The following table provides a summary of the assets acquired and liabilities as of the date of the acquisition of Banc of Manhattan Capital, LLC in 2009.
|
October 1, 2009 | |||||
---|---|---|---|---|---|---|
Assets |
||||||
Cash & due from bank |
$ | 840,064 | ||||
Accounts Receivable |
728,268 | |||||
Leasehold improvements |
18,664 | |||||
Furniture, fixtures & equipment |
178,735 | |||||
Prepaid expenses & other assets |
53,653 | |||||
Goodwill |
279,391 | |||||
Total assets |
$ | 2,098,774 | ||||
Liabilities and Equity |
||||||
Liabilities |
||||||
Unearned Income |
$ | 75,000 | ||||
Accrued expensesthird parties |
127,206 | |||||
Accrued expensesprincipals |
151,674 | |||||
Deferred compensation |
405,045 | |||||
Loan from principals |
30,000 | |||||
Loan from Bodi Advisors, LLC |
59,849 | |||||
Loan from Manhattan Bancorp |
250,000 | |||||
Total liabilities |
1,098,774 | |||||
Equity |
||||||
BOM Capital membership equity |
||||||
Membership Units 1,000,000 |
1,000,000 | |||||
Accumulated deficit |
| |||||
Total equity |
1,000,000 | |||||
Total liabilities and equity |
$ | 2,098,774 | ||||
80
MANHATTAN BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010
Note 18. Segment Information
The Company segregates its operations into three primary segments: The Banking Operation (Bank of Manhattan, N.A.), the Non-Bank Financial Operations (MCM LLC and Other, which includes the Parent Company, MBFS Financial Holding, Inc. along with the eliminations between segments. The Company determines the operating results of each segment based upon internal management systems.
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 fair value. Information reported internally for performance assessment follows:
|
Condensed Statements of Operation | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2010
|
Bank | MCM | Other | Consolidated Company |
|||||||||
|
(Dollars in Thousands) |
||||||||||||
Net interest Income, including loan fees |
$ | 5,486 | $ | 30 | $ | | $ | 5,516 | |||||
Less: Provision for loan losses |
727 | | | 727 | |||||||||
Non-interest income |
394 | 7,397 | (42 | ) | 7,749 | ||||||||
Net revenue |
5,153 | 7,427 | (42 | ) | 12,538 | ||||||||
Non-interest expense |
6,818 | 7,717 | 2,696 | 17,231 | |||||||||
loss before taxes |
$ | (1,665 | ) | $ | (290 | ) | $ | (2,738 | ) | $ | (4,693 | ) | |
Total assets |
$ | 150,923 | $ | 2,225 | $ | (200 | ) | $ | 152,948 | ||||
|
Condensed Statements of Operation | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2009
|
Bank | MCM(1) | Other | Consolidated Company |
|||||||||
|
(Dollars in Thousands) |
||||||||||||
Net interest Income, including loan fees |
$ | 3,755 | $ | | $ | | $ | 3,755 | |||||
Less: Provision for loan losses |
1,180 | | | 1,180 | |||||||||
Non-interest income |
141 | 893 | (15 | ) | 1,019 | ||||||||
Net revenue |
2,716 | 893 | (15 | ) | 3,594 | ||||||||
Non-interest expense |
6,017 | 923 | 1,700 | 8,640 | |||||||||
loss before taxes |
$ | (3,301 | ) | $ | (30 | ) | $ | (1,715 | ) | $ | (5,046 | ) | |
Total assets |
$ | 151,506 | $ | 1,340 | $ | (531 | ) | $ | 152,315 | ||||
81
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with the Company's accountants on accounting and financial disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported on a timely basis.
The Company's management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2010, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2010 is effective.
Changes in Internal Control
There were no changes in the Company's internal control over financial reporting in the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
82
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required under this Item will be found in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2010 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item will be found in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2010 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK HOLDER MATTERS
The information required under this Item will be found in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2010 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item will be found in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2010 and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item will be found in the Company's Proxy Statement for the 2011 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2010 and is incorporated herein by reference.
83
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The listing of financial statements required by this item is set forth in the index under Item 8 of this Annual Report on Form 10-K.
The listing of supplementary financial statement schedules required by this item is set forth in the index under Item 8 of this Annual Report on Form 10-K.
The listing of exhibits required by this item is set forth in the Exhibit Index beginning on page 87 of this Annual Report on Form 10-K, which Exhibit Index indicates each exhibit that is a management contract or compensatory plan or arrangement.
See exhibits listed in "Exhibit Index" on page 87 of this report.
There are no financial statement schedules required by Regulation S-X that have been excluded from the Annual Report on Form 10-K.
84
Pursuant to the requirements of Section 13 of 15(d) 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: March 30, 2011 |
/s/ TERRY ROBINSON Terry Robinson President and Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirement of the Securities and Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Members of the Company's Board of Directors |
|
---|---|---|
Dated: March 30, 2011 |
/s/ J. GRANT COUCH, JR. J. Grant Couch Jr. Chairman of the Board |
|
Dated: March 30, 2011 |
/s/ CHRIS W. CARAS JR. Chris W. Caras, Jr. |
|
Dated: March 30, 2011 |
/s/ HARRY W. CHENOWETH Harry W. Chenoweth |
|
Dated: March 30, 2011 |
/s/ JOHN D. FLEMMING John D. Flemming |
|
Dated: March 30, 2011 |
/s/ DEAN FLETCHER Dean Fletcher Chief Financial Officer (Principal Financial and Accounting Officer) |
|
Dated: |
Patrick E. Greene |
85
|
Members of the Company's Board of Directors |
|
---|---|---|
Dated: March 30, 2011 |
/s/ CHRISTOPHER J. GROWNEY Christopher J. Growney |
|
Dated: March 30, 2011 |
/s/ GREG JACOBSON Greg Jacobson |
|
Dated: |
Kyle A. Ransford |
|
Dated: March 30, 2011 |
/s/ TERRY ROBINSON Terry Robinson Chief Executive Officer (Principal Executive Officer) |
|
Dated: March 30, 2011 |
/s/ LARRY S. MURPHY Larry S. Murphy |
|
Dated: March 30, 2011 |
/s/ STEPHEN P. YOST Stephen P. Yost |
86
|
Exhibit Number | ||
---|---|---|---|
3.1 | Articles of Incorporation of Manhattan Bancorp, as amended, incorporated by reference to Form SB-2 Registration Statement filed with the Securities and Exchange Commission ("SEC") on February 5, 2007. | ||
3.2 |
By-laws of Manhattan Bancorp, incorporated by reference to Form SB-2 Registration Statement filed with the Securities and Exchange Commission ("SEC") on February 5, 2007. |
||
4.1 |
Specimen Common Stock Certificate, incorporated by reference to Form SB-2 Registration Statement Registration Statement filed with the Securities and Exchange Commission ("SEC") on February 5, 2007. |
||
10.1 |
Lease for Main office of Bank of Manhattan, incorporated by reference to Form SB-2 Registration Statement filed with the Securities and Exchange Commission ("SEC") on February 5, 2007. |
||
10.2 |
Form of Stock Option Plan, incorporated by reference to Form SB-2 Registration Statement filed with the Securities and Exchange Commission ("SEC") on February 5, 2007.(x) |
||
10.3 |
Stock Purchase Agreement dated May 14, 2008 between Manhattan Bancorp and Carpenter Fund Manager GP, LLC incorporated by reference to Form 8-K filed with the SEC on May 16, 2008. |
||
10.4 |
First Amended and Restated Employment Agreement dated March 26, 2009 between Manhattan Bancorp, Bank of Manhattan, N.A. and Dean Fletcher, incorporated by reference to Form 8-K filed with the SEC on March 16, 2009.(x) |
||
10.5 |
Amendment to First Amended and Restated Employment Agreement dated September 8, 2010 between Manhattan Bancorp, Bank of Manhattan, N.A. and Dean Fletcher, incorporated by reference to Form 8-K filed with the SEC on September 8, 2010.(x) |
||
10.6 |
Employment Agreement dated March 26, 2009 between Bank of Manhattan and Rick Sowers, incorporated by reference to Form 8-K filed with the SEC on March 16, 2009.(x) |
||
10.7 |
Operating Agreement of Manhattan Capital Markets LLC, dated as of July 30, 2010, by and between MBFS Holdings, Inc and Bodi Advisors, Inc. |
||
10.8 |
Amendment No. 1 to Operating Agreement of Manhattan Capital Markets LLC, dated as of November 30, 2010, by and between MBFS Holdings, Inc. and Bodi Advisors, Inc. |
||
10.9 |
Employment Agreement dated October 1, 2009 by and between BOM Capital, LLC and Harold Hermelee, incorporated by reference to Form 8-K filed with the SEC on October 7, 2009.(x) |
||
10.10 |
Employment Agreement dated October 1, 2009 by and between BOM Capital, LLC and Tad Dahlke, incorporated by reference to Form 8-K filed with the SEC on October 7, 2009.(x) |
||
10.11 |
Employment Agreement dated October 1, 2009 by and between BOM Capital, LLC and Greg Jacobson, incorporated by reference to Form 8-K filed with the SEC on October 7, 2009.(x) |
||
10.12 |
Employment Agreement dated December 8, 2009 by and between Manhattan Bancorp and Kyle A. Ransford, incorporated by reference to Form 8-K filed with the SEC on December 14, 2009.(x) |
||
10.13 |
Employment Agreement dated March 1, 2010 by and between Manhattan Bancorp, Bank of Manhattan, N.A. and Deepak Kumar, incorporated by reference to Form 8-K filed with the SEC on March 5, 2010.(x) |
87
|
Exhibit Number | ||
---|---|---|---|
10.14 | Employment Agreement dated November 23, 2010 by and between Manhattan Bancorp, Bank of Manhattan, N.A. and Terry L. Robinson, incorporated by reference to Form 8-K files with the SEC on November 23, 2010.(x) | ||
21 |
Subsidiaries of the registrant. |
||
23.1 |
Consent of Vavrinek, Trine, Day & Co, LLP. |
||
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. |
88
Exhibit 10.7
OPERATING AGREEMENT
OF
MANHATTAN CAPITAL MARKETS LLC
TABLE OF CONTENTS
|
|
Page |
|
|
|
ARTICLE I TERMS AND CONDITIONS |
1 | |
|
|
|
1.1 |
Name |
1 |
1.2 |
Term |
1 |
1.3 |
Principal Office and Agent |
1 |
1.4 |
Business of the Company |
1 |
1.5 |
Limitation of Liability |
1 |
1.6 |
Treatment of Company |
1 |
1.7 |
Certain Definitions |
2 |
|
|
|
ARTICLE II CAPITAL CONTRIBUTIONS |
2 | |
|
|
|
2.1 |
Capital Contributions |
2 |
2.2 |
Capital Accounts |
4 |
2.3 |
No Interest |
4 |
2.4 |
Loans from Members |
5 |
2.5 |
Repurchase of Class A and Class B Membership Units of Management Company |
5 |
|
|
|
ARTICLE III MEMBERSHIP; CONVERSION RIGHT OF MANAGEMENT COMPANY |
5 | |
|
|
|
3.1 |
Admission of Additional Members |
5 |
3.2 |
Representations and Warranties |
6 |
3.3 |
Withdrawals |
6 |
3.4 |
Lack of Authority |
6 |
3.5 |
Membership Meetings |
6 |
3.6 |
Merger of Management Company and MB |
6 |
|
|
|
ARTICLE IV TRANSFER AND ASSIGNMENT OF INTERESTS |
9 | |
|
|
|
4.1 |
Restrictions on Transfer |
9 |
4.2 |
Tag-Along Rights |
9 |
4.3 |
Drag-Along Rights |
9 |
4.4 |
Change in Control of MB |
10 |
4.5 |
Substitution of Members |
12 |
4.6 |
Ownership of Management Company |
13 |
|
|
|
ARTICLE V MANAGEMENT AND CONTROL OF THE COMPANY |
14 | |
|
|
|
5.1 |
Board of Directors |
14 |
5.2 |
Members |
15 |
5.3 |
Officers |
15 |
5.4 |
Matters Affecting Directors and Officers |
17 |
5.5 |
Indemnification |
18 |
5.6 |
Consent and Voting Rights of Members |
18 |
TABLE OF CONTENTS
(continued)
|
|
Page |
|
|
|
|
|
|
ARTICLE VI ALLOCATIONS OF NET INCOME AND NET LOSS AND DISTRIBUTIONS |
18 | |
|
|
|
6.1 |
Allocations of Net Income and Net Loss |
18 |
6.2 |
Distributions |
19 |
6.3 |
Transferred Interests |
19 |
6.4 |
Code Section 704(b) Allocations |
20 |
6.5 |
Code Section 704(c) Allocations |
21 |
6.6 |
Tax Matters Member |
22 |
|
|
|
ARTICLE VII BOOKS AND RECORDS |
23 | |
|
|
|
7.1 |
Accounting Principles |
23 |
7.2 |
Records and Reports |
23 |
7.3 |
Returns and Other Elections |
24 |
7.4 |
Bank Accounts |
24 |
|
|
|
ARTICLE VIII DISSOLUTION AND WINDING UP |
24 | |
|
|
|
8.1 |
Dissolution |
24 |
8.2 |
Winding-up |
24 |
8.3 |
Distribution of Assets on Dissolution |
24 |
8.4 |
Distributions in Kind |
25 |
8.5 |
Distributions to Trust |
25 |
8.6 |
Certificates of Dissolution and Cancellation |
25 |
8.7 |
Company Name |
25 |
|
|
|
ARTICLE IX DEFINITIONS |
25 | |
|
|
|
ARTICLE X MISCELLANEOUS PROVISIONS |
35 | |
|
|
|
10.1 |
Notices |
35 |
10.2 |
Application of Law |
35 |
10.3 |
No Action for Partition |
36 |
10.4 |
Headings and Sections |
36 |
10.5 |
Amendments |
36 |
10.6 |
Number and Gender |
36 |
10.7 |
Binding Effect |
36 |
10.8 |
Counterparts |
36 |
10.9 |
Severability |
36 |
10.10 |
Entire Agreement |
36 |
10.11 |
Insurance |
36 |
10.12 |
Consultation Rights |
37 |
10.13 |
Expenses |
37 |
10.14 |
Arbitration Agreement |
37 |
10.15 |
CPP |
38 |
OPERATING AGREEMENT
OF MANHATTAN CAPITAL MARKETS LLC
This Operating Agreement (the Operating Agreement) of Manhattan Capital Markets LLC, a California limited liability company (the Company) is made as of July 30, 2010, by and among each of the Persons whose name is set forth on Exhibit A to this Operating Agreement, as it may be amended from time to time (each such party a Member and collectively, the Members).
WHEREAS, the Articles of Organization (the Articles) of the Company were filed in the Office of the Secretary of State of California on June 22, 2010; and
WHEREAS, the Members desire to enter into this Agreement to set forth their respective ownership interests in the Company and the principles by which it will be operated and governed.
NOW, THEREFORE, in consideration of the mutual covenants and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Members hereby agree as follows:
ARTICLE I
TERMS AND CONDITIONS
1.1 Name. The name of the Company is Manhattan Capital Markets LLC. The Company may conduct business under that name or any other name as decided by the Board.
1.2 Term. The term of existence of the Company will be perpetual, unless the Company is earlier dissolved in accordance with this Operating Agreement, the Articles, or the Act.
1.3 Principal Office and Agent. The principal office of the Company will be located at 2141 Rosecrans Avenue, Suite 1160, El Segundo, California 90245 or such other location as the Board may select from time to time. The agent of the Company is the initial agent named in the Articles or another Person selected by the Board from time to time.
1.4 Business of the Company. The Company shall engage in the Business, and any other business as may be approved by the Board that may be conducted by a California limited liability company. The Company shall have any and all lawful powers necessary or desirable to carry out the purposes and business of the Company.
1.5 Limitation of Liability. To the fullest extent permitted by current and future applicable law, no Member is liable for the debts, obligations or liabilities of the Company, including under a judgment, decree, or order of a court.
1.6 Treatment of Company. The Members intend that the Company be treated as a partnership, rather than as an association taxable as a corporation, for federal income tax purposes. No Member, Director or Officer may cause the Company to elect to be taxed as an
association taxable as a corporation under Treasury Regulations Section 301.7701-3(c) or otherwise take any action that would result in the Company not being treated as a partnership for federal income tax purposes without the unanimous approval of the Members.
1.7 Certain Definitions. When used in this Operating Agreement, the capitalized terms not defined elsewhere will have the meanings set forth within Article IX of this Operating Agreement.
ARTICLE II
CAPITAL CONTRIBUTIONS
2.1 Capital Contributions.
(a) Each Member will make initial Capital Contributions to the Company in the amounts and in the manner shown opposite the Members name on Exhibit A to this Operating Agreement when requested by the Board. No Member will be required to make any additional Capital Contributions to the Company except as expressly provided herein. However, the Members may make additional Capital Contributions if approved by the Board in its sole and absolute discretion on such terms as may be approved by the Board upon compliance with the provisions of Section 2(c) hereof.
(b) The Company shall have such classes (Classes) or series (Series) thereof, issued in units (Units), as are described in this Section 2.1(b) or as may be established from time to time by the Board under Section 2.1. The following rules govern the Classes for all purposes of this Operating Agreement at all times: (a) each Member of a Class has the same rights and obligations hereunder as any other Member of the same Class; (b) Members of one Class have different rights and obligations from those of another Class only to the extent expressly provided in this Operating Agreement; and (c) a Person may own Units of different Classes at the same time, and in that case shall be deemed to be a Member of one Class to the extent of the amount of Units of such Class owned by such Person and a Member of another Class to the extent of the amount of Units of such other Class owned by such Person. Initially, the Company shall have two Classes of Interests, the Class A Membership Units and the Class B Membership Units.
(i) The Company shall have 1,000,000 authorized Class A Membership Units. A total of 700,000 Class A Membership Units will be issued to MB pursuant to the Contribution Agreement, and 300,000 Class A Membership Units will be issued to Management Company pursuant to the Contribution Agreement. Prior to the EBITDA Trigger Date and satisfaction of the Minimum EBITDA Threshold, the Class A Membership Units shall have the sole right to vote or to participate in the management of the Company.
(ii) The Company shall have 166,667 authorized Class B Membership Units, all of which shall be issued to Management Company pursuant to the Contribution Agreement. Prior to the EBITDA Trigger Date and satisfaction of the Minimum EBITDA Threshold, the Class B Membership Units shall have no right to vote or to participate in the management of the Company, or any right to share in allocations of Net Income or Net Loss, or to any distributions hereunder other than distributions upon dissolution of the Company under
Section 8.3(c). On and after the EBITDA Trigger Date upon satisfaction of the Minimum EBITDA Threshold, or upon such quarter-end date occurring prior to the EBITDA Trigger Date as the Company shall have achieved cumulative consolidated EBITDA of not less than $20,000,000, excluding revenue related to mortgage banking, the Ownership Percentages will be recalculated such that the Class B Membership Units shall have the right to vote and participate in the management of the Company, and the right to share in all allocations of Net Income or Net Loss and to receive distributions hereunder at the same per Unit rate as the Class A Membership Units.
(iii) The EBITDA Trigger Date shall mean December 31, 2011. The EBITDA Measurement Period shall mean the period commencing on the Initial Date and ending on the EBITDA Trigger Date. The Initial Date shall be October 1, 2009. The Minimum EBITDA Threshold shall mean cumulative consolidated EBITDA for the Company and its wholly owned subsidiaries for the EBITDA Measurement Period, excluding any revenue related to mortgage banking, of not less than $20,000,000. If on the EBITDA Trigger Date, the Minimum EBITDA Threshold has not been satisfied, the Class B Membership Units shall be cancelled and redeemed by the Company for $0.01.
(c) Should the Board determine, in its reasonable discretion, that additional capital is required in connection with the Business, the Board may call for additional Capital Contributions (Additional Capital Contributions) from the Members.
(i) The Board shall give written notice to the Members of the total amount of Additional Capital Contributions requested and the reasons for such Additional Capital Contributions and shall provide the Members with not less than 45 days to provide the total Additional Capital Contributions requested in proportion to their ownership of (A) the Class A Membership Units prior to the EBITDA Trigger Date and (B) all Class A and Class B Membership Units after the EBITDA Trigger Date.
(ii) In the event the Members fail to contribute all of the Additional Capital Contributions requested by the Board under Section 2.1(c)(i), the Board may cause Interests respecting such Additional Capital Contributions to be issued to such Persons, including the Members, as the Board may determine, and to admit such purchasers as Members. Such additional Interests shall have such terms as the Board may determine, which terms may be superior to the terms of the Units or other Interests previously issued to the Members; provided, that if the Board proposes to issue such additional Interests, such Interests shall first be offered for a period of not less than fifteen (15) days from the date of delivery of written notice thereof to the Members before being issued to any other Person. If more than one Member elects to purchase the additional interests, the Board shall resolve all disputes, including the respective pro rata share based on the relative Ownership Percentage of each electing Member or on the amount of the purchase of the additional Interests of each electing Member, as best as the Board reasonably can, and the Boards determination thereof shall be final and binding on all Members. Any additional Interests not sold to the existing Members may then be offered and sold to other Persons on the same terms as offered to the Members.
2.2 Capital Accounts. The Company will establish an individual capital account (the Capital Account) for each Member. The Company will determine and maintain each Capital Account in accordance with the following provisions:
(a) To each Members Capital Account there shall be credited: (i) such Members Capital Contributions (including Additional Capital Contributions, if any), (ii) such Members distributive share of Net Income and any items in the nature of income or gain which are specially allocated pursuant to Sections 6.1(b) or 6.4 hereof, and (iii) the amount of any Company liabilities assumed by such Member or which are secured by any Company property distributed to such Member.
(b) To each Members Capital Account there shall be debited (i) the amount of cash and the Gross Asset Value of any Property distributed to such Member pursuant to any provision of this Agreement, (ii) such Members distributive share of Net Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Sections 6.1(b) or 6.4 hereof, and (iii) the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.
(c) In the event all or a portion of a Members Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest; and
(d) In determining the amount of any liability for purposes of subparagraphs (a) and (b) above, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Treasury Regulations.
The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent therewith. In the event the Board shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or the Members), are computed in order to comply with Treasury Regulations Section 1.704-1(b), the Board may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to this Agreement hereof upon the dissolution of the Company. The Board also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Companys balance sheet, as computed for book purposes, in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treasury Regulations Section 1.704-1(b), provided that, to the extent that any such adjustment is inconsistent with other provisions of this Agreement and would have a material adverse effect on any Member, such adjustment shall require the consent of such Members.
2.3 No Interest. The Company will not pay any interest on Capital Contributions.
2.4 Loans from Members. Loans may be made by the Members to the Company on such terms as may be agreed upon by the Board and such Members.
2.5 Repurchase of Class A and Class B Membership Units of Management Company.
(a) All or a portion of the Class A Membership Units and Class B Membership Units issued to the Management Company shall be repurchased by the Company under the circumstances set forth in this Section 2.5 for a price equal to $0.01 per Unit, unless the Board elects in writing to waive such repurchase in whole or in part. In the event the Management Condition is not satisfied at any time during the period commencing on July 30, 2010 and ending on the first anniversary of the Initial Date, a percentage amount of Class A Membership Units and Class B Membership Units owned by the Management Company equal to that percentage of shares of common stock of the Management Company owned by the Management Principals shall be repurchased. In the event the Management Condition is not satisfied at any time during the second year following the Initial Date, two-thirds of that percentage amount of Class A Membership Units and Class B Membership Units owned by the Management Company equal to that percentage of shares of common stock of the Management Company owned by the Management Principals shall be repurchased. In the event the Management Condition is not satisfied at any time during the third year following the Initial Date, one-third of that percentage amount of Class A Membership Units and Class B Membership Units owned by the Management Company equal to that percentage of shares of common stock of the Management Company owned by the Management Principals shall be repurchased, unless the Minimum EBITDA Threshold shall have been satisfied for the EBITDA Measurement Period as of the EBITDA Trigger Date. Notwithstanding the foregoing, upon a Change in Control the Class A Membership Units and Class B Membership Units shall no longer be subject to repurchase under this Section 2.5(a).
(b) The Management Condition is the continued full-time employment of at least two of the Management Principals by the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC, except where a Management Principal is terminated by the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC without Cause or resigns for Good Reason (as defined in such Management Principals employment agreement with the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC).
ARTICLE III
MEMBERSHIP; CONVERSION RIGHT OF MANAGEMENT COMPANY
3.1 Admission of Additional Members. Subject to Section 2.1(c) hereof, the terms of admission or issuance of Interests to new Members shall be determined by the Board. The Board will reflect the creation of any new Class or Series in an amendment to this Operating Agreement and/or adoption of an Admission Agreement indicating the different rights, powers and duties. All Members must agree in writing to be bound by the terms of this Operating Agreement and must deliver to the Company such additional documentation as the Board may require.
3.2 Representations and Warranties. Each Member hereby represents and warrants to the Company and to each other Member that (a) the Member has full power and authority to execute and agree to this Operating Agreement and to perform his or her obligations under this Operating Agreement, and that all actions necessary for the due authorization, execution, delivery and performance of this Operating Agreement have been duly taken; (b) the Member has duly executed and delivered this Operating Agreement; and (c) the Members authorization, execution, delivery and performance of this Operating Agreement does not conflict with any other agreement or arrangement to which the Member is a party or by which the Member is bound.
3.3 Withdrawals. No Member has the right voluntarily to withdraw from the Company as a Member, or to receive any portion of any Capital Contribution, except upon dissolution of the Company.
3.4 Lack of Authority. No Member (other than a Member that is a duly appointed Officer) has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company or to incur any expenditure on behalf of the Company.
3.5 Membership Meetings. No annual or regular meetings of the Members are required to be held. However, if such meetings are held, such meetings will be noticed, held, and conducted pursuant to the Act. In any instance in which the approval of the Members is required under this Operating Agreement or the Act, such approval may be obtained in any manner permitted by the Act.
3.6 Merger of Management Company and MB.
(a) In the event that all of the Merger Conditions are satisfied, Management Company shall have the right to elect to cause Management Company to be merged with and into MB with MB surviving (the Merger), in which event all, but not less than all, of the shareholders of the Management Company shall exchange all of their shares in the Management Company for shares of Common stock of Manhattan Bancorp resulting in the Company becoming a wholly-owned subsidiary of MB. The Members intend for the Merger to qualify as a tax-free reorganization within the meaning of Section 368 of the Code and the Members agree to adjust the structure of the Merger as necessary to accomplish this intent. Such election (Merger Election) shall be delivered in writing to MB not later than March 31, 2012.
(b) The Merger Conditions are the following:
(i) The Company and its wholly owned subsidiaries shall have consolidated EBITDA of not less than $20,000,000 for the EBITDA Measurement Period.
(ii) MB shall conclude that the Manhattan Bancorp shares may be issued to Management Company shareholders in the Merger without registration or qualification under the Securities Act of 1933 (Securities Act) or state securities laws, and Management Company shall provide MB with such agreements and understandings as MB or Manhattan Bancorp may reasonably require to establish such exemptions.
(iii) The Merger may be effected as a tax-free reorganization within the meaning of Section 368 of the Code, and MB and the Management Company shall have received such assurances respecting such tax-free treatment as they may reasonably require.
(iv) All liabilities of the Management Company shall have been paid or provided for in a manner satisfactory to MB, the assets of Management Company shall be unencumbered and not subject to any rights of any third party, and there shall be no material pending or threatened litigation or claim of any kind against Management Company (except for litigation or claims brought by Manhattan Bancorp or any Affiliate thereof); provided, however, that trades may be outstanding provided such are within normal parameters for the operations of the Company. The Management Principals shall indemnify and hold harmless MB from and against any and all liabilities, whether absolute or contingent, of the Management Company, and shall execute such reasonable indemnity agreements as MB may require reflecting such indemnity.
(v) The Management Company and MB shall enter into an agreement and plan of merger reflecting the terms set forth in this Section 3.6 and containing such representations, warranties, covenants, conditions and other terms customary for transactions like the Merger.
(vi) All regulatory and other third-party approvals required in connection with the completion of the Merger shall be received without the imposition of any condition that would be materially burdensome to the Company, MB or Manhattan Bancorp.
(vii) The Management Condition is satisfied.
(c) The aggregate maximum number of shares of Manhattan Bancorp common stock to be issued in the Merger upon conversion of the shares of Management Company shall be equal to the lesser of (i) 20,000 shares for each percentage point of Net Income or Net Loss included in the Ownership Percentage in all Net Income and Net Loss of the Company then represented by the Class A and Class B Membership Units owned by Management Company, pro rated for any portion less than a full percentage point, and (ii) 800,000.
(d) If the outstanding shares of the stock of Manhattan Bancorp are increased, decreased, or changed into, or exchanged for a different number or class of shares or securities of Manhattan Bancorp, without receipt of consideration by Manhattan Bancorp, through reorganization, merger, recapitalization, reclassification, stock split-up, stock dividend, stock consolidation, or otherwise, an appropriate and proportionate adjustment shall be made in the number and class of shares to be exchanged for the shares of Management Company in the Merger.
(e) The closing of the Merger will take place not later than the last to occur of (i) the date sixty (60) days following the date of delivery of the Election Notice, and five (5) business days following receipt of any necessary third-party approvals. The closing shall be contingent upon the continued satisfaction of the Merger Conditions at the time of closing.
Management Company and its shareholders will execute and deliver such documents as may be reasonably required by MB to complete the transaction.
(f) All of the shares of Manhattan Bancorp issued to the Management Company shareholders in connection with the Merger shall not be released at the closing to such shareholders, but in four tranches subject to satisfaction of the Release Condition on each Release Date as to each such holder. Pending release MB shall hold such shares in escrow. The Release Condition is that such recipient shareholder at the effective time of the Merger shall remain employed by the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC unless employment has been terminated by death, disability, or by the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC without Cause (as such terms are defined herein or, if defined in a written employment agreement between the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC and such recipient, the definition set forth in the written employment agreement between such recipient and the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC), or by such individual due to material breach by the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC of its financial obligations to such Person under any employment agreement or for Good Reason (as defined and to the extent provided for in a written employment agreement between the Company, any of the Companys wholly-owned subsidiaries, or BOM Capital, LLC and such recipient). Twenty five percent (25%) of the shares shall be released on the closing date of the Merger. The remaining Manhattan Bancorp shares issued to an individual Management Company shareholder in the Merger shall be released by MB to former Management Company shareholders in installments of twenty five percent (25%) each on each of June 26, 2012, June 26, 2013 and June 26, 2014 if the Release Condition is satisfied on such dates (a Release Date) as to such shareholder. At such time as a former Management Company shareholder fails to satisfy the Release Condition, all shares that would be otherwise issuable to such shareholder on all future Release Dates shall be cancelled without payment and released to Manhattan Bancorp. Notwithstanding the foregoing all shares not previously released will be released upon occurrence of a Change in Control or sale by MB of a majority interest in the Company or by Manhattan Bancorp of a majority interest in MB; provided the Non-Competition Agreements are delivered to MB by each of the Management Principals who are to receive shares. While Manhattan Bancorp shares are escrowed, former Management Company shareholders who may become entitled to such shares shall be entitled to exercise all voting rights and to receive all dividends and other distributions payable in respect of such shares (other than stock dividends). The holding of any shares of Manhattan Bancorp in escrow pursuant to this Section 3.6(f) is intended to comply with the guidelines set forth for escrowed shares in Revenue Procedure 84-42, 1984-1 C.B. 521 and Rev. Proc. 77-37, 1977-2 C.B. 568. This Section 3.6(f) shall be interpreted consistent with and, if necessary, adjusted to comply with that intent.
(g) The Management Company shareholders will comply with all federal and state securities laws in connection with any sale or other disposition of shares of Manhattan Bancorp. Manhattan Bancorp will be under no obligation to register or qualify such shares under any such law, or to satisfy the conditions of Rule 144 under the Securities Act.
ARTICLE IV
TRANSFER AND ASSIGNMENT OF INTERESTS
4.1 Restrictions on Transfer. No Member may Transfer such Members Interest in the Company, in whole or in part, or enter into any agreement as a result of which any Person will become interested in such Members Interest in the Company, without the prior written consent of the Board (which consent may be withheld in the Boards sole and absolute discretion). Any contrary right is hereby waived. Any attempted Transfer by a Person without such prior written consent is null and void ab initio. The Board may condition its consent to a transfer of an Interest on such terms as it may determine, including requiring that such Interest first be offered for sale to the Company or its Members. The foregoing restrictions shall not apply to any Transfer by MB of its Interest in the Company.
4.2 Tag-Along Rights. In the event MB elects to sell all or a portion of its Interests in the Company, such that the Person or the Affiliates of the Person acquiring such Interests would acquire an Ownership Percentage of more than 50% in the Net Loss and Net Income of the Company, in an arms length transaction (i) to a purchaser for cash and/or deferred payments, or (ii) in exchange for equity interests in another entity (other than an entity controlled by or under common control with the Company) pursuant to merger or other business combination (each a Transaction), Management Company shall have the right to participate (a Tag-along Right) in such Transaction. MB shall not complete such a Transaction unless notice of the proposed terms of such transaction is first given to Management Company of its right to be included in such sale (the Transaction Notice). Within 15 days of the date of the Transaction Notice, Management Company may advise the Board and MB in writing of Management Companys acceptance of the terms of the Transaction and any Class A Membership Units (prior to the EBITDA Trigger Date) or Class A and Class B Membership Units (after the EBITDA Trigger Date if the Minimum EBITDA Threshold has been satisfied for the EBITDA Measurement Period) Management Company desires to include in the Transaction. The Proportionate Share of Management Company shall be equal to the aggregate Ownership Percentage represented by the Units proposed to be sold by MB in the Transaction multiplied by the percentage of the total Ownership Percentage represented by issued and outstanding Class A Membership Units (prior to the EBITDA Trigger Date) or Class A and Class B Membership Units (after the EBITDA Trigger Date if the Minimum EBITDA Threshold has been satisfied for the EBITDA Measurement Period) of the Company owned by Management Company. To the extent the purchaser in the Transaction is unwilling to increase the total amount of Interests to be purchased to include the Units proposed to be transferred by Management Company and all Units elected to be sold by MB, the number of Units to be sold by MB shall be reduced accordingly so as to permit Management Company to sell to the purchaser up to that percentage of the total Units equal to its Proportionate Share. Management Company agrees to execute any purchase agreements or other documents required by the purchaser and to cause the Non-Competition Agreements to be executed and delivered by the Management Principals to MB if the transaction includes all Units then owned by Management Company, as a condition to its right to participate in the Transaction.
4.3 Drag-Along Rights. In the event MB elects to complete a Transaction, MB may elect to cause Management Company to participate in such Transaction (a Drag-Along Right). MB shall notify Management Company of the terms thereof and the Units to be sold by
Management Company (the Drag-Along Notice) at least thirty (30) days prior to the anticipated date set for the closing of the Transaction, together with a statement including the material terms of the transaction and the identity of the parties. For a period of twenty (20) days from the date of delivery of such Drag-Along Notice, Management Company shall have the right by giving written notice to MB (a Drag-Along Election) to elect to (a) participate in the transaction by including Units owned by Management Company in an amount equal to its Designated Percentage according to the terms of the Drag-Along Notice, or (b) sell its Designated Percentage of its Units to MB or such party as MB may designate for cash equal to the amount that Management Company would receive in its capacity as a Member of the Company in respect of the Designated Percentage of its Units if the assets of the Company were sold at a cash price equal to their Fair Market Value (determined in the manner provided for under Section 4.4) and the cash proceeds of such sale were distributed after payment or provision for all Company liabilities. Notwithstanding the foregoing, if a Drag-Along Notice is delivered to Management Company in connection with a Transaction that could reasonably be expected to be completed prior to the EBITDA Trigger Date, Management Company may deliver the Drag-Along Election within fifteen (15) days of receipt of a copy of the Appraisers determination of Fair Market Value to either (y) sell the Designated Percentage of its Units for the cash amount determined based on such appraisal, or (z) require the Board to cause the Company to be liquidated and dissolved. Management Company shall transfer in the Transaction its Designated Percentage as determined below. The Designated Percentage of Management Company included by MB in the Transaction shall be equal to the total of all Ownership Percentages represented by Units proposed to be sold in the Transaction multiplied by the Ownership Percentage of the total issued and outstanding Class A Membership Units (prior to the EBITDA Trigger Date) or Class A and Class B Membership Units (after the EBITDA Trigger Date if the Minimum EBITDA Threshold has been satisfied for the EBITDA Measurement Period) of the Company represented by the Units owned by the Management Company, unless otherwise agreed by MB and Management Company. Management Company agrees to execute any purchase agreements or other documents required by the purchaser in connection with the Transaction and to cause Non-Competition Agreements to be executed and delivered by the Management Principals if the Transaction includes all Class A Membership Units then owned by the Management Company, as a condition to its participation therein.
4.4 Change in Control of MB. In the event a Change in Control of MB or Manhattan Bancorp shall occur prior to the Merger, MB shall give Management Company not less than thirty (30) days prior notice of the anticipated closing date of the transaction and a statement including the material terms of the transaction and identity of the parties (Control Notice). For a period of twenty (20) days from the date of delivery of such notice, Management Company shall have the right by giving written notice to MB (an Election Notice) to elect to sell all, but not less than all, of its Units to MB or such party as MB may designate for cash equal to the amount that Management Company would receive in its capacity as a Member if the assets of the Company were sold at a cash price equal to their Fair Market Value and the cash proceeds of such sale were distributed after payment or provision for all Company liabilities. If the Election Notice is timely delivered, the Fair Market Value shall be determined. The Fair Market Value shall be the value as determined by a recognized valuation, appraisal or investment banking firm selected by the board (Appraiser), and the determining of Fair Market Value by the Appraiser shall be binding on the parties. The Appraiser shall determine the Fair Market Value of the Companys assets as of the time of the giving of the Control Notice subject to
subsection (c) below. Should the Appraiser express the Fair Market Value as a range, the midpoint of such range shall be used to calculate the Fair Market Value herein. In arriving at the Fair Market Value of the Companys assets, the appraisers shall use the going concern concept, without any discounts for minority interest or lack of marketability, and observe the following bases for valuation, but shall not be limited to them in computing the Fair Market Value of the Companys assets:
(i) In determining the Fair Market Value, the existence of a willing purchaser shall be assumed;
(ii) Past, present and prospective earnings or market conditions, including economic risk attendant thereto and existing and prospective economic conditions in the businesses in which the Company is engaged, including availability of third party financing for the Companys products, shall be considered in arriving at a valuation figure; and
(iii) The Appraiser shall assume that the existing employment agreements between the Company and the Management Principals them employed by the Company remain in effect and all potential severance, change in control and other benefits thereunder are paid by the Company, and reduce the value of the Company by the present value of any additional compensation to be paid to all employees of the Company, including the Management Principals, above the compensation earned by them at the time of the Control Notice.
(b) Notwithstanding the foregoing, if a Control Notice is delivered to Management Company in connection with a Change in Control transaction that could reasonably be expected to be completed prior to the EBITDA Trigger Date, Management Company may deliver the Election Notice within fifteen (15) days of receipt of a copy of the Appraisers determination of Fair Market Value elect, in its sole discretion, to either (i) waive its right to have its shares purchased hereunder in connection with such Change in Control, (ii) sell all Units for the cash amount determined based on such appraisal as provided above in this Section 4.4, or (iii) require the Board to cause the Company to be liquidated and dissolved.
(c) Management Company agrees to execute any purchase agreements or other documents required by the purchaser of any Units hereunder and to cause the Non-Competition Agreements to be executed and delivered by the Management Principals, as a condition to its right to sell its Units hereunder.
(d) A Change in Control of MB, Manhattan Bancorp or the Company occurs upon the effective date of the first to occur of the following events:
(i) Merger, Consolidation, and Other Transactions. Any (A) merger where the Company or MB or Manhattan Bancorp, or a corporation in which the Companys or MBs or Manhattan Bancorps shareholders (or in the case of the Company, its voting membership interest holders) as constituted immediately prior to the merger do not own, directly or indirectly, at least 50% of such entitys common stock or voting membership interests or 50% of the common stock or voting membership interests of the parent of such corporation or entity (or an equivalent economic interest in the case of an entity that is not a corporation or limited
liability company) following such merger in the same proportions as their ownership interests in the Company or MB or Manhattan Bancorp prior to such transaction, is not the surviving corporation; (B) a transfer of all or a substantial portion (more than 50%) of the assets of the Company or MB or Manhattan Bancorp to another corporation or other person in which the Companys or MBs or Manhattan Bancorps shareholders or voting membership interest holders as constituted immediately prior to such transfer do not own, directly or indirectly, at least 50% of the common stock or voting membership interests or 50% of the common stock or voting membership interests of the parent of such corporation or entity (or an equivalent economic interest in the case of a transferee that is not a corporation or limited liability company) following such transfer in the same proportions as their ownership interests in the Company or MB or Manhattan Bancorp prior to such transaction; or (C) the liquidation or dissolution of the Company or MB or Manhattan Bancorp, except for a liquidation or dissolution in which the assets and liabilities of the Company or MB or Manhattan Bancorp are transferred to a transferee in which the owners of the Companys or MBs or Manhattan Bancorps common stock or voting membership interests as constituted immediately prior to the transaction own, directly or indirectly, at least 50% of the common stock or voting membership interests or 50% of the common stock or voting membership interests of the parent of the transferee (or an equivalent economic interest in the case of a transferee that is not a corporation or limited liability company) following such liquidation or dissolution in the same proportions as their ownership interests in the Company or MB or Manhattan Bancorp prior to such transaction; or
(ii) Majority Stockholder. Any person (as such term is used in Section 13(d) of the securities Exchange Act of 1934, as amended (the Exchange Act)), together with its Affiliates (but excluding MB, Manhattan Bancorp, Management Company, the Companys or MBs or Manhattan Bancorps employee benefit plans, and the individuals who were the Companys or MBs or Manhattan Bancorps officers or directors on the date of this Agreement, or direct or indirect owners or a group of affiliated owners of in excess of 20% of the shares or voting membership interests of MB or the Company on the date of this Agreement or their respective Affiliates), becomes the beneficial owner (within the meaning of Rule 13(d)(3) under the Exchange Act) of more than 50% of the outstanding Units of the Company or MBs or Manhattan Bancorps outstanding common stock.
(iii) Regulatory Exception. Notwithstanding anything else to the contrary set forth herein, a Change in Control shall not include any sale of Units, Interests, stock or other securities, merger, transfer of assets, consolidation, liquidation, reorganization or other transaction instituted by or at the request of FINRA, the Securities Exchange Commission, the Office of the Comptroller of the Currency, Federal Reserve Board, the Federal Deposit Insurance Corporation or any other regulatory agency to resolve any supervisory concerns respecting MB, Manhattan Bancorp or any of its banking subsidiaries, Management Company or the Company.
(e) MB agrees to provide the Company with reasonable notice respecting any regulatory concerns that could reasonably be expected to adversely impact the rights of Management Company under Section 4.4(c) hereof.
4.5 Substitution of Members. A transferee of an Interest will have the right to become a substitute Member only if (a) consent of the Board is given in accordance with
Section 4.1, (b) such person executes an instrument satisfactory to the Board accepting and adopting the terms and provisions of this Operating Agreement, and (c) such person pays any reasonable expenses in connection with his or her admission as a new Member. The admission of a substitute Member will not result in the release of a Member who assigned his Interest from any liability that such Member may have to the Company unless the transferee is a transferee of MB that expressly agrees to assume such liability.
4.6 Ownership of Management Company.
(a) Management Company will not be permitted to have any shareholders other than shareholders reasonably approved by the Board who are full-time employees of the Company or any of its subsidiaries, provided, that nothing herein shall restrict a member of Management Company from (i) transferring shares in Management Company to an inter vivos trust of which the approved equity holder is a settler and, together with such settlors spouse, is the life beneficiary; or (ii) transferring shares in Management Company by will or law of intestate succession. Each of the Management Principals will initially own no more than 23% of the outstanding equity interests of Management Company and shall, at all times, own at least 10% of the outstanding equity interests of Management Company individually, unless such requirement is waived by the Board. In the event that the employment of a Management Principal ceases for any reason prior to a Change in Control, the Company shall redeem from the Management Company, at a price of $0.01 per Unit, a percentage of the total Class A Membership Units and Class B Membership Units then owned by the Management Company in the event such Management Principals total percentage ownership in the Management Company (the Management Principal Percentage Interest) exceeds 15% of the total outstanding Management Company shares or other equity interests. The amount of Class A Membership Units and Class B Membership Units to be redeemed shall equal the result obtained by multiplying (i) the Management Principal Percentage Interest minus 15%, by (ii) the number of Class A Membership Units and Class B Membership Units then owned by the Management Company. The foregoing repurchase rights of the Company shall be in addition to, and not in lieu of, any repurchase of Units under Section 2.5 hereof, and shall be determined and concluded after any repurchase under Section 2.5 has been concluded.
(b) Management Company agrees that neither its outstanding shares, nor its Interests in the Company will be pledged, hypothecated or subject to any security interest otherwise transferred except as provided herein or in accordance with the Management Company Shareholders Agreement. Management Company also agrees to cause all of its shareholders to provide services exclusively to Company and its subsidiaries. At no time will Management Company engage in any business other than owning Units in the Company. A copy of the executed Management Company Buy-Sell Agreement is attached hereto as Exhibit C, and no material changes or amendments thereto will be made without approval of the Board, and no shares or other rights shall be issued to any Person not executing a copy thereof and becoming a party thereto.
(c) In order to ensure compliance with various laws and regulations including, without limitation, those relating to banking, the payment system, money laundering and fund transfers, as well as to ensure compliance with certain obligations that are or may hereafter be imposed under the terms of any processing or other third party agreement relating to operation of
the business of the Company, Management Company agrees to comply with all commercially reasonable requests for any documentation or other information concerning Management Company shareholders (Indirect Investors), and their respective Affiliates, and to provide such written assurances as may be reasonably requested from time to time by the Company or MB.
(d) In the event that the Board or MB reasonably determines that the continued association with the Company of any Indirect Investor in Management Company will have a material adverse effect on the Companys or MBs ability to conduct business (a Licensing Issue), Management Company agrees, upon thirty (30) days advance written notice, to take such remedial action as may be reasonably requested by the Board in order to rectify such Licensing Issue including, but not limited to, taking commercially reasonable steps to redeem the Indirect Investors interest in Management Company if the Licensing Issue relates to such Indirect Investors interest in Management Company.
ARTICLE V
MANAGEMENT AND CONTROL OF THE COMPANY
5.1 Board of Directors.
(a) Subject to the limitations set forth in this Agreement, the business and affairs of the Company shall be managed and all Company powers shall be exercised by or under the direction of a board of directors (each a Director and collectively the Board or Board of Directors) who shall be designated by the Members as set forth herein and who shall constitute the, and have all the powers of, managers of the Company within the meaning of the Act. The Board shall initially consist of seven Directors until changed by a vote of the Board, including a majority of both the Management Company Directors and MB Directors.
(b) (i) Three directors shall be appointed and may be removed or replaced by Management Company (the Management Company Directors) and four directors shall be appointed and may be removed or replaced by MB (the MB Directors). The initial Management Company Directors shall be Harold Hermelee, Tad Dahlke and Greg Jacobson. At MBs option it may elect to appoint less than four MB Directors, in which event the votes of the MB Directors in office shall be weighted so as to constitute four-sevenths of the total votes. For example, if there are only two MB Directors in office, then each such MB Director shall have two votes on all matters submitted to the Board.
(ii) A member of the Board may be removed at any time and for any reason by the Member appointing such Director. Any vacancy in the Board occurring because of death, resignation or removal of a Director may be filled by the Member entitled to appoint such Director.
(iii) Any action taken by the Board shall be duly authorized if approved by a number of Directors equal to a majority of the authorized Directors (subject to the last two sentences of Section 5.1(b)(i).
(c) Regular meetings of the Board are not required. The Directors shall confer and vote according to written procedures to which they may agree from time to time,
which procedures shall be part of the Companys books and records. Directors may vote by proxy until such time as the Board shall elect to discontinue such procedure. Any proxy shall be in writing, shall be valid only for the specific meeting or actions identified therein, and shall be delivered to the Chairman of the Board. Any matter relating to voting and meeting procedures of the Board not otherwise addressed by this Agreement or by written procedures under the foregoing sentence shall be governed by those provisions of the California General Corporation Law applicable to meeting and voting procedures for the board of directors of a corporation, with such changes as are necessary or appropriate to apply such provisions to meetings of managers of a limited liability company.
5.2 Members. Members shall only have the right to vote on the election or removal of Directors in accordance with Section 5.1. Except as otherwise specifically provided herein, all other matters shall be determined by the Board.
(a) Whenever this Agreement requires a vote, approval or consent by the Members, except as expressly provided otherwise in this Agreement, such vote, approval or consent shall be by a Majority in Interest of the Members.
(b) The Members shall confer and vote according to such written procedures as they may approve from time to time, which procedures shall be part of the Companys books and records. Any matter relating to voting and meeting procedures of the Members not otherwise addressed by this Agreement or by written procedures under the foregoing sentence shall be governed by those provisions of the Act applicable to meeting and voting procedures for members of a limited liability company. Notwithstanding anything to the contrary in this Section 5.2(b),
(i) in no event shall annual or other regular meetings of the Members be required;
(ii) on any matter that is to be voted on by the Members, the Members may take such action without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by those Members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Interests entitled to vote thereon were present and voted; provided, that the Members signing such consent shall promptly give copies of the same to the Board and the other Members; and
(iii) on any matter that is to be voted on by Members, the Members may vote in person or by proxy.
5.3 Officers.
(a) The Board shall delegate such duties and responsibilities necessary to operate the business of the Company to one or more officers of the Company (each an Officer and collectively the Officers) as the Board determines from time to time and are consistent with this Agreement. The Officers shall include a President, three Senior Managing Directors (which shall be the most senior position in the Company other than President or Chief Executive Officer), and may include a Secretary, a Chief Financial Officer, and in addition thereto and at
the discretion of the Board, a Chairman of the Board, a Treasurer, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other Officers as may be elected or appointed by the Board. One person may hold two or more offices. The initial President, Chief Executive Officer and Senior Managing Director of the Company shall be Greg Jacobson. Harold Hermelee and Tad Dahlke shall each be Senior Managing Directors as long as they are employed by the Company on a full-time basis. The Company shall have an executive committee (Executive Committee) that shall have such authority as is specified herein or as granted from time-to-time by the Board. Greg Jacobson, Harold Hermelee and Tad Dahlke shall constitute the initial members of the Executive Committee and shall be members of the Executive Committee as long as they are employed by the Company on a full-time basis. The Executive Committee shall prepare an annual operating budget at least three months prior to the beginning of each 12 months of operations of the Company for approval by the Board (the Annual Budget).
(b) Subject to the authority of the Board and the provisions of this Agreement and such policies as may be adopted by the Board in the future, the Officers shall have the responsibility and the authority to make all day to day decisions respecting the Business. Notwithstanding the foregoing, without the consent of the Board, the Officers, including the Executive Committee, shall not:
(i) take any action that would conflict with any provision of this Agreement;
(ii) make any distributions of property or cash to any Member;
(iii) incur any indebtedness other than indebtedness not exceeding $10,000 other than funds borrowed from MB or its Affiliates;
(iv) make any expenditures of capital in excess of $15,000 in any single transaction or series of related transactions;
(v) create or cause to be created any liens against any of the Companys assets or properties, including, without limitation, the Companys cash flow;
(vi) commence any Bankruptcy Action;
(vii) institute or settle any litigation or arbitration;
(viii) sell any material Company assets or engage in any transaction outside the ordinary course of business;
(ix) exceed the approved expenditures in any Annual Budget line item by more than 10%, or 6% respecting the total Annual Budget;
(x) engage in any business other than the Business;
(xi) enter into any merger, joint venture, partnership, operating or similar arrangement;
(xii) hire any employees on terms not approved by the Board or the Board Designee;
(xiii) increase the commissions, pay or benefits payable by the Company to any shareholders of the Management Company;
(xiv) enter into any lease of real property; or
(xv) enter into any vendor contract, license or other agreement with any early termination charge or cancellation fee in excess of $25,000.
Notwithstanding the foregoing, if a specific action described in clauses (iii), (iv) or (xii) is contemplated by the then current approved Annual Budget, and is otherwise implemented in a manner consistent with this Operating Agreement and the written policies of the Company, the Officers may implement such action without further Board approval. With respect to hiring matters under Section 5.3(b)(xii) the initial Board Designee shall be Jeffrey Watson, or, if Mr. Watson is unavailable to act or unable to act within two (2) business days of a request for approval to hire a Company employee, Rick Sowers. The Board may change the Board Designee upon written notice to the Executive Committee at any time. The employment of all Company employees shall be subject to a satisfactory prior background check, including a credit report, litigation, lien and regulatory enforcement searches.
5.4 Matters Affecting Directors and Officers.
(a) Notwithstanding any provision of the Act to the contrary, no Director shall have the authority to execute any note, mortgage, evidence of indebtedness, contract, conveyance, or other instrument (or any assignment or endorsement thereof) in the name of the Company, or otherwise bind the Company with respect to such instrument. Any such instruments may be signed by any person or persons and in such manner as from time to time shall be determined by the President or the Board and, unless so authorized by the President or the Board, no Director, Officer, agent, or employee other than Senior Managing Directors shall have any power or authority to bind the Company by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount.
(b) Each Director and Officer shall at all times be under a duty to (a) discharge such persons duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner such person reasonably believes to be in the best interests of the Company; (b) take all actions that may be necessary or appropriate for the continuation of the Company as a limited liability company under California law, the protection of the Members from personal liability for the debts and liabilities of the Company, and the accomplishment of the Companys purposes; and (c) devote such time to the Company as the Board shall determine shall be necessary to manage the Companys business; and each such person shall use such Persons reasonable efforts to conduct the affairs of the Company in a manner such Person believes to be in the best interests of the Company, including the safekeeping and use of all of the Company property for the exclusive benefit of the Company. In discharging the duties hereunder, a Director or Officer may rely on information
received from other persons if such reliance is consistent with such Officers duties under this Section 5.4(b).
5.5 Indemnification. To the fullest extent permitted by applicable law, each of the Members, Directors and Officers of the Company (each an Indemnitee) will be indemnified and held harmless by the Company, including advancement of expenses, but only to the extent that the assets of the Company are sufficient therefor, from and against all claims, liabilities, and expenses arising out of any management of the affairs of the Company, subject to all limitations and requirements imposed by the Act. These indemnification rights are in addition to any rights that the Indemnitee may have against third parties.
5.6 Consent and Voting Rights of Members. The actions listed in this Article V and specifically identified elsewhere in this Agreement as requiring the consent of one or more Members constitute the only matters of the Company upon which Members will have a right to consent or vote in their capacities as Members, notwithstanding any provision of the Act, including specifically any right to vote on any reorganization or the right to exercise dissenters rights under Chapter 13 of the Act.
ARTICLE VI
ALLOCATIONS OF NET INCOME AND NET LOSS AND DISTRIBUTIONS
6.1 Allocations of Net Income and Net Loss. After giving effect to the special allocations set forth in Section 6.4 hereof, of Net Income, Net Loss or items thereof required by Code Section 704(b) and the Treasury Regulations promulgated thereunder, Net Income and Net Loss shall be allocated to the Members in the following priority and manner:
(a) Net Income shall be allocated to the Members in the following order of priority:
(i) First, to any Member allocated Net Loss under Section 6.1(b) that could not be allocated to another Member due to the limitations contained in the proviso in Section 6.1(b), an amount equal to the amount of such Net Loss;
(ii) Thereafter, to the Members, pro rata, in proportion to their respective Ownership Percentages, subject, in the case of the Class B Membership Units, to the provisions of Section 2.1(b)(ii).
(b) Net Loss shall be allocated to the Members pro rata, in proportion to their respective Ownership Percentages, subject, in the case of the Class B Membership Units, to the provisions of Section 2.1(b)(ii), provided, however, any allocations of Net Loss which would cause a Member to have an Adjusted Capital Account Deficit shall be applied proportionally to the other Members so as to allocate the maximum amount of Net Loss to such Members without causing any Member to have an Adjusted Capital Account Deficit.
(c) For purposes of this Agreement, Adjusted Capital Account Deficit shall mean, with respect to any Member, the deficit balance, if any, in such Members Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts which such Member is obligated to
restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
6.2 Distributions. Except upon the liquidation of the Company under Section 8.3 hereof (in which case distributions shall be made in the manner and at the time provided in Section 8.5 hereof) the Company shall make distributions of Available Cash according to this Section 6.2.
(a) No distribution shall be made under this Section 6.2 to the extent it would, in the reasonable determination of the Board, cause the Company to have insufficient cash flow to operate its business in a reasonable manner or to be in default under any net worth, debt-to-equity ratio, asset base, or similar financial test or covenant contained in, or otherwise violate or accelerate, any financing arrangement, promissory note, loan or credit agreement, security agreement, indenture, or other instrument to which the Company is a party (other than an instrument under or with respect to which a Member or Affiliate thereof is the applicable creditor).
(b) Subject to the Company having Available Cash, the Company shall make minimum distributions in cash to the Members in an aggregate amount with respect to each Fiscal Year, no later than the date occurring ninety (90) days after the end of such Fiscal Year, in an amount at least equal to 40% of its taxable Net Income with respect to such Fiscal Year other than any Net Income allocated to offset Net Loss previously allocated to a Member. Distributions of Available Cash to the Members pursuant to this Section 6.2(b) shall be subject to the provisions of Section 6.2(a).
(c) The Board is hereby authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over any federal, state, local, or foreign government any amounts required to be so withheld pursuant to the Code or any provisions of any other federal, state, or local law and shall allocate such amounts to the Members with respect to which such amount was withheld. Distributions shall be deemed made to a Member in such amounts that the Company withholds or pays over to a taxing authority on account of amounts allocable to a Member pursuant to any requirement of the Code or of foreign, state or local tax law.
(d) Subject to the distribution provisions of Section 8.2 governing distributions upon dissolution, Available Cash shall thereafter be distributed in such amounts and at such times as the Board shall determine, in its discretion after due consideration to the interests of all Members, to the Members in accordance with their respective Ownership Percentages after accounting for any prior distributions made under Section 6.2(b).
6.3 Transferred Interests. If any Interest is transferred, or is increased or decreased by reason of the admission of a new Member, or otherwise, during any Fiscal Year of the
Company, each item of income, gain, loss, deduction, or credit of the Company for such Fiscal Year allocable, and cash or Company property which is distributable, to the holder of such Interest for such Fiscal Year shall be allocated and distributed based on a method consistent with Section 706(d) of the Code. All requirements of the Code and Treasury Regulations (including Section 752 and related Treasury Regulations) shall be applied in any reasonable manner approved by the President after consultation with the Companys accountants.
6.4 Code Section 704(b) Allocations. The following special allocations shall be made in the following order and priority:
(a) Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(f), notwithstanding any other provision of this Agreement, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Members share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.4(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.
(b) Member Nonrecourse Debt Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding any other provision of this Agreement, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Members share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This Section 6.4(b) is intended to comply with the partner nonrecourse debt minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 6.4(c) shall be made only if and to the extent that the Member would have an Adjusted
Capital Deficit after all other allocations provided for in this Agreement have been tentatively made as if this Section 6.4(c) were not in this Agreement. This Section 6.4(c) is intended to comply with the qualified income offset requirement in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
(d) Gross Income Allocation. In the event any Member has an Adjusted Capital Account Deficit at the end of any Fiscal Year, such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 6.4(d) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit in excess of such sum after all other allocations provided for in this Agreement have been made as if Section 6.4(c) hereof and this Section 6.4(d) were not in this Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Members in proportion to their respective Ownership Percentages.
(f) Member Nonrecourse Deductions. Member Nonrecourse Deductions for any Fiscal Year shall specially be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i)(1); provided, however, that if more than one Member bears the economic risk of loss for such debt, the Member Nonrecourse Deductions attributable to such Member Nonrecourse Debt shall be allocated to and among the Member in the same proportion that they bear the economic risk of loss for such Member Nonrecourse Debt. This Section 6.4(f) is intended to comply with the provision of Treasury Regulations Section and shall be interpreted consistently therewith.
(g) Curative Allocations. The allocations set forth in Sections 6.4(a) through (f) (the Regulatory Allocations) are intended to comply with certain requirements of the Treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 6.4(g). Therefore, notwithstanding any other provision of this Agreement (other than the Regulatory Allocations), the Board shall make such offsetting allocations of Company income, gain, loss, or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Members Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement.
6.5 Code Section 704(c) Allocations. Notwithstanding any other provision in this Article VI, in accordance with Code Section 704(c) and the Treasury Regulations promulgated thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Gross Asset Value (computed in accordance with subparagraph (a) of the definition of Gross Asset Value) on the date of contribution. In the event the Gross Asset Value of any property is adjusted pursuant to subparagraph (b) of the definition
of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. Allocations pursuant to this Section 6.5 are solely for purposes of federal, state and local taxes. As such, they shall not affect or in any way be taken into account in computing a Members Capital Account or share of Net Income, Net Loss, or other items or distributions pursuant to any provisions of this Agreement. Any elections or other decisions relating to such allocations shall be made by the Board in any manner that reasonably reflects the purpose and intention of this Agreement.
6.6 Tax Matters Member.
(a) The Board shall designate one Member to be the tax matters partner of the Company pursuant to Code Section 6231(a)(7) (the Tax Matters Member), or, if the Board fails to designate a Member, then the Tax Matters Member shall be that Member that has the largest Ownership Percentage at the close of the applicable taxable year.
(b) The Tax Matters Member shall take no action in such capacity without the consent of the Board (not to be unreasonably withheld or delayed) other than such action as the Tax Matters Member may be required to take by law. In complying with the responsibilities outlined in Code Sections 6222 through 6231, the Tax Matters Member shall incur no liability to the other Members provided that the Tax Matters Member was not grossly negligent in complying with its responsibilities. The Tax Matters Member shall not be required to incur any expenses for the preparation for or pursuance of administrative or judicial proceedings unless the Board agrees on a method for sharing such expenses, or the Company may pay for such expenses.
(c) The Tax Matters Member shall not enter into any extension of the period of limitations for making assessments on behalf of the other Members without first obtaining the consent of the Board.
(d) No Member shall file, pursuant to Code Section 6227, a request for an administrative adjustment of items for any Company taxable year without first notifying the Board. If the Board agrees with the requested adjustment, then the Tax Matters Member shall file the request for administrative adjustment on behalf of the requesting Member. If such consent is not obtained within thirty (30) calendar days from such notice, or within the period required to timely file the request for administrative adjustment, if shorter, any Member, including the Tax Matters Member, may file a request for administrative adjustment on its own behalf.
(e) Any Member intending to file a petition under Code Sections 6226, 6228 or other Section with respect to any item or other matter involving the Company shall notify the Board of such intention and the nature of the contemplated proceeding. In the case where the Tax Matters Member is the Member intending to file such petition on behalf of the Company, such notice shall be given within a reasonable period of time to allow the other Members to participate in the choosing of the forum in which such petition will be filed. If any Member intends to seek review of any court decision rendered as a result of a proceeding instituted under
the preceding provisions of this Section 6.6, then such Member shall notify the Board of such intended action.
(f) The Tax Matters Member shall not bind the Members to a settlement agreement without obtaining the consent of the Board. For purposes of this Section 6.6, the term settlement agreement shall include a settlement agreement at either an administrative or judicial level. Any Member who enters into a settlement agreement with respect to any Company items (within the meaning of Code Section 6231(a)(3)) shall notify the Board of such settlement agreement and its terms within ninety (90) calendar days from the date of settlement. Under no circumstances shall the Tax Matters Member enter into a settlement agreement without the prior consent of the Board.
(g) The provisions of this Section 6.6 shall survive the termination of the Company or the termination of any Members Interest in the Company and shall remain binding on the Members for a period of time necessary to resolve with the IRS, the United States Department of the Treasury or any state taxation authority with jurisdiction over the Company any and all matters regarding the United States Federal or any state income taxation of the Company.
(h) If any Member intends to file a notice of inconsistent treatment under Code Section 6222(b), such Member shall give reasonable notice under the circumstances to the Board of such intent and the manner in which the Members intended treatment of an item is (or may be) inconsistent with the treatment of that item by the other Members.
ARTICLE VII
BOOKS AND RECORDS
7.1 Accounting Principles. The Net Income and Losses of the Company shall be determined in accordance with accounting principles applied on a consistent basis under such method of accounting as may be approved by the Board.
7.2 Records and Reports. At the expense of the Company, the Company will maintain records and accounts of all operations and expenditures of the Company. At a minimum, the Company will keep at its principal place of business the following records:
(a) A current list that states: (i) the name and mailing address of each Member and (ii) the Interests owned by each Member;
(b) Copies of the federal, state and local information or income tax returns for each of the Companys three (3) most recent tax: years (or such shorter period that the Company has been in existence);
(c) A copy of the Articles and this Operating Agreement, all amendments or restatements thereof, executed copies of any powers of attorney, and copies of any document that creates, in the manner provided by the Articles or this Agreement, classes or groups of Members;
(d) Correct and complete books and records of account of the Company; and
(e) Any other books, records or documents required by this Operating Agreement, the Articles, the Act or other applicable law.
7.3 Returns and Other Elections. The Board will cause the preparation and timely filing of all tax returns required to be filed by the Company pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Company does business. Copies of the returns, or pertinent information therefrom, shall be furnished to the Members within one hundred twenty (120) days after the end of each Fiscal Year. All elections permitted to be made by the Company under federal or state laws will be made by the Board.
7.4 Bank Accounts. All funds of the Company will be deposited in its name in an account maintained in a commercial financial institution, which shall be Bank of Manhattan unless otherwise determined by the Board. The funds of the Company shall not be commingled with the funds of any other Person. Checks may be drawn on the Company account or accounts only for the purposes of the Company and may be signed by one or more of the Board or a designated Officer or Officers.
ARTICLE VIII
DISSOLUTION AND WINDING UP
8.1 Dissolution. The Company will be dissolved and its affairs will be wound up upon the first to occur of the following:
(a) On the election of the Board to dissolve the Company;
(b) The sale or other disposition of all of the Companys assets for
(c) The election of Management Company as permitted under Sections 4.3 or 4.4(d) hereof.
8.2 Winding-up.
(a) On dissolution of the Company, the business and affairs of the Company will terminate, the assets of the Company will be liquidated, and the Companys affairs will be wound up under this Article VIII.
(b) Dissolution of the Company is effective as of the day on which the event giving rise to the dissolution occurs, but the Company shall not terminate until there has been a winding up of the Companys business and affairs and the Companys assets have been distributed as provided in Section 8.3.
(c) On dissolution of the Company, the Board (or an agent approved by the Board, who may be an Officer) may cause any part or all of the assets of the Company to be sold or distributed in kind in the manner approved by the Board (or an agent approved for such purpose).
8.3 Distribution of Assets on Dissolution. In settling accounts after dissolution, the assets of the Company will be paid in the following order:
(a) First, to creditors, including Members, in the order of priority as provided by law, except those to Members of the Company on account of their Capital Contributions;
(b) Second, amounts necessary to establish such cash reserves that the Board deems reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company; and
(c) Third, to the Members, pro rata, in proportion to and in an amount equal to the positive balances in their respective Capital Accounts (after making all allocations required by Article VI).
8.4 Distributions in Kind. Assets of the Company may be distributed to the Members entitled thereto individually or as tenants-in-common in the same proportions as the Members would have been entitled to cash distributions if the property had been sold for cash and the net proceeds distributed to the Members. If distributions in kind are made to the Members on dissolution and winding up of the Company, the Capital Account balances of those Members will be adjusted to reflect the Members allocable share of gain or loss that would have resulted if the distributed property had been sold at its fair market value.
8.5 Distributions to Trust. Distributions pursuant to Section 8.3 may be made to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying contingent or unforeseen liabilities or obligations of the Company. The assets of any such trust will be distributed to the Members from time to time, subject to the approval of the Board (or an agent approved for such purpose) in the same proportions as the amounts distributed to the trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement.
8.6 Certificates of Dissolution and Cancellation. When all liabilities and obligations of the Company have been paid or discharged or adequate provision has been made therefor, and all of the remaining property and assets of the Company have been distributed to the Members according to their respective rights and interests, a certificate of dissolution and a certificate of cancellation shall be executed on behalf of the Company by the President, a Senior Managing Director or another authorized Officer and shall be filed with the Office of the Secretary of State of the State of California, and the Officers, Directors and/or Members shall execute, acknowledge and file any and all other instruments necessary or appropriate to reflect the dissolution and the completion of the winding up of the Company.
8.7 Company Name. In the event of termination of the Company or its sale to any other Person, the Company or its acquiror shall have no further right to use the name Manhattan Capital or any derivation thereof without the consent of MB.
ARTICLE IX
DEFINITIONS
The following terms used in the Operating Agreement will have the meanings set forth below, unless the context otherwise requires:
AAA |
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AAA shall have the meaning set forth in Section 10.14(b). |
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AAA Commercial Arbitration Rules |
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AAA Commercial Arbitration Rules shall have the meaning set forth in Section 10.14(b). |
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Act |
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The California Limited Liability Company Act, as amended. |
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Additional Capital Contribution |
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Additional Capital Contribution shall have the meaning set forth in Section 2.1(c) |
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Adjusted Capital Account Deficit |
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Adjusted Capital Account Deficit shall have the meaning set forth in Section 6.1(c). |
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Admission Agreement |
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An agreement between the Company and any Member pursuant to which such Member is issued an Interest in the Company. |
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Affiliate |
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With respect to a Person, any other Person controlled by, controlling or under common control with such Person. |
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Annual Budget |
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Annual Budget shall have the meaning set forth in Section 5.3(a). |
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Appraiser |
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Appraiser shall have the meaning set forth in Section 4.4(a). |
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Articles |
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Articles shall have the meaning set forth in the Preamble. |
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Available Cash |
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Available Cash means, with respect to any fiscal period, such portion of the cash in the Companys bank accounts that, in the sole discretion of the Board, is available for distribution to the Members after a reasonable provision has been made for reserves. |
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Bankruptcy Action |
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Bankruptcy Action means: |
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(a) The commencement of any voluntary proceedings under federal or state bankruptcy laws; |
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(b) The failure to terminate any involuntary proceedings under federal or state bankruptcy laws within thirty (30) days after the commencement thereof; |
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(c) A general assignment for the benefit of creditors; or |
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(d) The issuance of a charging order against the interest of any person without the removal thereof within thirty (30) days after issuance. |
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Board or Board of Directors |
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Board or Board of Director has the meaning set forth in Section 5.1(a). |
Business |
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The Business of the Company shall consist of (a) holding shares of stock in Manhattan Advisory Services Inc., and (bc) related or incidental activities and such other activities as may be approved by the Board, including both a majority of the MB Directors and Management Company Directors. |
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Business Day |
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Any day other than a Saturday, a Sunday, or a day on which banks are closed in Los Angeles, California. |
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Capital Account |
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The account established for each Member maintained in a manner that the Board determines is in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv) and Section 2.2 hereof. |
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Capital Contribution |
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The total amount of cash and the fair market value of other property, net of liabilities securing such property contributed to the Company by any Member (or the predecessor holder or holders of the Interests of any Member). |
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Cause |
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Cause shall mean termination of employment for personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or cease-and-desist or other order of any banking or other regulatory agency or material breach of any provision of this Agreement. For purposes of this Operating Agreement, no act, or the failure to act, on an employees part shall be considered willful unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interests of Company, MB or Manhattan Bancorp, and any banking subsidiary thereof. |
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Change in Control |
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Change in Control shall have the meaning set forth in Section 4.4(d). |
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Class |
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Class shall have the meaning set forth in Section 2.1(b). |
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Class A Membership Units |
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Class A Membership Units shall have the meaning set forth in Section 2.1(b). |
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Class B Membership Units |
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Class B Membership Units shall have the meaning set forth in Section 2.1(b). |
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CPP |
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CPP shall have the meaning set forth in Section 10.15. |
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Code |
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The Internal Revenue Code of 1986, as amended (or any corresponding provision of succeeding law). |
Company |
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Manhattan Capital Markets LLC, a California limited liability company. |
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Company Minimum Gain |
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Company Minimum Gain has the same meaning as partnership minimum gain set forth in Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d). |
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Contribution Agreement |
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That certain Contribution Agreement dated as of July 30, 2010, by and among the Company, Bodi Investors, Inc. and MBFS Holdings, Inc. |
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Depreciation |
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Deprecation means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable for federal income tax purposes with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board. |
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Designated Percentage |
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Designated Percentage shall have the meaning set forth in Section 4.3. |
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Director |
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Director shall have the meaning set forth in Section 5.1(a). Notwithstanding any other provisions hereof, no individual shall serve as a Director if the Office of the Comptroller of the Currency, Federal Reserve Board, or any other regulatory agency shall object to such individuals service. |
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Dispute |
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Dispute shall have the meaning set forth in Section 10.14(a). |
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Drag-Along Election |
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Drag-Along Election shall have the meaning set forth in Section 4.3. |
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Drag-Along Notice |
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Drag-Along Notice shall have the meaning set forth in Section 4.3. |
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Drag-Along Rights |
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Drag-Along Rights shall have the meaning set forth in Section 4.3. |
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EBITDA |
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EBITDA shall mean, for any period, the consolidated earnings (or loss) of the Company for such period (excluding extraordinary items) before (a) income tax expense, (b) net interest expense, (c) amortization expense, and (d) depreciation, and with all charges, |
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reserves and accruals determined in accordance with generally accepted accounting principles and reflected on the Companys financial statements. |
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EBITDA Measurement Period |
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EBITDA Measurement Period shall have the meaning set forth in Section 2.1(b)(iii). |
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EBITDA Trigger Date |
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EBITDA Trigger Date shall have the meaning set forth in Section 2.1(b)(iii). |
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EESA |
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EESA shall have the meaning set forth in Section 10.15. |
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Election Notice |
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Election Notice shall have the meaning set forth in Section 4.4(a). |
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Exchange Act |
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Exchange Act shall have the meaning set forth in Section 4.4(d)(ii). |
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Executive Committee |
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Executive Committee shall have the meaning set forth in Section 5.3. |
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Fair Market Value |
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Fair Market Value shall have the meaning set forth in Section 4.4(a). |
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Fiscal Year |
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The period of January 1 to and including December 31. |
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Gross Asset Value |
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Gross Asset Value means, with respect to any asset, the assets adjusted basis in the hands of the Company for federal income tax purposes, except as follows: |
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(a) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as reasonably determined by the contributing Member and the Board; |
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(b) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as reasonably determined by the Board, as of the following times: (i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; (iii) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); and (iv) in connection with the grant of an interest in the Company (other than a de minimus interest) as consideration for the provision to or for the benefit of the Company by an existing Member acting in a member capacity, or by a new |
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Member acting in a Member capacity in anticipation of being a Member; provided, however, that adjustments pursuant to clauses (i), (ii) and (iv) above shall be made only if the Board reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; |
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(c) The Gross Asset Value of any Company asset distributed to any Member shall be adjusted to equal the gross fair market value (taking into account Code Section 7701(g) into account) of such asset on the date of distribution as reasonably determined by the Board; and |
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(d) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (f) of the definition of Net Losses, and Net Income and Section 6.4(g) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent the Board determines that an adjustment pursuant to subparagraph (b) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraphs (a), (b) or (d) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Loss and Net Income. |
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Indemnitee |
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Indemnitee shall have the meaning set forth in Section 5.5. |
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Indirect Interests |
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Indirect Interests shall have the meaning set forth in Section 4.6(c). |
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Initial Date |
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Initial Date shall have the meaning set forth in Section 2.1(b)(iii). |
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Initial Employee Equity Schedule |
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The schedule set forth as Exhibit B to this Agreement setting forth the names of all employees of the Company who are shareholders of the Management Company as of the date hereof, together with a description of the total number of shares held by such person in the Management Company. |
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Interests |
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Units representing the entire ownership interest of all Members of the |
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Company, and all rights and liabilities associated therewith, at any particular time, including, without limitation, rights to distributions (liquidating or otherwise), allocations, information, and consent or approval rights. Units may be issued in one or more Classes or Series as provided herein. |
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Licensing Issue |
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Licensing Issue shall have the meaning set forth in Section 4.6(d). |
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Majority in Interest |
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That number of Members or class of Members, as the case may be, whose Ownership Percentages equal more than 50% of the aggregate Ownership Percentages of all Members or class of Members, as the case may be. |
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Management Company: |
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Bodi Advisors Inc., a California corporation. |
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Management Company Directors |
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Management Company Directors shall have the meaning set forth in Section 5.1(b)(i). |
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Management Condition |
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Management Condition shall have the meaning set forth in Section 2.5(b). |
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Management Principal Percentage Interest |
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Management Principal Percentage Interest shall have the meaning set forth in Section 4.6(a). |
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Management Principals |
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Management Principals means Greg Jacobson, Tad Dahlke and Harold Hermelee. |
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Manhattan Bancorp |
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Manhattan Bancorp, a California corporation and the parent of MB. |
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MB |
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MB Financial Services, Inc., a California corporation. |
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MB Directors |
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MB Directors shall have the meaning set forth in Section 5.1(b)(i). |
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Member |
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Each Person designated as a Member on Exhibit A, and each Person hereinafter admitted to the Company as a Member, as provided in this Operating Agreement, but does not include a Person who has ceased to be a Member. |
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Member Nonrecourse Debt |
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Member Nonrecourse Debt has the same meaning as the term partner nonrecourse debt set forth in Treasury Regulations Section 1.704-2(b)(4). |
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Member Nonrecourse Debt Minimum Gain |
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Member Nonrecourse Debt Minimum Gain means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Treasury Regulations Section 1.704-2(i)(3). In the case of Member Nonrecourse Debt for which the creditors recourse against |
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the Company is not limited to particular assets of the Company, until such time as there is regulatory guidance on the determination of minimum gain with respect to such liabilities, all such liabilities of the Company shall be treated as a single liability and allocated to the Companys assets using any reasonable basis selected by the Board. |
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Member Nonrecourse Deductions |
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Member Nonrecourse Deductions has the same meaning as the term partner nonrecourse deductions set forth in Treasury Regulations Section 1.704-2(i). |
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Merger |
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Merger shall have the meaning set forth in Section 3.6(a). |
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Merger Conditions |
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Merger Conditions shall have the meaning set forth in Section 3.6(a). |
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Merger Election |
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Merger Election shall have the meaning set forth in Section 3.6(a). |
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Minimum EBITDA Threshold |
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Minimum EBITDA Threshold shall have the meaning set forth in Section 2.1(b)(iii). |
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Mortgage Banking Condition |
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Mortgage Banking Condition means the election, at its sole option, of Bank of Manhattan, a subsidiary of Manhattan Bancorp, to enter the mortgage banking business and the execution by such bank and the Company of a mortgage services agreement under which the bank may elect to fund loans originated through Mortgage Broker and to compensate Mortgage Broker for services rendered in connection with such activities. |
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Mortgage Broker |
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A subsidiary of Company which may be formed to engage in the residential mortgage brokerage business. |
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Mortgage Broker Revenue |
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Amounts received by Company or Mortgage Broker for the origination, placement, marketing and/or sale of mortgage loans (including net gain on the sale of assets in excess of their cost basis) by Company or Mortgage Broker, less any adjustment for loan loss provisions (including reserves and actual losses) adopted by the Board of Directors of Company or Mortgage Broker and reflected in the Companys or Mortgage Brokers financial statements. |
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Net Loss or Net Income |
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For any Fiscal Year, an amount equal to the Companys taxable income or loss for such Fiscal Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): |
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(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Loss or Net |
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Income pursuant to this definition of Net Loss and Net Income shall be added to such taxable income or loss; |
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(b) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of Net Loss and Net Income shall be subtracted from such taxable income or loss; |
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(c) In the event the Gross Asset Value of any Company property is adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset Value hereof, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Net Loss or Net Income; |
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(d) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; |
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(e) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year, computed in accordance with the definition of Depreciation; |
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(f) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Members interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Net Loss or Net Income; and |
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(g) Any items which are specially allocated pursuant to Sections 6.4 or 6.5 hereof shall not be taken into account in computing Net Loss or Net Income. |
Non-Competition Agreement |
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Non-Competition and Non-Solicitation Agreements in the form of Exhibit E to be executed by the Management Principals as provided herein. |
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Nonrecourse Deductions |
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Nonrecourse Deductions has the meaning set forth in Treasury Regulations Sections 1.704-2(b)(1) and 1.704-2(c). The amount of Nonrecourse Deductions for a Fiscal Year shall generally equal the net increase, if any, in the amount of Company Minimum Gain for that Fiscal Year, reduced (but not below zero) by the aggregate distributions during the year of proceeds of Nonrecourse Liabilities that are allocable to an increase in Company Minimum Gain, with such other modifications as provided in Treasury Regulations Section 1.704-2(c). |
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Nonrecourse Liability |
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Nonrecourse Liability has the meaning set forth in Treasury Regulations Section 1.704-2(b)(3). |
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Officer |
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Officers shall have the meaning set forth in Section 5.3(a). |
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Operating Agreement |
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This Operating Agreement, as it may be amended from time to time. |
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Ownership Percentage |
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The ownership percentage represented by a Unit in each item of Net Income, Net Loss and distributions expressed as a percentage of all outstanding Class A Membership Units. |
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Person |
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An individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, or a government or political subdivision thereof. |
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Prime Rate |
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The prime or reference rate charged by major U.S. money center banks as listed in the Money Rates column of The Wall Street Journal. |
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Proportionate Share |
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Proportionate Share shall have the meaning set forth in Section 4.2. |
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Regulatory Allocations |
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Regulatory Allocations shall have the meaning set forth in Section 6.4(g). |
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Release Condition |
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Release Condition shall have the meaning set forth in Section 3.6(f). |
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Release Date |
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Release Date shall have the meaning set forth in Section 3.6(f). |
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Securities Act |
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Securities Act shall have the meaning set forth in Section 3.6(b)(ii). |
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Series |
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Series shall have the meaning set forth in Section 2.1(b). |
Tag-Along Right |
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Tag-Along Right shall have the meaning set forth in Section 4.2. |
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Tax Matters Member |
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Tax Matters Member shall have the meaning set forth in Section 6.6(a). |
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Transaction |
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Transaction shall have the meaning set forth in Section 4.2. |
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Transaction Notice |
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Transaction Notice shall have the meaning set forth in Section 4.2. |
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Transfer |
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Or derivations thereof of an Interest means the sale, assignment, exchange, pledge, hypothecation, or other disposition of an Interest. |
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Treasury Regulations |
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The Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations. |
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Units |
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Units shall have the meaning set forth in Section 2.1. Except as otherwise provided herein, each Unit shall share equally in all allocations of Net Income and Net Loss and distributions. |
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UST |
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UST shall have the meaning set forth in Section 10.15. |
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Notices.
(a) Any notice, notification, demand or request provided or permitted to be given under this Operating Agreement must be in writing and will have been deemed to have been properly given, unless explicitly stated otherwise, if sent by (i) Federal Express or other comparable overnight courier, (ii) registered or certified mail, postage prepaid, return receipt requested, or (iii) emailed to the president of the recipient with confirmation of delivery.
(b) For purposes of all notices, the addresses of the Members are set forth on Exhibit A.
(c) All notices, notifications, demands or requests so given will be deemed given and received (i) if mailed, seven (7) days after being deposited in the mail; (ii) if sent via overnight courier, the next Business Day after being deposited; or (iii) if sent by email, the next Business Day after being emailed.
10.2 Application of Law. This Operating Agreement and the application or interpretation hereof, shall be governed exclusively by the laws of the State of California, and specifically the Act.
10.3 No Action for Partition. No Member may maintain any action for partition with respect to the property of the Company.
10.4 Headings and Sections. The headings in this Operating Agreement are inserted for convenience only and do not describe, interpret, define or limit the scope, extent or intent of this Operating Agreement or any provision hereof. Unless the context requires otherwise, all references in this Operating Agreement to Sections or Articles will be deemed to mean and refer to Sections or Articles of this Operating Agreement.
10.5 Amendments. Notwithstanding anything else contained in this Operating Agreement, the Articles and this Operating Agreement may be amended, supplemented or restated by approval of the Board; provided, however, that no amendment may be adopted without the consent of all affected Members if the amendment would (a) dilute the economic interests of the Member of any Class or Series other than on a basis that is proportional to all Members of such Class or Series, (b) obligate any Member to contribute additional capital beyond the Capital Contributions provided herein without the consent of the contributing member, or (c) change the Company to a general partnership.
10.6 Number and Gender. Where the context so indicates, the masculine includes the feminine and the neuter, the neuter includes the masculine and feminine, and the singular includes the plural.
10.7 Binding Effect. Except as herein otherwise provided to the contrary, this Operating Agreement will be binding upon and inure to the- benefit of the Members, their distributees, heirs, legal representatives, executors, administrators, successors and assigns.
10.8 Counterparts. This Operating Agreement may be executed in multiple counterparts, each of which is considered an original and will be binding upon the Member who executed the same, but all of such counterparts will constitute the same agreement.
10.9 Severability. If any provision of this Operating Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, the legality, validity, and enforceability of the remaining provisions of this Operating Agreement shall not be affected thereby, and in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Operating Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be legal, valid, and enforceable.
10.10 Entire Agreement. The Articles and this Operating Agreement (a) constitute the entire agreement between the parties relating to the subject matter hereof, and (b) supersede all previous contracts and agreements between the parties hereto, both oral and written. Neither this Operating Agreement nor any Admission Agreement shall be construed to be a contract between the Company and a Member regarding employment, the provision of services to the Company or any other subject other than the terms set forth in this Operating Agreement or any such Allocation Agreement.
10.11 Insurance. The Company may purchase and maintain insurance on behalf of any Person who is or was a Director, Officer, employee or agent of the Company or who is or was
serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, manager, agent or similar functionary or another Person against any liability.
10.12 Consultation Rights. For as long as the Management Principals continue to be employed on a full-time basis by the Company, and Management Company is not in default of its obligations hereunder, the Management Company shall have reasonable consultation rights with respect to Manhattan Bancorp concerning matters affecting the Business and its development, including reasonable access by the Management Principals to senior management of Manhattan Bancorp and the ability to report directly to and consult with the board of directors of Manhattan Bancorp at each regular meeting thereof.
10.13 Expenses. The Company will pay all expenses and costs, including reasonable attorneys and filing fees, incurred by Management Company, the Management Principals, MB and Manhattan Bancorp in connection with the negotiation and preparation of this Operating Agreement and the formation and capitalization of the Company.
10.14 Arbitration Agreement.
(a) Binding Arbitration. Upon the request of either of the parties hereto, whether made before or after the institution of any legal proceeding, any action, dispute, claim or controversy of any kind (for example, whether in contract or in tort, under statutory or common law, or legal or equitable), now existing or hereafter arising between or among the parties in any way arising out of, pertaining to or in connection with the Agreement, shall be resolved by mandatory and binding arbitration in accordance with the terms of this Section 10.14. The occurrence of any of the foregoing matters shall be referred to as a Dispute. Any party to this Agreement may bring by summary proceedings (for example, a plea in abatement or motion to stay further proceedings) an action in court to compel arbitration of any Dispute.
(b) Governing Rules. All Disputes between the parties shall be resolved by mandatory and binding arbitration administered by the American Arbitration Association (AAA) pursuant to the Federal Arbitration Act (Title 9 of the United States Code) in accordance with this Agreement and the AAAs published Commercial Arbitration Rules, in effect on the date of this Agreement (AAA Commercial Arbitration Rules). If Title 9 of the United States Code is inapplicable to any such claim or controversy for any reason, such arbitration shall be conducted pursuant to the laws of the State of California and in accordance with this Agreement and the AAAs Commercial Rules. To the extent that any inconsistency exists between this Agreement and such rules, this Agreement shall control. Judgment upon the award rendered by the arbitrator(s) may be entered in and enforced by any court having jurisdiction and in accordance with the practice of such court.
(c) No Waiver; Preservation of Remedies; No Punitive Damages; Attorneys Fees. The institution and maintenance of an action for judicial relief, pursuit of provisional or ancillary remedies, or exercise of self-help remedies shall not constitute a waiver of the right of any party, including without limitation the plaintiff, to submit any Dispute to arbitration nor render inapplicable the compulsory arbitration provisions hereof. Neither the arbitrator nor any court shall have the authority to award punitive damages or any other damages not measured by actual damages. In Disputes each party agrees that a party may proceed against all liable
persons, or against one or more of them, being less than all, without impairing rights against other liable persons. A party may release or settle with one or more liable persons as the party deems fit without releasing or impairing rights to proceed against any persons not so released except to the extent that such settlement eliminates or reduces the amount a party may recover from persons not released by reason of the absence of several liability of the person not released, the reduction in the amount of the loss suffered by the claimant as a result of any recovery received in any settlement, or any other offset recognized in law or equity. The prevailing party in any arbitration proceeding is entitled to the recovery of reasonable attorneys fees and costs, including without limitation arbitration filing fees, arbitrators fees and other arbitration fees. As used herein, prevailing party shall be that party which the arbitrator has determined has successfully established its claim or defense to a claim.
(d) Arbitration Proceeding. Except as otherwise provided for herein, the laws of the State of California, including but not limited to the confidentiality of communications in alternate dispute resolution proceedings, that would otherwise be applicable shall apply in any arbitration proceeding. Any attorney-client privilege and other protection against a disclosure of confidential information, including without limitation any protection afforded the work-product of any attorney, that could otherwise be claimed by any party shall be available to and may be claimed by any such party in any arbitration proceeding. No party waives any attorney-client privilege or any other protection against disclosure of confidential information by reason of anything contained in or done pursuant to or in connection with this Agreement. Any arbitration proceeding shall be conducted in Los Angeles, California, before a single arbitrator. If the parties cannot agree on an arbitrator to conduct the arbitration proceeding within 30 calendar days of the date of the AAAs notice to the respondent of the filing of an arbitration proceeding under this Agreement, then the arbitrator shall be selected pursuant to the provisions for appointment of an arbitrator in the AAAs Commercial Rules subject to the qualifications and experience set forth herein, provided that the arbitrator shall be required to be an attorney who has a minimum of fifteen years of private practice experience in corporate law, including mergers and acquisitions.
(e) Confidentiality. Any arbitration proceedings conducted pursuant to this Agreement shall be confidential. Without the written consent of all parties to the arbitration, or unless otherwise required by law, no party participant or the arbitrator may disclose the existence, content, or result of any arbitration, including any information about the evidence adduced by any other party in the arbitration proceeding or about documents produced by any other party, except in the course of another judicial, regulatory, or arbitration proceeding, or as may be requested by a Governmental Authority. Before making any disclosure permitted by the preceding sentence, the party shall give the other party reasonable written notice of the intended disclosure and afford the other party opportunity to protect its interests. The arbitrator, expert witnesses, and stenographic reporters shall sign appropriate nondisclosure agreements.
10.15 CPP. The Members acknowledge that Manhattan Bancorp is a participant in the Troubled Assets Relief Program Capital Purchase Program (CPP) established under the Emergency Economic Stabilization Act of 2008 (EESA). Under EESA Manhattan Bancorp and its Affiliates, including the Company, may be subject to certain limitations on their activities, including the amounts which may be paid as compensation to certain senior executives and other employees, and the structure of compensation plans and incentives. Additional
requirements may be imposed under EESA by the U.S. Treasury Department (UST) or subsequent legislation or regulations applicable to CPP participants at any time. The Company shall operate at all times in full compliance with EESA and subsequent legislation or regulations applicable to CPP participants and the regulations and guidance issued by the UST pursuant thereto to the extent they apply to the Company, and the Members agree to comply and to cause any Indirect Investors in the Company to comply with all requirements thereof to the extent they apply to the Members or such Indirect Investors.
[Signature page follows]
The undersigned, being all of the initial Members of the Company, do hereby ratify, confirm and approve the adoption of this Agreement as the Limited Liability Company Operating Agreement of the Company, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, do hereby assume and agree to be bound by and to perform all of the terms and provisions set forth in this Operating Agreement.
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MEMBERS: | ||
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MBFS HOLDINGS, INC., | ||
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a California corporation | ||
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| |
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By: |
/s/ Deepak Kumar | |
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Name: |
Deepak Kumar |
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Title: |
President/CEO |
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BODI ADVISORS INC., | ||
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a California corporation | ||
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| |
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| |
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By: |
/s/ Ted Dahlke | |
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Name: |
Ted Dahlke |
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Title: |
President |
EXHIBIT A
MEMBERS CAPITAL CONTRIBUTIONS
Name and Address |
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Capital |
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Class A |
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Class B |
| |
|
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|
|
|
|
| |
MBFS Holdings, Inc. |
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$ |
7.00 |
|
700,000 |
|
0 |
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|
|
|
|
|
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| |
Bodi Advisors Inc. |
|
$ |
3.00 |
|
300,000 |
|
166,667 |
|
EXHIBIT B
INITIAL EMPLOYEE EQUITY SCHEDULE
Shareholders |
|
Shares |
|
|
|
|
|
Greg Jacobson |
|
2,340 |
|
Tad Dahlke |
|
1,550 |
|
Hal Hermelee |
|
1,550 |
|
David Cassan |
|
600 |
|
Kent Usell |
|
600 |
|
Matthew Kennedy |
|
600 |
|
David Smith |
|
600 |
|
Russell Hossain |
|
600 |
|
Peter Harrison |
|
600 |
|
Dan Baruch |
|
600 |
|
Paul Jacob |
|
300 |
|
TOTAL |
|
9,940 |
|
EXHIBIT C
MANAGEMENT COMPANY BUY-SELL AGREEMENT
EXHIBIT D
FORM OF NON-COMPETITION AGREEMENT
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
This Non-Competition and Non-Solicitation Agreement (this Agreement) is dated as of [ ], by and between [ ] (Shareholder) and BODI Advisors, Inc., a California corporation (Management Company), Manhattan Capital Markets LLC, a California limited liability company (Company), MBFS Holdings, Inc., a California corporation formerly named MB Financial Services, Inc. (MB), and Manhattan Bancorp, a California corporation (Manhattan Bancorp).
RECITALS
A. Shareholder is a stockholder, director and executive officer of Management Company and a director and executive officer of Company;
B. Management Company is the owner of a substantial equity interest in Company (the Company Interest). MB is also the owner of a substantial equity interest in the Company, and Manhattan Bancorp is the owner of MB;
C. Pursuant to Sections 4.2, 4.3, and 4.4 of the operating agreement of the Company, dated as of October 1, 2009 (Company Operating Agreement), Management Company has been granted both certain rights and assumed certain obligations to include the Company Interest in a sale by MB of its interests in the Company or to have the Company Interest purchased by MB upon a Change in Control of MB or Manhattan Bancorp (a Transaction);
D. Under Section 4.4(c) of the Company Operating Agreement, Shareholder has agreed to execute and deliver this Agreement, and to perform his obligations hereunder, upon a Transaction.
E. By virtue of the Transaction, the Company will obtain a substantial economic benefit. Substantially all of the assets of the Management Company consist of the Company Interest. Shareholder is, in turn, a substantial shareholder in Management Company and will receive substantial economic benefit from Management Companys sale of the Company Interest.
F. In order to induce MB to enter into the Company Operating Agreement and acquire an interest in the Company, and to induce any acquirer of MB or Manhattan Bancorp or the Company Interest in connection with the Transaction, and to minimize the risk that the acquirer will lose the benefit of the goodwill and other assets being directly or indirectly acquired by it, the Shareholder has agreed to restrict his activities in accordance with the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the promises, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby
agree as follows:
AGREEMENT
1. Covenant Not To Compete. For a period of 18 months from the later of (a) closing (Closing) of a Change in Control (as defined in the Company Operating Agreement), and (b) termination of Shareholders employment by the Company (the Non-Compete Period), the Shareholder shall not, directly or indirectly, including without limitation as an officer, director, proprietor, employee, independent contractor, partner, member, investor, guarantor, consultant, advisor, agent, sales representative or other participant, engage in or assist with any activity which is the same as, similar to or competitive with the Companys Business (as defined in the Company Operating Agreement), in any state in the United States in which the Company or an affiliate thereof, during the immediately prior 3-year period, has been or at the time of the Closing is, engaged, or, in the case of mortgage brokerage activities only, the State of California. The Shareholder understands the foregoing restrictions may limit his abilities to engage in certain business during the Non-Compete Period; however, Shareholder also acknowledges and agrees that he will receive sufficiently high remuneration and other benefits under the Operating Agreement to justify these restrictions.
2. Non-Solicitation.
2.1 Employees/Contractors/Consultants. During the 18 months following the termination of Shareholders employment with the Company, whether during or after the Non-Compete Period, (the Post Employment Period), Shareholder shall not directly or indirectly induce, solicit, recruit, or encourage or attempt to induce, solicit, recruit, or encourage any person then employed (whether part-time or full-time) by the Company or an affiliate (which term shall include any acquirer of the Company or MB or Manhattan Bancorp or their affiliates) thereof or any person employed (whether part-time or full-time) by the Company or an affiliate thereof within the prior year, whether as an officer, employee, independent contractor, consultant or advisor, to leave such employ of the Company or an affiliate thereof, to cease providing or otherwise alter the services then provided to the Company or an affiliate thereof; provided, that such restriction shall not prevent Shareholder or any business with which Shareholder is affiliated, from hiring or retaining any such person that contacts Shareholder respecting employment without having been directly or indirectly induced, solicited, recruited or encouraged in any way by Shareholder or any business with which Shareholder is affiliated.
2.2 Customers. During the Post-Employment Period, the Seller and the Shareholder shall not solicit or encourage any Customer of the Company or an affiliate thereof to use the facilities or services of any competitor of the Company or an affiliate thereof. Customer shall mean any person or entity to whom the Company provides goods or services or any person or entity with whom the Company has attempted to or is attempting to enter into a business relationship for the purpose of providing goods or services related to the Business.
3. Separate Covenants. The terms and provisions of the covenants contained in Sections 1 and 2 above are intended to be separate and divisible provisions and if, for any reason, any one or more of the sections or subsections are held to be invalid or unenforceable, the validity or the enforceability of any other provision of this Agreement shall not thereby be
affected. If, in any judicial proceeding, a court shall refuse to enforce any of the separate covenants (or any part thereof) contained in Sections 1 and 2 then such unenforceable covenants (or any such part) shall be deemed eliminated from this Agreement for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants (or portions thereof) to be enforced.
3.1 Reformation. Each party hereto acknowledges that the potential restrictions on Shareholders future activities imposed by the covenants in Sections 1 and 2 are reasonable in both duration and scope and in all other respects. In the event that the provisions of Sections 1 or 2 should ever be deemed to exceed the duration or scope permitted by applicable law, then such provisions shall be reformed to the maximum time, scope or other limitation, as the case may be, permitted by applicable law, and each party agrees that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.
3.2 Specific Performance. Shareholder acknowledges that it would be impossible to determine the amount of damages that would result from any breach of any of the provisions of Sections 1 or 2 and that the remedy at law for any breach, or threatened breach, of any of such provisions would likely be inadequate and, accordingly, agrees that the Company, MB, Manhattan Bancorp or an affiliate thereof shall, in addition to any other rights or remedies which they may have at law or in equity, be entitled to seek such equitable and injunctive relief as may be available from any court of competent jurisdiction to restrain the Shareholder from violating any of such provisions of this Agreement. In connection with any action or proceeding for such equitable or injunctive relief, the Shareholder hereby waives any claim or defense that a remedy at law alone is adequate and agree, to the maximum extent permitted by law, to have each such provision of Sections 1 and 2 specifically enforced against Shareholder, without the necessity of posting bond or other security, and consent to the entry of equitable or injunctive relief against them enjoining or restraining any breach or threatened breach of any of the provisions of Sections 1 or 2.
4. Miscellaneous.
4.1 Amendment; Waiver. This Agreement shall not be amended, altered or modified in any manner whatsoever, except by a written instrument executed by the parties hereto. No waiver of any breach or default hereunder shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach of the same or similar nature.
4.2 Governing Law. This Agreement shall be deemed to be made in and in all respects shall be interpreted, construed and governed by and in accordance with the laws of the State of California, without regard to the conflict of law principles thereof.
4.3 Jurisdiction. Any legal action or proceeding with respect to this Agreement may be brought in the courts of the State of California in the County of Los Angeles or of the United States of America for the Central District of California and, by execution and delivery of this Agreement, each of the parties hereby accepts for themselves and in respect of their property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each of the
parties irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the delivery of notice as provided in Section 4.4 below, such service to become effective thirty (30) days after such delivery.
4.4 Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed to have been given (i) if personally delivered, when so delivered, (ii) if mailed, one week after having been placed in the United States mail, registered or certified, postage prepaid, addressed to the party to whom it is directed at the address listed below or (iii) if given by facsimile, when the notice is transmitted to the facsimile number specified below, and the appropriate answerback or telephonic confirmation is received:
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Greg Jacobson |
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Manhattan Bancorp |
4.5 Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with reference to the transactions contemplated hereby and supersede all other prior agreements, understandings, representations and warranties, both written and oral, between the parties or their respective representatives, agents or attorneys, with respect to the subject matter hereof.
4.6 Parties In Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors, assigns, estate, heirs, executors, administrators and other legal representatives, as the case may be. Nothing in this Agreement, express or implied, is intended to confer upon any other person or entity, other than parties hereto and their respective successors, assigns, estate, heirs, executors, administrators and other legal representatives, as the case may be, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
4.7 Assignment. This Agreement shall not be assignable by law or otherwise without the prior written consent of the other parties hereto; provided, however, that the Company or MB or Manhattan Bancorp or an affiliate thereof may assign any of its rights and obligations hereunder to any of its affiliates or to any other entity which may acquire all or substantially all of the assets, shares or business of the Company, MB, Manhattan Bancorp or any of its affiliates or any entity with or into which the Company or any of their affiliates may be consolidated or merged.
4.8 Compliance. The failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right that any party may have hereunder
shall not be deemed to be waiver of such provision or right or any other provision or right of this Agreement.
4.9 Advice of Counsel. EACH OF THE PARTIES ACKNOWLEDGES THAT, IN EXECUTING THIS AGREEMENT, THEY HAVE HAD THE OPPORTUNITY TO SEEK THE ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAVE READ AND UNDERSTOOD ALL OF THE TERMS AND PROVISIONS OF THIS AGREEMENT. THIS AGREEMENT SHALL NOT BE CONSTRUED AGAINST ANY PARTY BY REASON OF THE DRAFTING OR PREPARATION HEREOF.
4.10 Headings. The section headings herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.
4.11 Severable Provisions. The provisions of this Agreement are separate and distinct, and if any provisions are determined to be unenforceable, in whole or in part, the remaining provisions, and the enforceable parts of any partially unenforceable provisions, shall nevertheless be enforceable.
4.12 Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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BODI ADVISORS, INC. | ||
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MBFS HOLDINGS, INC. | ||
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MANHATTAN CAPITAL MARKETS, LLC | ||
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MANHATTAN BANCORP | ||
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Exhibit 10.8
MANHATTAN CAPITAL MARKETS LLC
AMENDMENT NO. 1
TO
OPERATING AGREEMENT
This Amendment No. 1 to Operating Agreement (this Amendment) is made as of November 30, 2010 and amends that certain Operating Agreement of Manhattan Capital Markets LLC, a California limited liability company, dated as of July 30, 2010, by and between MBFS Holdings, Inc., a California corporation, and Bodi Advisors, Inc., a California corporation (the Operating Agreement). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Operating Agreement.
WHEREAS, the parties to the Operating Agreement desire to amend the Operating Agreement to set forth the terms of Class C Membership Units; and
WHEREAS, pursuant to Section 10.5 of the Operating Agreement, the parties thereto may amend the Operating Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Amendment of the Operating Agreement. Notwithstanding anything in the Operating Agreement to the contrary, from and after November 30, 2010, the Operating Agreement will be amended as follows:
A. The following Section 2.1(b)(iv) is hereby added to the Operating Agreement:
(iv) As of November 30, 2010, the Company shall be authorized to issue up to 500,000 Units of a new Class of Interests (the Class C Membership Units) to MB for a purchase price of $1.00 per Unit. MB, and any successor in interest as the holder of the Class C Membership Units, is referred to herein in connection with such Units as Class C Members. Such Units shall be non-voting except that the approval of the Class C Members owning a majority of the Class C Membership Units shall be required as a condition to (A) the issuance of any new Units of any Class of Interests, (B) changes to terms, rights and preferences of any outstanding Class of Interests, (C) the Merger, and (D) any action described in Section 1.6 of the Agreement. In addition, the Class C Membership Units shall not be subject to Section 4.1 of the Agreement (Restrictions on Transfer), or treated as outstanding Interests owned by MB for purposes of Section 4.2 (Tag-Along Rights) or Section 4.3 ( Drag-Along Rights) of the Agreement. The Class C Membership Units shall also be entitled to receive a cumulative, but not compounded, preferred
return of six percent (6.0%) per annum on the amount of their Net Capital Contributions payable monthly on the first day of each month (Preferred Return). The Net Capital Contributions of the Class C Membership Units shall mean the aggregate purchase price paid and other Capital Contributions made with respect to the Class C Membership Units less any distributions made with respect to the Class C Membership Units other than distributions of Preferred Return. The Class C Membership Units shall not be entitled to be allocated Net Income or Net Loss, or to receive distributions or any other allocations respecting Ownership Percentages except as set forth in Sections 6.1, 6.2 and 8.3 of this Agreement. Upon payment of all accrued but unpaid Preferred Return and the return of all Net Capital Contributions of the Class C Members respecting the Class C Membership Units, the Class C Membership Units shall be deemed to have been retired and cancelled.
B. Section 6.1 of the Operating Agreement is hereby deleted and replaced in its entirety with the following:
6.1 Allocations of Net Income and Net Loss. After giving effect to the special allocations set forth in Section 6.4 hereof, of Net Income, Net Loss or items thereof required by Code Section 704(b) and the Treasury Regulations promulgated thereunder, Net Income and Net Loss shall be allocated to the Members in the following priority and manner:
(a) Net Income shall be allocated to the Members in the following order of priority:
(i) First, to the Class C Members until the Class C Members have been allocated Net Income equal to the Preferred Return paid to the Class C Members;
(ii) Second, to any Member allocated Net Loss under Section 6.1(b) that could not be allocated to another Member due to the limitations contained in the proviso in Section 6.1(b), an amount equal to the amount of such Net Loss; and
(ii) Thereafter, to the Members (other than the Class C Members with respect to the Class C Membership Units) pro rata, in proportion to their respective Ownership Percentages, subject, in the case of the Class B Membership Units, to the provisions of Section 2.1(b)(ii).
(b) Net Loss shall be allocated to the Members (other than the Class C Members with respect to the Class C Membership Units) pro rata, in proportion to their respective Ownership Percentages, subject, in the case of the Class B Membership Units, to the provisions of Section 2.1(b)(ii), provided, however, any allocations of Net Loss which would
cause a Member to have an Adjusted Capital Account Deficit shall be applied proportionally to the other Members (other than the Class C Members with respect to the Class C Membership Units) so as to allocate the maximum amount of Net Loss to such Members without causing any Member to have an Adjusted Capital Account Deficit.
(c) For purposes of this Agreement, Adjusted Capital Account Deficit shall mean, with respect to any Member, the deficit balance, if any, in such Members Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentence of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
C. Section 6.2 of the Operating Agreement is hereby deleted and replaced in its entirety with the following:
6.2 Distributions. Except upon the liquidation of the Company under Section 8.3 hereof (in which case distributions shall be made as provided in Section 8.3 hereof) the Company shall make distributions of Available Cash according to this Section 6.2.
(a) No distribution shall be made under this Section 6.2 to the extent it would, in the reasonable determination of the Board, cause the Company to have insufficient cash flow to operate its business in a reasonable manner or to be in default under any net worth, debt-to-equity ratio, asset base, or similar financial test or covenant contained in, or otherwise violate or accelerate, any financing arrangement, promissory note, loan or credit agreement, security agreement, indenture, or other instrument to which the Company is a party (other than an instrument under or with respect to which a Member or Affiliate thereof is the applicable creditor).
(b) Distributions of Available Cash shall be made first to the Class C Members until payment of any accrued but unpaid Preferred Return and thereafter to the Class C Members until all Net Capital Contributions respecting the Class C Membership Units have been returned.
(c) Subject to the Company having Available Cash and after all distributions have been made under Section 6.2(b), the Company shall make minimum distributions in cash to the Members (other than the Class C Members with respect to the Class C Membership Units) in an aggregate amount with respect to each Fiscal Year, no later than the date occurring ninety (90) days after the end of such Fiscal Year, in an amount at least equal to 40% of its taxable Net Income with respect to such Fiscal Year other than any Net Income allocated to offset Net Loss previously allocated to a Member. Distributions of Available Cash to the Members pursuant to this Section 6.2(c) shall be subject to the provisions of Section 6.2(a).
(d) The Board is hereby authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over any federal, state, local, or foreign government any amounts required to be so withheld pursuant to the Code or any provisions of any other federal, state, or local law and shall allocate such amounts to the Members with respect to which such amount was withheld. Distributions shall be deemed made to a Member in such amounts that the Company withholds or pays over to a taxing authority on account of amounts allocable to a Member pursuant to any requirement of the Code or of foreign, state or local tax law.
(e) Thereafter, Available Cash shall be distributed in such amounts and at such times as the Board shall determine, in its discretion after due consideration to the interests of all Members, to the Members in accordance with their respective Ownership Percentages after accounting for any prior distributions made under Sections 6.2(b) and 6.2(c).
D. Section 8.3(c) of the Operating Agreement is hereby deleted and replaced in its entirety with the following:
(c) Third, to the Class C Members until they have received any accrued but unpaid Preferred Return and the balance of their Net Capital Contributions, and thereafter to the Members (other than the Class C Members with respect to the Class C Membership Units) pro rata, in proportion to and in an amount equal to the positive balances in their respective Capital Accounts (after making all allocations required by Article VI).
2. Effectiveness of Amendment. Each of the undersigned, by its signature below, does hereby give its written consent to the amendment of the Operating Agreement in accordance with the foregoing provisions.
3. Confirmation of Operating Agreement. Except as set forth in Section 1 of this Amendment, the Operating Agreement is not being amended, supplemented or otherwise
modified, and the terms, conditions and agreements set forth in the Operating Agreement are hereby ratified and confirmed and shall continue in full force and effect.
4. Governing Law. This Amendment shall be governed and construed in accordance with the laws of the State of California.
5. Severability. Each provision of this Amendment shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair the operation of or affect those portions of this Amendment that are valid, enforceable and legal.
6. Counterparts. This Amendment may be executed in several counterparts with the same effect as if the parties executing the several counterparts had all executed one counterpart as of the day and year first written above.
[Signature page follows]
IN WITNESS THEREOF, the undersigned have executed this Amendment No. 1 to Operating Agreement to be effective as of the day and year first above written.
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MBFS HOLDINGS, INC., | ||
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a California corporation | ||
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/s/Dean Fletcher | |
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Dean Fletcher |
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Executive Vice President/CFO |
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BODI ADVISORS, INC., | ||
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a California corporation | ||
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/s/Greg Jacobson | |
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Greg Jacobson |
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Executive Vice President |
Bank of Manhattan, N.A., a nationally-chartered banking association organized under the laws of the United States.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements (No. 000-54116 and No. 333-140448) on Form S-8 for Manhattan Bancorp and Subsidiaries of our report dated March 30, 2011, with respect to the consolidated statements of financial condition of Manhattan Bancorp and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2010 and 2009, appearing in the Annual Report on Form 10-K of Manhattan Bancorp and Subsidiaries for the years ended December 31, 2010 and 2009.
/s/
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
March 30, 2011
CERTIFICATION
(Section 302 of Sarbanes-Oxley)
I, Terry Robinson, President and Chief Executive Officer of Manhattan Bancorp, certify that:
Date: March 30, 2011 | /s/ TERRY ROBINSON Terry Robinson President and Chief Executive Officer |
CERTIFICATION
(Section 302 of Sarbanes-Oxley)
I, Dean Fletcher, Executive Vice President and Chief Financial Officer of Manhattan Bancorp, certify that:
Date: March 30, 2011 | /s/ DEAN FLETCHER Dean Fletcher Executive Vice President and Chief Financial Officer |
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report on Form 10-K (the "Form 10-K") for the year ended December 31, 2010 of Manhattan Bancorp (the "Company").
I, Terry Robinson, President and Chief Executive Officer of the Company, certify that, to the best of my knowledge:
Dated: March 30, 2011
/s/ TERRY ROBINSON Terry Robinson |
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President and Chief Executive Officer |
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the annual report on Form 10-K (the "Form 10-K") for the year ended December 31, 2010 of Manhattan Bancorp (the "Company").
I, Dean Fletcher, Executive Vice President and Chief Financial Officer of the Company, certify that, to the best of my knowledge:
Dated: March 30, 2011
/s/ DEAN FLETCHER Dean Fletcher Executive Vice President and Chief Financial Officer |