SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010 |
OR |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 333-12892
MISSION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
California | 77-0559736 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
3380 S. Higuera St., San Luis Obispo, California 93401
(Address of principal executive offices)
(805) 782-5000
Issuer’s telephone number
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No (not yet applicable to registrant)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 3,345,602 shares of common stock outstanding as of May 7, 2010.
Mission Community Bancorp
Form 10-Q/A
EXPLANATORY NOTE
We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the three months ended March 31, 2010 (the “Original Filing”) to amend and restate our unaudited condensed consolidated financial statements and related disclosures for the three months ended March 31, 2009, as discussed in Note 10 to the accompanying restated unaudited condensed consolidated financial statements. The amendment to this most recent Form 10-Q is being filed only because the originally filed report for March 31, 2010 includes financial statements which present comparisons to the uncorrected March 31, 2009, financial statements. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on May 24, 2010. This Amendment corrects and restates the original Quarterly Report on Form 10-Q, but continues to be reported as of the date of the original filing of the Form 10-Q on May 24, 2010, with the exception of updating the original filing for subsequent events (see Note 9).
Background of the Restatement
On June 11, 2010, the Company announced that its Audit Committee, with the assistance of its independent auditors, had determined that an error had been made with respect to the recognition of a $479 thousand tax benefit in the first fiscal quarter of 2009. As a result of this error, the Company announced that the previously issued unaudited condensed consolidated financial statements for the fiscal quarters ended March 31, 2009, June 30, 2009, and September 30, 2009 in the Company’s Forms 10-Q for those periods should no longer be relied upon (collectively, the “Affected Periods”). The error had been corrected on a year-to-date basis as of September 30, 2009. This restatement reflects the appropriate portion of the correction in the first quarter of 2009, rather than in the third quarter. The financial statements for the full year 2009 are not included in the Affected Periods.
Description of the Error
The recognition of a $479 thousand tax benefit in the first fiscal quarter of 2009 was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable. However, at that time, management was unaware of a previous interpretation under the tax law that would disqualify the Company from electing the extended carryback period under ARRA. The error was corrected on a year-to-date basis as of September 30, 2009. This restatement reflects the appropriate portion of that correction in the first quarter of 2009, rather than in the third quarter.
Restatement of Other Financial Statements
This amendment to our Quarterly Report on Form 10-Q is being filed to restate our unaudited condensed consolidated financial statements and related financial information for the quarterly period ended March 31, 2009. The amendment to this most recent Form 10-Q is being filed only because the originally filed report for March 31, 2010 includes financial statements which present comparisons to the uncorrected March 31, 2009, financial statements. With the filing of this Form 10-Q/A, we are concurrently filing amendments to our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009, June 30, 2009 and September 30, 2009. The consolidated financial statements and related financial information contained in any of the Company’s filings with the SEC during the Affected Periods should no longer be relied upon.
Mission Community Bancorp
March 31, 2010
Index
PART I – FINANCIAL INFORMATION
PART I
Item 1. Financial Statements (Restated)
Mission Community Bancorp and Subsidiary | ||||||||||||
Condensed Consolidated Balance Sheets | ||||||||||||
Unaudited | (dollars in thousands) | |||||||||||
(Restated) | ||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 13,900 | $ | 8,595 | $ | 3,147 | ||||||
Federal funds sold | - | - | 28,005 | |||||||||
Total cash and cash equivalents | 13,900 | 8,595 | 31,152 | |||||||||
Interest-bearing deposits in other banks | 400 | 425 | 11,710 | |||||||||
Investment securities available for sale | 40,662 | 40,142 | 20,693 | |||||||||
Loans held for sale | 771 | 904 | 1,414 | |||||||||
Loans, net of unearned income | 131,714 | 135,506 | 152,932 | |||||||||
Less allowance for loan losses | (5,080 | ) | (5,537 | ) | (4,038 | ) | ||||||
Net loans | 126,634 | 129,969 | 148,894 | |||||||||
Federal Home Loan Bank stock and other stock, at cost | 3,003 | 3,003 | 2,757 | |||||||||
Premises and equipment | 3,335 | 3,255 | 2,661 | |||||||||
Other real estate owned | 1,500 | 2,206 | 983 | |||||||||
Company owned life insurance | 2,909 | 2,886 | 2,813 | |||||||||
Accrued interest and other assets | 1,847 | 1,721 | 2,576 | |||||||||
Total Assets | $ | 194,961 | $ | 193,106 | $ | 225,653 | ||||||
Liabilities and Shareholders' Equity | ||||||||||||
Deposits: | �� | |||||||||||
Noninterest-bearing demand | $ | 22,194 | $ | 24,616 | $ | 21,479 | ||||||
Money market, NOW and savings | 57,979 | 54,144 | 38,008 | |||||||||
Time certificates of deposit | 85,178 | 85,010 | 101,605 | |||||||||
Total deposits | 165,351 | 163,770 | 161,092 | |||||||||
Other borrowings | 6,000 | 6,000 | 35,300 | |||||||||
Junior subordinated debt securities | 3,093 | 3,093 | 3,093 | |||||||||
Accrued interest and other liabilities | 2,234 | 1,605 | 1,076 | |||||||||
Total liabilities | 176,678 | 174,468 | 200,561 | |||||||||
Shareholders' Equity: | ||||||||||||
Preferred stock - Series A (100,000 shares issued and outstanding) | 392 | 392 | 392 | |||||||||
Preferred stock - Series B (20,500 shares issued and outstanding) | 192 | 192 | 192 | |||||||||
Preferred stock - Series C (50,000 shares issued and outstanding) | 500 | 500 | 500 | |||||||||
Preferred stock - Series D (5,116 shares issued and outstanding) | 5,068 | 5,068 | 5,072 | |||||||||
Common stock - 10,000,000 shares authorized; | ||||||||||||
Issued and outstanding: 1,345,602 at March 31, 2010; | ||||||||||||
December 31, 2009 and March 31, 2009 | 18,042 | 18,042 | 18,042 | |||||||||
Additional paid-in capital | 251 | 242 | 187 | |||||||||
Retained earnings (deficit) | (6,730 | ) | (6,280 | ) | 563 | |||||||
Accumulated other comprehensive income - | ||||||||||||
unrealized appreciation on available-for-sale | ||||||||||||
securities | 568 | 482 | 144 | |||||||||
Total shareholders' equity | 18,283 | 18,638 | 25,092 | |||||||||
Total Liabilities and Shareholders' Equity | $ | 194,961 | $ | 193,106 | $ | 225,653 |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiary | ||||||||
Condensed Consolidated Statements of Income | ||||||||
Unaudited | (in thousands, except per share data) | |||||||
For the Three Months Ended | ||||||||
(Restated) | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Interest Income | ||||||||
Interest and fees on loans | $ | 2,058 | $ | 2,331 | ||||
Interest on investment securities | 309 | 259 | ||||||
Other interest income | 7 | 93 | ||||||
Total interest income | 2,374 | 2,683 | ||||||
Interest Expense | ||||||||
Interest on money market, NOW and savings deposits | 119 | 153 | ||||||
Interest on time certificates of deposit | 338 | 650 | ||||||
Other interest expense | 99 | 399 | ||||||
Total interest expense | 556 | 1,202 | ||||||
Net interest income | 1,818 | 1,481 | ||||||
Provision for loan losses | 200 | 300 | ||||||
Net interest income after provision for loan losses | 1,618 | 1,181 | ||||||
Non-interest income | ||||||||
Service charges on deposit accounts | 82 | 82 | ||||||
Gain on sale of loans | - | 62 | ||||||
Loan servicing fees, net of amortization | 34 | 25 | ||||||
Gain on sale of available-for-sale securities | 58 | 239 | ||||||
Loss or writedown of fixed assets or other real estate | (106 | ) | - | |||||
Other income and fees | 39 | 28 | ||||||
Total non-interest income | 107 | 436 | ||||||
Non-interest expense | ||||||||
Salaries and employee benefits | 923 | 979 | ||||||
Occupancy expenses | 300 | 172 | ||||||
Furniture and equipment | 124 | 111 | ||||||
Data processing | 188 | 186 | ||||||
Professional fees | 134 | 95 | ||||||
Marketing and business development | 29 | 34 | ||||||
Office supplies and expenses | 57 | 70 | ||||||
Insurance and regulatory assessments | 204 | 57 | ||||||
Loan and lease expenses | 34 | 32 | ||||||
Provision for unfunded commitments | - | 35 | ||||||
Other expenses | 118 | 121 | ||||||
Total non-interest expense | 2,111 | 1,892 | ||||||
(Loss) before income taxes | (386 | ) | (275 | ) | ||||
Income tax expense (benefit) | - | - | ||||||
Net (loss) | $ | (386 | ) | $ | (275 | ) | ||
Net income (loss) applicable to common stock | $ | (413 | ) | $ | (276 | ) | ||
Per Common Share Data: | ||||||||
Net Income (Loss) - Basic | $ | (0.31 | ) | $ | (0.21 | ) | ||
Net Income (Loss) - Diluted | $ | (0.31 | ) | $ | (0.21 | ) | ||
Average common shares outstanding - basic | 1,345,602 | 1,345,602 | ||||||
Average common shares outstanding - diluted | N/A | N/A |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiary | ||||||||||||||||||||||||||||||||
Condensed Consolidated Statements of Changes in Shareholders' Equity (Restated) | ||||||||||||||||||||||||||||||||
(Unaudited - dollars in thousands) | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Retained | Other | ||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Comprehensive | Earnings | Comprehensive | |||||||||||||||||||||||||||
Stock | Shares | Amount | Capital | Income | (Deficit) | Income(Loss) | Total | |||||||||||||||||||||||||
Balance at January 1, 2009 | $ | 1,084 | 1,345,602 | $ | 18,042 | $ | 172 | $ | 864 | $ | 355 | $ | 20,517 | |||||||||||||||||||
Issuance of 5,116 shares of | ||||||||||||||||||||||||||||||||
Series D preferred stock | ||||||||||||||||||||||||||||||||
to U.S. Treasury Department, | ||||||||||||||||||||||||||||||||
net of issuance costs of $44 | 5,072 | 5,072 | ||||||||||||||||||||||||||||||
Dividends declared and paid | ||||||||||||||||||||||||||||||||
on Series D preferred stock | (26 | ) | (26 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 15 | 15 | ||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net (loss) | $ | (275 | ) | (275 | ) | (275 | ) | |||||||||||||||||||||||||
Less beginning of year | ||||||||||||||||||||||||||||||||
unrealized gain on | ||||||||||||||||||||||||||||||||
securities sold during | ||||||||||||||||||||||||||||||||
the period, net | ||||||||||||||||||||||||||||||||
of taxes of $-0- | (285 | ) | (285 | ) | (285 | ) | ||||||||||||||||||||||||||
Net unrealized gain on | ||||||||||||||||||||||||||||||||
remaining available- | ||||||||||||||||||||||||||||||||
for-sale securities, | ||||||||||||||||||||||||||||||||
net of taxes of $100 | - | - | - | - | 74 | - | 74 | 74 | ||||||||||||||||||||||||
Total comprehensive income (loss) | $ | (486 | ) | |||||||||||||||||||||||||||||
Balance at March 31, 2009 | $ | 6,156 | 1,345,602 | $ | 18,042 | $ | 187 | $ | 563 | $ | 144 | $ | 25,092 | |||||||||||||||||||
Balance at January 1, 2010 | $ | 6,152 | 1,345,602 | $ | 18,042 | $ | 242 | $ | (6,280 | ) | $ | 482 | $ | 18,638 | ||||||||||||||||||
Dividends declared and paid | ||||||||||||||||||||||||||||||||
on Series D preferred stock | (64 | ) | (64 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 9 | 9 | ||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Net (loss) | $ | (386 | ) | (386 | ) | (386 | ) | |||||||||||||||||||||||||
Less beginning of year | ||||||||||||||||||||||||||||||||
unrealized gain on | ||||||||||||||||||||||||||||||||
securities sold during | ||||||||||||||||||||||||||||||||
the period, net | ||||||||||||||||||||||||||||||||
of taxes of $-0- | (22 | ) | (22 | ) | (22 | ) | ||||||||||||||||||||||||||
Net unrealized gain on | ||||||||||||||||||||||||||||||||
remaining available- | ||||||||||||||||||||||||||||||||
for-sale securities, | ||||||||||||||||||||||||||||||||
net of taxes of $-0- | - | - | - | - | 108 | - | 108 | 108 | ||||||||||||||||||||||||
Total comprehensive income (loss) | $ | (300 | ) | |||||||||||||||||||||||||||||
Balance at March 31, 2010 | $ | 6,152 | 1,345,602 | $ | 18,042 | $ | 251 | $ | (6,730 | ) | $ | 568 | $ | 18,283 |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiary | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
(Unaudited - dollars in thousands) | ||||||||
For the Three Months Ended | ||||||||
(Restated) | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Operating Activities | ||||||||
Net (loss) | $ | (386 | ) | $ | (275 | ) | ||
Adjustments to reconcile net (loss) to net | ||||||||
cash provided by (used in) operating activities: | ||||||||
Depreciation | 133 | 105 | ||||||
Accretion of discount on securities and loans, net | (23 | ) | (35 | ) | ||||
Provision for credit losses | 200 | 300 | ||||||
Provision for losses on unfunded loan commitments | - | 35 | ||||||
Stock-based compensation | 9 | 15 | ||||||
Gain on sale of securities | (58 | ) | (239 | ) | ||||
Gain on loan sales | - | (62 | ) | |||||
Writedown of other real estate owned | 106 | - | ||||||
Increase in company-owned life insurance | (23 | ) | (24 | ) | ||||
Other, net | 503 | (298 | ) | |||||
Proceeds from loan sales | 2,920 | 2,184 | ||||||
Loans originated for sale | (2,041 | ) | (2,265 | ) | ||||
Net cash provided by (used in) operating activities | 1,340 | (559 | ) | |||||
Investing Activities | ||||||||
Net decrease (increase) in deposits in other banks | 25 | - | ||||||
Purchase of available-for-sale securities | (3,967 | ) | (4,448 | ) | ||||
Proceeds from maturities, calls and paydowns of available-for-sale securities | 3,536 | 1,017 | ||||||
Proceeds from sales of available-for-sale securities | 58 | 7,726 | ||||||
Net decrease (increase) in loans | 2,409 | (1,074 | ) | |||||
Purchases of premises and equipment | (213 | ) | (168 | ) | ||||
Proceeds from sale of other real estate owned | 600 | - | ||||||
Net cash provided by investing activities | 2,448 | 3,053 | ||||||
Financing Activities | ||||||||
Net increase in demand deposits and savings accounts | 1,413 | 4,017 | ||||||
Net increase in time deposits | 168 | 12,271 | ||||||
Net increase (decrease) in other borrowings | - | (10,400 | ) | |||||
Proceeds from issuance of preferred stock under TARP-CPP, net | - | 5,072 | ||||||
Payment of TARP-CPP dividends | (64 | ) | (26 | ) | ||||
Net cash provided by financing activities | 1,517 | 10,934 | ||||||
Net increase in cash and cash equivalents | 5,305 | 13,428 | ||||||
Cash and cash equivalents at beginning of year | 8,595 | 17,724 | ||||||
Cash and cash equivalents at end of period | $ | 13,900 | $ | 31,152 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | 545 | 1,247 | ||||||
Taxes paid | - | - |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiary
Notes to Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation and Management Representations
The unaudited consolidated financial statements include accounts of Mission Community Bancorp (“the Company”) and its subsidiary, Mission Community Bank (“the Bank”) and the Bank’s subsidiary, Mission Community Development Corporation. All material inter-company balances and transactions have been eliminated.
These financial statements have been prepared in accordance with the Securities and Exchange Commission’s rules and regulations for quarterly reporting and, therefore, do not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. These financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2009, which was filed on April 15, 2010.
Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial statements for the three-month periods ended March 31, 2010 and 2009 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.
Management has determined that because all of the commercial banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.
Note 2 – Stock Based Compensation
The Company has a stock option plan, adopted in 1998, which is more fully described in Note I to the consolidated financial statements in the Company’s Annual Report on Form 10-K. The 1998 Stock Option Plan has been terminated with respect to the granting of future options under the Plan. In 2008 the Company adopted the Mission Community Bancorp 2008 Stock Incentive Plan, which has been approved by the Company’s shareholders. The 2008 Plan provides for the grant of various equity awards, including stock options.
The Company accounts for equity-based compensation arrangements, including employee stock options, using the “modified prospective method,” where stock-based compensation expense is recognized using the fair value based method for all new awards granted after January 1, 2006.
During the three-month periods ended March 31, 2010 and 2009, the Bank recognized pre-tax stock-based compensation expense of $9,000 and $15,000, respectively. As of March 31, 2010, the Company has unvested options outstanding with unrecognized compensation expense totaling $119,000, which is scheduled to be recognized as follows (in thousands):
April 1 through December 31, 2010 $ 29
2011 38
2012 37
2013 15
Total unrecognized compensation cost $119
Note 3 — Investment Securities
Investment securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values as of the balance sheet dates were as follows:
(in thousands) | Gross | Gross | Estimated | |||||||||||||
Amortized | Unrealized | Unrealized | Market | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
March 31, 2010: | ||||||||||||||||
U.S. Government agencies | $ | 13,940 | $ | 18 | $ | (2 | ) | $ | 13,956 | |||||||
Mortgage-backed securities | 20,356 | 415 | (19 | ) | 20,752 | |||||||||||
Municipal securities | 2,917 | 55 | (20 | ) | 2,952 | |||||||||||
Corporate debt securities | 2,878 | 121 | - | 2,999 | ||||||||||||
Asset-backed securities | 3 | - | - | 3 | ||||||||||||
$ | 40,094 | $ | 609 | $ | (41 | ) | $ | 40,662 | ||||||||
December 31, 2009: | ||||||||||||||||
U.S. Government agencies | $ | 15,442 | $ | 40 | $ | (14 | ) | $ | 15,468 | |||||||
Mortgage-backed securities | 16,631 | 244 | (40 | ) | 16,835 | |||||||||||
Municipal securities | 2,918 | 61 | (6 | ) | 2,973 | |||||||||||
Corporate debt securities | 2,841 | 147 | - | 2,988 | ||||||||||||
Asset-backed securities | 1,828 | 50 | - | 1,878 | ||||||||||||
$ | 39,660 | $ | 542 | $ | (60 | ) | $ | 40,142 |
The scheduled maturities of investment securities at March 31, 2010, were as follows. Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.
(in thousands) | Available-for-Sale Securities | |||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Within one year | $ | 2,147 | $ | 2,171 | ||||
Due in one year to five years | 14,399 | 14,507 | ||||||
Due in five years to ten years | 8,738 | 8,940 | ||||||
Due in greater than ten years | 14,810 | 15,044 | ||||||
$ | 40,094 | $ | 40,662 |
Investment securities in a temporary unrealized loss position as of each balance sheet date are shown in the following table, based on the length of time they have been continuously in an unrealized loss position:
(in thousands) | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
March 31, 2010: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 998 | $ | 2 | $ | - | $ | - | $ | 998 | $ | 2 | ||||||||||||
Mortgage-backed securities | 4,473 | 19 | - | - | 4,473 | 19 | ||||||||||||||||||
Municipal securities | 1,221 | 20 | - | - | 1,221 | 20 | ||||||||||||||||||
Corporate debt securities | - | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | ||||||||||||||||||
$ | 6,692 | $ | 41 | $ | - | $ | - | $ | 6,692 | $ | 41 | |||||||||||||
December 31, 2009: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 4,421 | $ | 14 | $ | - | $ | - | $ | 4,421 | $ | 14 | ||||||||||||
Mortgage-backed securities | 5,712 | 40 | - | - | 5,712 | 40 | ||||||||||||||||||
Municipal securities | 875 | 6 | - | - | 875 | 6 | ||||||||||||||||||
Corporate debt securities | - | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | ||||||||||||||||||
$ | 11,008 | $ | 60 | $ | - | $ | - | $ | 11,008 | $ | 60 |
As of March 31, 2010, ten securities have been in an unrealized loss position for less than twelve months and none for more than twelve months. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery. As of March 31, 2010, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of March 31, 2010 are other than temporarily impaired.
During the first quarters of 2010 and 2009, the Bank sold $5,532,000 and $7,487,000 of investment securities for net gains of $58,000 and $239,000, respectively.
As of March 31, 2010, investment securities carried at $6,831,000 and $6,465,000, respectively, were pledged to secure public deposits as required by law, and borrowings from the Federal Home Loan Bank of San Francisco.
Note 4 — Loans
The Bank’s loan portfolio consists primarily of loans to borrowers within the Central Coast area of California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank’s market area and, as a result, the Bank’s loan and collateral portfolios are concentrated in those industries and in that geographic area. As of March 31, 2010, loans totaling $80,997,000 were pledged to secure borrowings and potential borrowings from the Federal Home Loan Bank of San Francisco.
Following is a summary of the investment in impaired loans as of the dates indicated, including the related allowance for loan losses and cash-basis income recognized. Also shown are loans on non-accrual and those that are past due and still accruing interest:
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||
Impaired loans: | ||||||||||||
Impaired loans with a related allowance for loan losses | $ | 1,663,026 | $ | 672,355 | $ | 4,137,693 | ||||||
Impaired loans with no related allowance for loan losses | 3,184,844 | 5,721,257 | 1,171,596 | |||||||||
Total impaired loans | $ | 4,847,870 | $ | 6,393,612 | $ | 5,309,289 | ||||||
Related allowance for loan losses | $ | 57,425 | $ | 66,821 | $ | 1,006,255 | ||||||
Average recorded investment in impaired loans | 5,620,741 | 5,677,877 | 6,896,702 | |||||||||
Interest income recognized for cash payments while impaired | 54,349 | 184,492 | 50,148 | |||||||||
Total loans on non-accrual | 4,287,832 | 5,891,045 | 3,419,741 | |||||||||
Total loans past due 90 days or more and still accruing | - | - | 797,997 |
Following is a summary of the changes in the allowance for loan and lease losses for the three-month periods ended March 31:
March 31, 2010 | March 31, 2009 | |||||||
Balance at beginning of year | $ | 5,536,929 | $ | 3,942,220 | ||||
Additions to the allowance charged to expense | 200,000 | 300,000 | ||||||
Less loans charged off | (687,354 | ) | (210,497 | ) | ||||
Plus recoveries on loans previously charged off | 30,817 | 6,482 | ||||||
Balance at end of period | $ | 5,080,392 | $ | 4,038,205 |
Note 5 — Preferred Stock
On January 9, 2009, in exchange for aggregate consideration of $5,116,000, Mission Community Bancorp issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of a new Series D Fixed Rate Cumulative Perpetual Preferred Stock (the “Series D Preferred”) having a liquidation preference of $1,000 per share. This transaction is a part of the Capital Purchase Program of the Treasury’s Troubled Asset Relief Program (“TARP”). The Series D Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company may not redeem the Series D Preferred Stock during the first three years except with the proceeds from a “qualified equity offering.” After three years, the Company may, at its option, redeem the Series D Preferred Stock at par value plus accrued and unpaid dividends. The Series D Preferred Stock is generally non-voting. Prior to January 9, 2012, unless the Company has redeemed the Series D Preferred Stock or the Treasury Department has transferred the Series D Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to issue a common stock dividend or repurchase its common stock, or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances. The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital.
Note 6 —Income taxes
The Company recognized no income tax expense or benefit for the three months ended March 31, 2010, or 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.
Note 7 — Fair Value Measurement
The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value:
· | Level 1—Quoted prices in active markets for identical assets or liabilities |
· | Level 2—Estimates based on significant other observable inputs that market participants would use in pricing the asset or liability |
· | Level 3—Estimates based on significant unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. |
For some assets or liabilities, the inputs used to measure fair value may fall into more than one level of the fair value hierarchy. In such cases, the asset or liability is identified based on the lowest level input that is significant to the fair value measurement. The Bank’s assessment of
the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
(in thousands) | Fair Value Measurements Using | |||||||||||||||
March 31, 2010: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available-for-sale securities | $ | - | $ | 40,659 | $ | 3 | $ | 40,662 | ||||||||
December 31, 2009: | ||||||||||||||||
Available-for-sale securities | $ | - | $ | 40,133 | $ | 9 | $ | 40,142 |
The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. The Bank has one security in its available-for-sale portfolio that has been assessed as “impaired” since 2004. Due to the illiquidity in the secondary market for this security and lack of observable inputs to the estimation process, the fair value estimate cannot be corroborated by observable market data; therefore, management has concluded that Level 3 pricing was more appropriate for this security. There were no changes in the valuation techniques used during 2010 or 2009 and there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2010.
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
(in thousands) | Current | |||||||||||||||||||
Period | ||||||||||||||||||||
Fair Value Measurements Using | Gains | |||||||||||||||||||
March 31, 2010: | Level 1 | Level 2 | Level 3 | Total | (Losses) | |||||||||||||||
Financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Impaired loans, net | ||||||||||||||||||||
of specific reserves | $ | - | $ | - | $ | 3,606 | $ | 3,606 | $ | (28 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | 1,500 | $ | 1,500 | $ | (106 | ) | ||||||||||
Full Year | ||||||||||||||||||||
Fair Value Measurements Using | Gains | |||||||||||||||||||
December 31, 2009: | Level 1 | Level 2 | Level 3 | Total | (Losses) | |||||||||||||||
Financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Impaired loans, net | ||||||||||||||||||||
of specific reserves | $ | - | $ | - | $ | 4,346 | $ | 4,346 | $ | (1,302 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | 2,206 | $ | 2,206 | $ | (472 | ) |
The following methods were used to estimate the fair value of each class of assets above. The fair value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less estimated costs to sell if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Impaired loans were remeasured and reported at fair value through specific valuation allocations of the allowance for loan losses and/or partial charge-offs of the impaired loans.
The fair value of other real estate is based on the values obtained through property appraisals, which can include observable and unobservable inputs. Other real estate fair values are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data, which in turn, required the use of unobservable inputs and assumptions in fair value measurements.
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first three months of 2010 and 2009:
(in thousands) | Level 3 Securities Available for Sale | |||||||
Three Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
Balance at beginning of year | $ | 9 | $ | 32 | ||||
Transfers into Level 3 | - | - | ||||||
Unrealized gains (losses) | ||||||||
included in other comprehensive income (loss) | - | - | ||||||
Purchases | - | - | ||||||
Settlements | - | - | ||||||
Paydowns and maturities | (6 | ) | (6 | ) | ||||
Balance at end of period | $ | 3 | $ | 26 |
The following methods and assumptions were used to estimate the fair value of significant financial instruments that are not carried at fair value in the consolidated balance sheet:
Financial Assets. The carrying amounts 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 banks. For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of values provided by brokers. The 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. The carrying value of accrued interest receivable approximates fair value and the fair value of Company owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers.
Financial Liabilities. The carrying amounts of deposit liabilities payable on demand and short-term borrowed funds 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 on rates currently available to the Bank 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 is summarized as follows:
March 31, 2010 | ||||||||
Carrying Value | Fair Value | |||||||
Financial Assets: | ||||||||
Cash and due from banks | $ | 13,900 | $ | 13,900 | ||||
Federal funds sold | - | - | ||||||
Interest-bearing deposits in other banks | 400 | 400 | ||||||
Investment securities | 40,662 | 40,662 | ||||||
Loans, net | 127,405 | 129,205 | ||||||
Federal Home Loan Bank and other stocks | 3,003 | 3,003 | ||||||
Company owned life insurance | 2,909 | 2,909 | ||||||
Accrued interest receivable | 876 | 876 | ||||||
Financial Liabilities: | ||||||||
Deposits | 165,351 | 165,703 | ||||||
Other borrowings | 6,000 | 6,235 | ||||||
Junior subordinated debt securities | 3,093 | 2,428 | ||||||
Accrued interest and other liabilities | 2,234 | 2,234 |
Note 8 — Recent Accounting Pronouncements
Accounting for Transfers of Financial Assets
In June 2009, the FASB issued ASC Topic 860, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140. This standard amends the derecognition accounting and disclosure guidance included in previously issued standards. This standard eliminates the exemption from consolidation for qualifying special-purpose entities (SPEs) and also requires a transferor to evaluate all existing qualifying SPEs to determine whether they must be consolidated in accordance with ASC Topic 810. This standard also provides more stringent requirements for derecognition of a portion of a financial asset and establishes new conditions for reporting the transfer of a portion of a financial asset as a sale. This standard is effective as of the beginning of the first annual reporting period that begins after November 5, 2009. Management adopted the provisions of this standard on January 1, 2010.
Terms of the Bank’s SBA loan sales typically provide for limited recourse if the borrower defaults on any of the first three payments after the sale. The revised guidance does not permit a loan transfer to the buyer to be recognized as a sale until that recourse period has expired, which results in a delay of approximately three months in recognizing gains on most sales of SBA loans beginning January 1, 2010, the date the Company adopted the new guidance. Therefore, no gains on the sale of SBA loans have been recognized in the first three months of 2010. Subject to the limited recourse mentioned above, gains on the sale of SBA loans sold during the first quarter of 2010 will be recognized in the second quarter of 2010.
Transfers and Servicing
In December 2009, the FASB issued Accounting Standards Update (ASU) No. 009-16, Transfers and Servicing (ASC Topic 860): Accounting for Transfers of Financial Assets, which updates the derecognition guidance in ASC Topic 860 for previously issued SFAS No. 66. This update reflects the Board’ response to issues entities have encountered when applying ASC 860, including: (1) requires that all arrangements made in connection with a transfer of financial assets be considered in the derecognition analysis, (2) clarifies when a transferred asset is considered legally isolated from the transferor, (3) modifies the requirements related to a transferee’ ability to freely pledge or exchange transferred financial assets, and (4) provides guidance on when a portion of a financial asset can be derecognized. This update is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 5, 2009. Management adopted the provisions of this standard on January 1, 2010 without a material impact on the Company’s financial condition or results of operations.
Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”: Improving Disclosures about Fair Value Measurements (“ASU 10-06”). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. The Company’s disclosures about fair value measurements are presented in Note 7—Fair Value Measurement. These new disclosure requirements were adopted by the Company during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 5, 2010. With respect to the portions of this ASU that were adopted during the current period, the adoption of this standard did not have a material impacted on the Company’s financial position, results of operations, cash flows, or disclosures. Management does not believe that the adoption of the remaining portion of this ASU will have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.
Note 9 — Subsequent Events
On April 27, 2010, there was an initial closing (the “Initial Closing”) under the Securities Purchase Agreement dated December 22, 2009, as amended (the “Securities Purchase Agreement”), by and between the Company and Carpenter Fund Manager GP, LLC (the “Manager”) on behalf of and as General Partner of Carpenter Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community BancFund—CA, L.P. (the “Investors”). At the Initial Closing the Investors purchased an aggregate of 2,000,000 shares of the common stock of the Company paired with warrants to purchase 2,000,000 shares of the common stock of the Company for an aggregate purchase price of $10 million. The warrants are exercisable for a term of ten years from issuance at an exercise price of $5.00 per share and contain customary anti-dilution provisions. Under the terms of the Securities Purchase Agreement, the Investors have the right to purchase, in a “Second Closing,” up to an additional 1,040,000 shares of the Company’s common stock, with each share of common stock paired with a warrant exercisable at a price of $5.00 per share of common stock, for an aggregate purchase price of $5.2 million.
Prior to the Initial Closing, the Manager was the largest shareholder of the Company, beneficially owning 333,334 shares of the common stock of the Company or 24.7% of the issued and outstanding shares. Following the Initial Closing, the Manager is the beneficial owner of 2,333,334 shares of the common stock of the Company (not including warrants) or 69.7% of the issued and outstanding shares.
The sale of the units in the Second Closing is contingent upon the approval of the Company and the Manager of the Company’s redemption of the TARP Preferred Stock (Series D), as well as the receipt of all regulatory and other approvals required with respect to a redemption of the TARP Preferred Stock, as well as certain other customary closing conditions.
The Agreement further provides that the Company will conduct a rights offering to its existing shareholders following the Initial Closing, pursuant to which each shareholder will be offered the right to purchase additional shares of common stock, paired with a warrant, at a price of $5.00 per unit of common stock and warrant. The rights offering is currently anticipated in the third quarter of 2010.
On May 26, 2010 the Company and the Manager, on behalf of the Investors entered into Amendment No. 2 (the “Amendment”) to the Securities Purchase Agreement. The Amendment increases the total investment in the securities of the Company to be purchased by the Investors at the second closing under the Second Closing from $5.2 million to $15.0 million. In lieu of purchasing 1,040,000 shares of the Company’s common stock and warrants to purchase 1,040,000 shares of the Company’s common stock at a purchase price of $5.00 per unit of one share of common stock and one warrant in the Second Closing, the Investors will now purchase an aggregate of 3,000,000 shares of common stock and warrants to purchase 3,000,000 shares of common stock at a purchase price of $5.00 per unit of one share of common stock and one warrant in the Second Closing.
The Amendment also deletes the requirement that the Company use the proceeds from the second closing to redeem the Company’s outstanding Series D Preferred Stock issued to the U.S. Treasury as part of the TARP Capital Purchase Program. It is intended that the Company will now use a substantial majority of the proceeds from the second closing under the Securities Purchase Agreement to enable a newly-formed wholly owned subsidiary of the Company, Mission Asset Management, Inc., to purchase from the Bank, certain non-performing loans and other real estate owned assets.
Pursuant to the Amendment, the Manager has also agreed that the term of the warrants previously issued to the Investors under the Initial Closing under the Securities Purchase Agreement, and the term of the new warrants to be issued to the Investors in the Second Closing under the Securities Purchase Agreement, be reduced from a term of 10 years to a term of 5 years.
Note 10 — Restated Financial Statements
When initially issued, the Company’s financial statements for the first three months of 2009 reflected a $479 thousand tax benefit. The recognition of the tax benefit was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable. ARRA, which was enacted in February, 2009, provided (for tax year 2008 only) an extended NOL carryback period of up to five years for an electing “eligible small business.” Eligible small business was defined to be a small business with average “gross receipts” for 2006-2008 of $15 million or less. Based on total income per the Company’s consolidated tax returns for 2006 and 2007 and estimated total income expected to be reported for its 2008 tax
return, management believed that the Company’s average gross receipts were less than $15 million. However, management was unaware at that time that—for banks—the term “gross receipts” has been interpreted under the tax law to include gross sales of securities and loans. When gross sales of SBA loans, not merely the gains on sale, are included in gross receipts, the Company’s three-year average gross receipts exceeds $15 million. Therefore, the Company did not qualify for the extended carryback period under ARRA. The error had been corrected on a year-to-date basis as of September 30, 2009. These restated financial statements reflect the appropriate portion of that correction in the first quarter of 2009, rather than in the third quarter.
The accompanying financial statements reflect the following changes from those originally issued as of and for the three months ended March 31, 2009 only (no changes were made to the financial statements for the three months ended March 31, 2010):
· | In the condensed consolidated balance sheet, accrued interest and other assets has been reduced from $3,055,000 to $2,576,000. Retained earnings has been reduced from $1,042,000 to $563,000 and total shareholders’ equity has been reduced from $25,571,000 to $25,092,000. Total assets has been reduced from $226,132,000 to $225,653,000, and total liabilities and shareholders’ equity has had the same adjustment. |
· | In the condensed consolidated statement of income, income tax expense (benefit) has been changed from a benefit of $479 thousand to zero. Net income of $204 thousand has been changed to a net loss of $(275) thousand, and net income (loss) applicable to common stock has been changed from an income of $163 thousand to a loss of $(276) thousand. Basic and diluted earnings (loss) per share have both been changed from earnings of $0.12 to a loss of $(0.21). No changes were made to loss before income taxes. |
· | In addition to the balance sheet changes noted above for retained earnings and total shareholders’ equity, the condensed consolidated statement of shareholders’ equity reflects an increase in the comprehensive loss from $(7) thousand to $(486) thousand. |
· | In the condensed consolidated statement of cash flows, changes have been made to the components of net cash provided by (used in) operating activities, but no changes have been made to total net cash provided by (used in) operating activities, investing activities or financing activities. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)
Forward-Looking Statements
Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements. These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.” Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Bank operates); competition from other providers of financial services offered by the Bank; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Bank’s credit customers; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company or the Bank. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.
Restatements of Results of Operations and Financial Condition
In this amendment to its Quarterly Report on Form 10-Q, the Company has voluntarily corrected and restated its earnings (loss) for the first quarter of 2009 to correct for an error in the recognition of an income tax benefit in that quarter. The Company’s originally-issued financial statements for that period reflected a $479 thousand tax benefit. The recognition of the tax benefit was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable. However, at that time management was unaware of a previous interpretation under the tax law that would disqualify the Company from electing the extended carryback period under ARRA. The error was corrected on a year-to-date basis as of September 30, 2009. This restatement reflects the appropriate portion of that correction in the first quarter of 2009, rather than in the third quarter.
Further information on this restatement and the specific accounts affected are detailed in Note 10 to the Notes to Condensed Consolidated Financial Statements (Restated).
Overview of Results of Operations and Financial Condition
· | The Company incurred a net loss of $(386) thousand for the first quarter of 2010, as compared with a net loss of $(275) thousand for the first quarter of 2009. The factors resulting in the 2010 loss will be discussed below. |
· | Net interest income for the three-month period ended March 31, 2010, increased by $337 thousand, or 23%, from the comparable period in 2009, primarily due to a $35 million decrease in the volume of borrowed funds, but also due to declining rates on certificates of deposit. As a result, the net interest margin climbed 109 basis points from the first quarter of 2009. |
· | The provision for loan losses decreased by $100 thousand from the first quarter of 2009 to the same quarter in 2010. |
· | For the three months ended March 31, 2010, non-interest income decreased by $329 thousand from the same period in 2009. Factors contributing to this decline are discussed in the Non-Interest Income section below. |
· | Non-interest expense increased by $219 thousand for the first quarter of 2010, as compared to the first quarter of 2009. See Non-Interest Expense below. |
· | No tax benefit was recorded for the three months ended March 31, 2010 or 2009, due to a limitation on the Company’s ability to recognize deferred tax assets. |
· | Total assets increased by $1.9 million from December 31, 2009 to March 31, 2010. Total loans decreased by $3.9 million over that period, while deposits increased by $1.6 million. |
Income Summary
For the three months ended March 31, 2010, the Company incurred a net loss of $(386) thousand. This compares with a net loss of $(275) thousand for the comparable period of 2009.
Return (loss) on average assets (annualized) was (0.81)% for the first quarter of 2010, as compared with (0.51)% for the first quarter of 2009. Annualized return on average equity was (8.34)% for the first quarter of 2010 as compared with (4.50)% for the comparable 2009 period.
Excluding taxes, the Company incurred a loss of $(386) thousand for the first quarter of 2010, as compared to a pre-tax loss of $(275) thousand for the same period in 2009.
Net Interest Income
Net interest income is the largest source of the Bank’s operating income. For the three-month period ended March 31, 2010, net interest income was $1.818 million, an increase of $337 thousand, or 23%, from the comparable period in 2009.
The net interest margin (net interest income as a percentage of average interest earning assets) was 3.95% for the three-month period ended March 31, 2010, an increase of 109 basis points as compared to the same period in 2009. Short-term interest rates dropped steeply in 2008 and stabilized in 2009 at the current very low level. The initial drop placed severe pressure on our interest margin throughout 2008 and into 2009 but as rates stabilized, higher-rate liabilities have rolled off or repriced downward, significantly reducing our interest cost. In addition, the Bank’s deposit base has grown substantially since mid-year 2008, as local depositors sought out safety, with yield often a secondary concern (see the Deposits section of this report). Partially offsetting the beneficial impact of lower interest expense has been a reduction in interest income on loans, as demand for quality credits has diminished during the recession.
The following table shows the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three-month periods ended March 31, 2010 and 2009:
Net Interest Analysis | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||
March 31, 2010 | March 31, 2009 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income* | $ | 136,010 | $ | 2,058 | 6.14 | % * | $ | 154,385 | $ | 2,331 | 6.14 | % * | ||||||||||||
Investment securities* | 39,674 | 309 | 3.15 | % * | 23,177 | 259 | 4.54 | % * | ||||||||||||||||
Federal funds sold | - | - | - | 18,714 | 9 | 0.20 | % | |||||||||||||||||
Other interest income | 11,108 | 7 | 0.25 | % | 14,467 | 83 | 2.34 | % | ||||||||||||||||
Total interest-earning assets / interest income | 186,792 | 2,374 | 5.15 | % | 210,743 | 2,682 | 5.18 | % | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (5,551 | ) | (3,935 | ) | ||||||||||||||||||||
Cash and due from banks | 2,701 | 3,459 | ||||||||||||||||||||||
Premises and equipment | 3,382 | 2,617 | ||||||||||||||||||||||
Other assets | 6,379 | 6,330 | ||||||||||||||||||||||
Total assets | $ | 193,703 | $ | 219,214 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 20,756 | 41 | 0.79 | % | $ | 9,418 | 42 | 1.81 | % | ||||||||||||||
Savings and Money Market deposit accounts | 35,063 | 78 | 0.90 | % | 25,109 | 110 | 1.79 | % | ||||||||||||||||
Certificates of deposit | 85,719 | 338 | 1.60 | % | 94,470 | 650 | 2.80 | % | ||||||||||||||||
Total interest-bearing deposits | 141,538 | 457 | 1.31 | % | 128,997 | 802 | 2.53 | % | ||||||||||||||||
Federal funds purchased | - | - | - | - | - | - | ||||||||||||||||||
Federal Home Loan Bank advances | 6,000 | 74 | 5.01 | % | 40,651 | 368 | 3.68 | % | ||||||||||||||||
Subordinated debt | 3,093 | 25 | 3.25 | % | 3,093 | 31 | 4.11 | % | ||||||||||||||||
Total borrowed funds | 9,093 | 99 | 4.41 | % | 43,744 | 399 | 3.71 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense | 150,631 | 556 | 1.50 | % | 172,741 | 1,201 | 2.83 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 22,696 | 20,602 | ||||||||||||||||||||||
Other liabilities | 1,596 | 1,110 | ||||||||||||||||||||||
Total liabilities | 174,923 | 194,453 | ||||||||||||||||||||||
Shareholders' equity | 18,780 | 24,761 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 193,703 | $ | 219,214 | ||||||||||||||||||||
Net interest-rate spread | 3.65 | % | 2.35 | % | ||||||||||||||||||||
Impact of non-interest-bearing | ||||||||||||||||||||||||
sources and other changes in | ||||||||||||||||||||||||
balance sheet composition | 0.30 | % | 0.51 | % | ||||||||||||||||||||
Net interest income / margin on earning assets | $ | 1,818 | 3.95 | % ** | $ | 1,481 | 2.86 | % ** | ||||||||||||||||
*No taxable-equivalent adjustment has been made on municipal securities and loans | ||||||||||||||||||||||||
because no tax benefits are currently being recognized by the Company. | ||||||||||||||||||||||||
** Net interest income as a % of earning assets |
Shown in the following table are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by the Bank and the Company on those assets and liabilities for the three-month periods ended March 31, 2010 and 2009. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.
Rate / Volume Variance Analysis | ||||||||||||
(In thousands) | Three Months Ended March 31, 2010 | |||||||||||
Compared to 2009 | ||||||||||||
Increase (Decrease) | ||||||||||||
in interest income and expense | ||||||||||||
due to changes in: | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest-earning assets: | ||||||||||||
Loans, net of unearned income | $ | (278 | ) | $ | 5 | $ | (273 | ) | ||||
Investment securities | 145 | (95 | ) | 50 | ||||||||
Federal funds sold | (9 | ) | - | (9 | ) | |||||||
Other interest income | (16 | ) | (60 | ) | (76 | ) | ||||||
Total increase (decrease) in interest income | (158 | ) | (150 | ) | (308 | ) | ||||||
Interest-bearing liabilities: | ||||||||||||
Transaction accounts | 31 | (32 | ) | (1 | ) | |||||||
Savings deposits | 34 | (66 | ) | (32 | ) | |||||||
Certificates of deposit | (56 | ) | (256 | ) | (312 | ) | ||||||
Total interest-bearing deposits | 9 | (354 | ) | (345 | ) | |||||||
Federal funds purchased | - | - | - | |||||||||
FHLB advances | (394 | ) | 100 | (294 | ) | |||||||
Subordinated debt | - | (6 | ) | (6 | ) | |||||||
Total borrowed funds | (394 | ) | 94 | (300 | ) | |||||||
Total increase (decrease) in interest expense | (385 | ) | (260 | ) | (645 | ) | ||||||
Increase (decrease) in net interest income | $ | 227 | $ | 110 | $ | 337 |
The table above reflects the impact of lower rates paid on deposit accounts, the $34.7 million reduction in average FHLB borrowings and the $8.8 million reduction in average certificates of deposit over the past year, somewhat offset by the reduced volume of loans outstanding in 2010. The significant reduction in relatively higher-cost FHLB borrowings and CD’s was driven by $23.4 million in core deposit growth (both interest-bearing and non-interest-bearing) and an $18.4 million contraction in outstanding loans. The overall rate decline on CD’s resulted from maturing CD’s being repriced downward in the current low rate environment.
Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain at a very low level through much of 2010 and, if so, we expect to see certificate of deposit rates continue to decline to a greater degree than loan rates, continuing to relieve pressure on the net interest margin. In the early stage of the next cycle of rising interest rates we would expect to see deposits repricing slightly faster than loans because “floors” (minimum rates) have been implemented on much of the variable rate loan portfolio. Many of those floor rates are currently higher than the rate would be without the imposition of the floor.
Provision for Loan Losses
The Bank recorded a $200 thousand provision for loan losses for the three months ended March 31, 2010, as compared with a $300 thousand provision for the first quarter of 2009.
The Bank makes provisions for loan losses when required to bring the total allowance for loan losses to a level deemed appropriate for the risk in the loan portfolio. The determination of the
appropriate level for the allowance is based on such factors as historical loss experience, the volume and type of lending conducted, the amount of nonperforming loans, regulatory standards, general economic conditions, and other factors related to the collectibility of loans in the portfolio.
Loan charge-offs totaled $689 thousand and recoveries totaled $32 thousand for the first quarter of 2010, as compared with $210 thousand of charge-offs and $6 thousand of recoveries for the same period in 2009. The ratio of allowance for loan losses to total loans was 3.83% at March 31, 2010, as compared to 2.62% a year ago and 4.06% as of December 31, 2009.
The provision for loan losses and allowance for loan losses reflect management’s consideration of the various risks in the loan portfolio. Additional discussion of loan quality and the allowance for loan losses is provided in the Asset Quality, Potential Problem Loans and Allowance for Loan and Lease Losses sections of this report.
Non-Interest Income
Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from the sale of loans and gains on sales of securities. For the three-month period ended March 31, 2010, non-interest income was $107 thousand, a decrease of $329 thousand, or 75%, from the same period in 2009.
The following table shows the major components of non-interest income:
Non-Interest Income | ||||||||||||||||
(In thousands) | For the Three Months Ended March 31, | |||||||||||||||
$ Amount | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
Service charges on deposit accounts | $ | 82 | $ | 82 | $ | - | 0 | % | ||||||||
Gain on sale of loans | - | 62 | (62 | ) | -100 | % | ||||||||||
Loan servicing fees, net of amortization | 34 | 25 | 9 | 36 | % | |||||||||||
Gain on sale of available-for-sale securities | 58 | 239 | (181 | ) | -76 | % | ||||||||||
Loss or writedown of other real estate | (106 | ) | - | (106 | ) | nm | ||||||||||
Other income and fees | 39 | 28 | 11 | 39 | % | |||||||||||
Total non-interest income | $ | 107 | $ | 436 | $ | (329 | ) | -75 | % | |||||||
nm - not meaningful |
The decrease in non-interest income was principally due to three factors:
· | Reduced sales of securities, resulting in a $181 thousand decrease in gains on security sales. |
· | Losses on sales of other real estate and writedowns on the value of certain other real estate properties held (total of $106 thousand). Gains and losses on other real estate are reported on a net basis, so losses and writedowns are reflected as negative non-interest income. |
· | No gains on sales of SBA loans were recognized in the first quarter of 2010 due to the new FASB guidance on accounting for transfers of financial assets, as noted above in Note 8 to the consolidated financial statements. In the first quarter of 2009, the Bank recorded $62 thousand in gains on SBA loan sales. |
The majority of the service charge income shown in the non-interest income table relates to NSF fee income and other fees not directly assessed on deposit accounts. Many of the Bank’s deposit products and services have had low or no monthly fees. However, management implemented a change in the Bank’s service charge structure during the first quarter of 2010, resulting in a $12 thousand increase in maintenance fees assessed on demand and savings accounts, while NSF fees declined by approximately the same amount.
Non-Interest Expense
Non-interest expense represents salaries and benefits, occupancy expenses, professional fees, outside services, and other miscellaneous expenses necessary to conduct business.
Non-interest expenses increased by $219 thousand, or 12%, for the three months ended March 31, 2010, as compared to the first quarter of 2009.
The following table shows the major components of non-interest expenses:
Non-Interest Expense | ||||||||||||||||
(In thousands) | For the Three Months Ended March 31, | |||||||||||||||
$ Amount | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
Salaries and employee benefits | $ | 923 | $ | 979 | $ | (56 | ) | -6 | % | |||||||
Occupancy expenses | 300 | 172 | 128 | 74 | % | |||||||||||
Furniture and equipment | 124 | 111 | 13 | 12 | % | |||||||||||
Data processing | 188 | 186 | 2 | 1 | % | |||||||||||
Professional fees | 134 | 95 | 39 | 41 | % | |||||||||||
Marketing and business development | 29 | 34 | (5 | ) | -15 | % | ||||||||||
Office supplies and expenses | 57 | 70 | (13 | ) | -19 | % | ||||||||||
Insurance and regulatory assessments | 204 | 57 | 147 | 258 | % | |||||||||||
Loan and lease expenses | 34 | 32 | 2 | 6 | % | |||||||||||
Provision for unfunded loan commitments | - | 35 | (35 | ) | -100 | % | ||||||||||
Other | 118 | 121 | (3 | ) | -2 | % | ||||||||||
Total non-interest expense | $ | 2,111 | $ | 1,892 | $ | 219 | 12 | % |
The increase in non-interest expense was principally due to material increases in FDIC insurance assessments (FDIC insurance increased $141 thousand for the first quarter of 2010 vs. 2009), and occupancy expenses increased primarily due to the lease cost of the Bank’s new administrative office in San Luis Obispo. These increased expenses were partially offset by cost containment measures taken in salaries and benefits.
Income Taxes
The Company recognized no income tax expense or benefit for the three months ended March 31, 2010 or 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.
Balance Sheet Analysis
At March 31, 2010, consolidated assets totaled $195.0 million, as compared with $193.1 million at December 31, 2009, and $225.7 million at the end of 2009’s first quarter. This represents a decrease of $30.7 million (14%) over the past twelve months. Total loans decreased $21.9 million (14%) over that period, while deposits increased $4.3 million, or 3%, borrowed funds decreased $29.3 million (83%) and shareholders’ equity decreased $6.8 million (27%). The decline in shareholder’s equity was due to net losses incurred over the past year. See also the Capital Ratios section of this report.
The following table shows balance sheet growth trends over the past five quarters:
Balance Sheet Growth | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Increase(Decrease) From Previous Quarter End* | |||||||||||||||||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | September 30, 2009 | June 30, 2009 | March 31, 2009 | ||||||||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||
Total Assets | $ | 1,855 | 3.9 | % | $ | (22,417 | ) | -41.3 | % | $ | (3,800 | ) | -6.9 | % | $ | (6,330 | ) | -11.3 | % | $ | 10,163 | 19.1 | % | |||||||||||||||||
Earning Assets | 1,894 | 4.2 | % | (19,722 | ) | -38.5 | % | (2,821 | ) | -5.4 | % | (8,757 | ) | -16.4 | % | 14,967 | 30.4 | % | ||||||||||||||||||||||
Loans | (3,925 | ) | -11.7 | % | (6,433 | ) | -17.9 | % | (8,600 | ) | -22.5 | % | (2,903 | ) | -7.5 | % | 1,035 | 2.7 | % | |||||||||||||||||||||
Deposits | 1,581 | 3.9 | % | (4,053 | ) | -9.6 | % | 7,138 | 17.6 | % | (407 | ) | -1.0 | % | 16,288 | 45.6 | % | |||||||||||||||||||||||
Borrowings | - | 0.0 | % | (13,300 | ) | -273.4 | % | (10,744 | ) | -141.9 | % | (5,256 | ) | -59.7 | % | (10,400 | ) | -92.3 | % | |||||||||||||||||||||
Shareholders' Equity | (355 | ) | -7.7 | % | (5,157 | ) | -86.0 | % | (389 | ) | -6.4 | % | (908 | ) | -14.5 | % | 4,575 | 90.4 | % | |||||||||||||||||||||
*Percentages shown as annualized rates |
Loans
The following table shows the composition of our loan portfolio by type of loan:
Loan Portfolio Composition | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | ||||||||||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||
Commercial | $ | 19,051 | 14.4 | % | $ | 19,633 | 14.4 | % | $ | 25,255 | 16.4 | % | ||||||||||||
Agricultural | 671 | 0.5 | % | 750 | 0.5 | % | - | 0.0 | % | |||||||||||||||
Leases, net of unearned income | 1,208 | 0.9 | % | 1,335 | 1.0 | % | 1,409 | 0.9 | % | |||||||||||||||
Municipal loans | 3,822 | 2.9 | % | 3,476 | 2.5 | % | 2,747 | 1.8 | % | |||||||||||||||
Real estate | 93,658 | 70.7 | % | 96,956 | 71.1 | % | 102,835 | 66.6 | % | |||||||||||||||
Construction | 12,496 | 9.4 | % | 12,512 | 9.2 | % | 18,486 | 12.0 | % | |||||||||||||||
Consumer | 1,579 | 1.2 | % | 1,748 | 1.3 | % | 3,614 | 2.3 | % | |||||||||||||||
Total loans | $ | 132,485 | 100.0 | % | $ | 136,410 | 100.0 | % | $ | 154,346 | 100.0 | % |
The table shows a net decrease in loans outstanding over the past twelve months—primarily in commercial, real estate and construction loans. Of the total real estate and construction loans as of March 31, 2010, 70% are commercial mortgage loans, and 47% of those are owner-occupied properties. Approximately 2% of the owner-occupied commercial mortgage loans contain SBA guarantees.
Asset Quality
Non-accrual loans totaled $4.3 million at March 31, 2010, as compared to $5.9 million at December 31, 2009 and $3.4 million at March 31, 2009.
Management classifies loans as non-accrual when principal or interest is past due 90 days or more based on the contractual terms of the loan, unless the loan is well-secured and in the process of collection. Loans that are not past-due 90 days or more will also be classified as non-accrual when, in the opinion of management, there exists a reasonable doubt as to the full and timely collection of either principal or interest. Once a loan is classified as non-accrual, it may not be reclassified as an accruing loan until all principal and interest payments are brought current and the loan is considered to be collectible as to both principal and interest.
Restructured loans are those loans with concessions in interest rates or repayment terms due to a decline in the financial condition of the borrower. Foreclosed real estate represents real estate acquired in satisfaction of loans through foreclosure or other means and is carried on an individual asset basis at the lower of the recorded investment in the related loan or the estimated fair value of the property, less selling expenses.
The following table presents information about the Company’s non-performing loans, including quality ratios as of March 31, 2010, December 31, 2009 and March 31, 2009:
Non-Performing Assets | ||||||||||||
(in thousands) | March 31 | December 31 | March 31 | |||||||||
2010 | 2009 | 2009 | ||||||||||
Loans in nonaccrual status | $ | 4,288 | $ | 5,891 | $ | 3,419 | ||||||
Loans past due 90 days or more and accruing | - | - | 798 | |||||||||
Restructured loans in accruing status | 740 | 831 | 675 | |||||||||
Total nonperforming loans | 5,028 | 6,722 | 4,892 | |||||||||
Foreclosed real estate | 935 | 1,641 | 83 | |||||||||
Total nonperforming assets | $ | 5,963 | $ | 8,363 | $ | 4,975 | ||||||
Allowance for loan losses | $ | 5,080 | $ | 5,537 | $ | 4,038 | ||||||
Asset quality ratios: | ||||||||||||
Non-performing assets to total assets | 3.06 | % | 4.33 | % | 2.20 | % | ||||||
Non-performing loans to total loans | 3.80 | % | 4.93 | % | 3.20 | % | ||||||
Allowance for loan losses to total loans | 3.83 | % | 4.06 | % | 2.64 | % | ||||||
Allowance for loan losses to total | ||||||||||||
non-performing loans | 101 | % | 82 | % | 83 | % |
The high level of non-performing loans over the past year has been due to the significant downturn in the economy and reduction in real estate collateral values in 2008 and 2009. The $5.0 million of non-performing loans as of March 31, 2010, includes $631 thousand of SBA loans, which are supported by $596 thousand of SBA loan guarantees. The remaining $4.3 million of non-performing loans are loans determined to be impaired. A determination of impairment is one of expected payment performance, but not necessarily probability of loss. Based on a loan-by-loan analysis of collateral values or the present value of estimated cash flows, the extent of the impairment of those impaired loans in excess of amounts already charged off is estimated to be $57 thousand, and has been provided in the allowance for loan and lease losses.
Potential Problem Loans
At March 31, 2010, the Bank had approximately $28.1 million of loans that were not categorized as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans. This represents a $3.5 million increase from the $24.6 million of potential problem loans at December 31, 2009. The $28.1 million of potential problem loans are supported by $623 thousand of SBA loan guarantees and $25.5 million are secured by real estate.
Potential problem loans were identified through the ongoing loan review process and are subject to continuing management attention. Management has provided in the allowance for loan and lease losses for potential losses related to these loans, based on an evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation.
While credit quality, as measured by loan delinquencies and by the Bank’s internal risk grading system, appears to be manageable as of March 31, 2010, there can be no assurances that new problem loans will not develop in future periods. A continuing decline in economic conditions in the Bank’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general. The Bank has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) at March 31, 2010 totaled $5.1 million, a decrease of $457 thousand from December 31, 2009. The ratio of ALLL to total loans at March 31, 2010, was 3.83%, as compared with 4.06% at December 31, 2009, and 2.62% at March 31, 2009. At March 31, 2010 and 2009, the ratio of ALLL to total non-performing loans was 101% and 83%, respectively.
The following table provides an analysis of the changes in the ALLL for the three-month periods ended March 31, 2010 and 2009:
Allowance for Loan and Lease Losses | ||||||||
(dollars in thousands) | Three Months Ended | |||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period | $ | 5,537 | $ | 3,942 | ||||
Provision for loan losses | 200 | 300 | ||||||
Loans charged off | (689 | ) | (210 | ) | ||||
Recoveries of previous charge-offs | 32 | 6 | ||||||
Net (charge-offs) | (657 | ) | (204 | ) | ||||
Balance at end of period | $ | 5,080 | $ | 4,038 | ||||
Allowance for loan losses as a percentage of: | ||||||||
Period end loans | 3.83 | % | 2.62 | % | ||||
Non-performing loans | 101 | % | 83 | % | ||||
As a percentage of average loans (annualized): | ||||||||
Net charge-offs (recoveries) | 1.96 | % | 0.54 | % | ||||
Provision for loan losses | 0.60 | % | 0.79 | % |
The $689 thousand of loans charged off in the first quarter of 2010 is comprised almost entirely of one home equity loan ($684 thousand).
The Bank makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio. At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the volume and type of lending conducted, the amount of identified potential loss associated with specific nonperforming loans, collateral values, regulatory policies, general economic conditions, and other factors related to the collectibility of loans in the portfolio.
Based on its quarterly review, management believes that the allowance for loan losses at March 31, 2010, is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involve uncertainty and matters of judgment. Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.
In addition, management has established a reserve for undisbursed loan commitments. As of March 31, 2010, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheet.
Investments
In 2004, management established a loss reserve for one of the Bank’s asset-backed securities after concluding it was “other than temporarily impaired.” The security is in non-accrual status, with interest payments, which have been received to date on a regular basis, being credited to the
reserve. As of March 31, 2010, the book value of the security was $3 thousand ($298 thousand amortized cost less the loss reserve, which totals $295 thousand).
While management has made a best effort to determine the probable loss on this security, no assurances can be given that future changes in the underlying collateral and payments will not materially affect the value of this security with either positive or negative changes. However, management will continue to closely monitor this investment and, if needed, recognize additional write-downs.
Excluding the impaired asset-backed security referred to above, all securities in the Bank’s investment portfolio are considered to be investment grade. The portfolio consists of a mixture of fixed-rate US agency securities (35%), fixed-rate mortgage-backed securities (33%), floating-rate mortgage-backed securities (14%), fixed-rate tax-exempt municipal securities (7%), floating-rate corporate debt securities (7%) and fixed-rate CMO’s (4%). The Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages. None of the Bank’s municipal securities may be called before 2011. The average life of the portfolio is projected to be 2.5 years, with a duration of 2.2 years.
Deposits
Deposits are the primary source of funding for lending and investing needs. Total deposits were $165.4 million as of March 31, 2010, as compared with $163.8 million at December 31, 2009, and $161.1 million at March 31, 2009.
The Bank generally prices interest-bearing deposits at or above the median rate by classification based on periodic interest rate surveys in the local market. Deposit rates are then adjusted to balance the cost of funds versus funding needs and asset and liability considerations. The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for the first three months of 2010 and 2009.
The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC, up to $50 million. The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of nearly 3,000 banks with other network banks (in increments of less than the per-depositor FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet. The CDARS program has become very attractive since mid-year 2008, as local depositors sought out safety with yield often a secondary concern. As of March 31, 2010, the Bank had issued $45.9 million of certificates of deposit to local customers through the CDARS program, as compared with $50.8 million as of March 31, 2009.
On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”). The legislation was in response to the financial crises affecting the banking system and financial markets. EESA temporarily raised the basic limit on FDIC deposit
insurance coverage from $100,000 to $250,000 per depositor, and the FDIC has extended the $250,000 limit through the end of 2013. See also Effects of Inflation and Economic Issues below, for a discussion of the Emergency Economic Stabilization Act of 2008 (“EESA”), and its impact on the Company.
On October 14, 2008, the FDIC announced another temporary program (until December 31, 2009) to provide full FDIC insurance coverage for non-interest bearing transaction accounts, regardless of dollar amount. Management and the board of directors evaluated the additional cost of this optional insurance program and determined that it would be in the Bank’s best interest to provide this coverage to its depositors. The FDIC has extended the unlimited insurance coverage for non-interest bearing accounts through December 31, 2010, for institutions that chose to remain in program, and the Bank opted to remain in the program.
Borrowings
In addition to the Company’s junior subordinated debt securities, the Bank has borrowed funds from the Federal Home Loan Bank of San Francisco (“FHLB”). Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term certificates of deposit. Although the Bank expects to continue to have borrowings from the FHLB, the Bank paid down those borrowings by $29.3 million over the past twelve months.
As of March 31, 2010, borrowings from the FHLB totaled $6.0 million, with a weighted average interest rate of 5.01%. Of the $6.0 million, $3.0 million (at 5.13%) matures in the second quarter of 2010 and the remaining $3.0 million (at 4.89%) matures in the fourth quarter of 2013.
Capital
Total shareholders’ equity has decreased $6.8 million, or 27%, over the past twelve months. The decrease was the result of net losses, primarily due to substantial increases in loan loss provisions.
The following table shows the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at March 31, 2010, December 31, 2009, and March 31, 2009:
Mission Community Bank | ||||||||||||||||||||||||
Capital Ratios | Amount of Capital Required | |||||||||||||||||||||||
(dollars in thousands) | To Be | To Be Adequately | ||||||||||||||||||||||
Actual | Well-Capitalized | Capitalized | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2010: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 21,701 | 14.45 | % | $ | 15,023 | 10.0 | % | $ | 12,018 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 19,782 | 13.17 | % | $ | 9,014 | 6.0 | % | $ | 6,009 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 19,782 | 10.24 | % | $ | 9,663 | 5.0 | % | $ | 7,730 | 4.0 | % | ||||||||||||
As of December 31, 2009: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 22,053 | 14.22 | % | $ | 15,509 | 10.0 | % | $ | 12,407 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 20,069 | 12.94 | % | $ | 9,306 | 6.0 | % | $ | 6,204 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 20,069 | 9.59 | % | $ | 10,462 | 5.0 | % | $ | 8,369 | 4.0 | % | ||||||||||||
As of March 31, 2009: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 27,647 | 15.84 | % | $ | 17,459 | 10.0 | % | $ | 13,967 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 25,435 | 14.57 | % | $ | 10,475 | 6.0 | % | $ | 6,984 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 25,435 | 11.64 | % | $ | 10,930 | 5.0 | % | $ | 8,744 | 4.0 | % |
See also Effects of Inflation and Economic Issues below, for a discussion of EESA and its impact on the Company.
Liquidity
The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded. The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit. Cash and cash equivalents (primarily federal funds sold) are the primary means for providing immediate liquidity. The Bank had $13.9 million in cash and cash equivalents on March 31, 2010, as compared with $8.6 million as of December 31, 2009 and $31.2 million on March 31, 2009.
In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain an appropriate ratio of loans to deposits, and to maintain sufficient off-balance-sheet sources of funds which may be drawn upon when needed. For the month of March 2010, the Bank’s loans-to-deposits ratio was 77%. The sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 26% as of March 31, 2010.
One of the Bank’s off-balance-sheet sources of funds is potential borrowing capacity through the FHLB. FHLB borrowings are collateralized by loans and/or investments and can be structured over various terms ranging from overnight to ten years. As of March 31, 2010, the Bank had outstanding borrowings from the FHLB totaling $6.0 million. Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased. The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets. Based on this limitation and
loans and securities pledged as of March 31, 2010, an additional $25.2 million could be borrowed from the FHLB if needed. The Bank substantially reduced its FHLB borrowings in 2009, paying off $39.7 million in borrowings over the course of the year. FHLB borrowings may be used from time to time when needed as part of the Bank’s normal liquidity management to fund asset growth on a cost-effective basis. The Bank has adequate loans to pledge as collateral should it need additional liquidity that cannot be funded by deposits.
The Bank also has the ability to access the Federal Reserve Board’s “Discount Window” for additional secured borrowing should the need arise.
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers, including commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheet.
As of the dates indicated, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:
Loan Commitments | ||||||||||||
(in thousands) | March 31 | December 31 | March 31 | |||||||||
2010 | 2009 | 2009 | ||||||||||
Commitments to Extend Credit | $ | 18,610 | $ | 18,219 | $ | 24,403 | ||||||
Standby Letters of Credit | 301 | 301 | 304 | |||||||||
$ | 18,911 | $ | 18,520 | $ | 24,707 |
The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management has established a reserve for undisbursed loan commitments. As of March 31, 2010, and December 31, 2009, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheet.
The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements. The effect on the Bank’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted, as there is no guarantee the lines of credit will ever be used.
Effects of Inflation and Economic Issues
A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with
relatively little investments in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Management believes that the impact of inflation on financial results depends on the Company’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.
Though not officially declared, there are indications that the national economy may have begun a recovery phase. After a 20-consecutive-month downward trend, the Index of Leading Indicators has been positive for the past twelve consecutive months (thru March). The Index of Coincident Indicators turned positive in July 2009 (+0.1%) after six consecutive monthly declines, and has been flat or positive each subsequent month through March. Real Gross Domestic Product (“GDP”) grew by 2.2% in the third quarter of 2009, 5.6% in the fourth, and 3.2% in the first quarter 2010.
California’s statewide unemployment rate (seasonally adjusted) has risen from 10.6% in March 2009, to 12.3% in December and 12.6% in March 2010, although the state added 32,400 jobs in the first quarter. The unemployment rates for San Luis Obispo and Santa Barbara counties are below the state average but—at 10.6% and 10.1%, respectively (not seasonally adjusted)—they have now moved above the national average. The two counties in our primary market have the 8th and 4th lowest unemployment rates in the state, but real estate values have declined significantly since 2007. After several years of strong appreciation, residential and commercial sale activity—and especially construction activity—slowed dramatically. There can be no assurance that the local economy will rebound quickly or that real estate values will return to pre-recession levels in the near term. As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.
The EESA gave the U.S. Treasury the authority to, among other things; invest in preferred stock of financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. There can be no assurance, however, as to the ultimate impact the EESA will have on the financial markets. Although the extreme level of volatility experienced in the fourth quarter of 2008 has abated to a large extent and credit availability, while still limited, appears to be improving, if the EESA fails to achieve its goal to help stabilize the financial markets or if financial market conditions worsen, the Company’s financial condition or results of operations could be materially and adversely affected.
On October 14, 2008, the U.S. Treasury Department announced that it would utilize a portion of the EESA funding to directly purchase up to $250 billion of preferred stock in banks. Management and the board of directors evaluated the initial terms of this capital purchase program and determined that it would be in the Company’s best interests to apply for the maximum amount of capital that might be made available to the Company and submitted its application in November 2008. The Treasury Dept., in consultation with the Federal Reserve Bank of San Francisco, which serves as the primary federal regulator of the Bank, subsequently
determined that the Company was eligible for $5.1 million of capital, which was issued in the form of Series D preferred stock on January 9, 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared. Disclosure controls and procedures are 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 within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls over financial reporting in the Company’s fiscal quarter ended March 31, 2010.
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings |
There are no material legal proceedings to which the Company is a party or to which any of its property is subject.
Item 1A. | Risk Factors |
Not applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Reserved) |
Item 5. | Other Information |
None.
Item 6. Exhibits
Exhibit Index:
Exhibit # | ||
2.1 | Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A) | |
3.1 | Restated Articles of Incorporation (I) | |
3.2 | Certificate of Amendment to Articles of Incorporation (L) | |
3.3 | Bylaws, as amended (B),(S) | |
4.1 | Certificate of Determination for Series A Non-Voting Preferred Stock (B) | |
4.2 | Certificate of Determination for Series B Non-Voting Preferred Stock (B) | |
4.3 | Certificate of Determination for Series C Non-Voting Preferred Stock (D) | |
4.4 | Purchase Agreement dated October 10, 2003, by and among Registrant, Mission Community Capital Trust I, and Bear Stearns & Co., Inc. (E) | |
4.5 | Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (E) | |
4.6 | Declaration of Trust of Mission Community Capital Trust I dated October 10, 2003 (E) | |
4.7 | Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (E) | |
4.8 | Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (E) | |
4.9 | Fee Agreement dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Co., Bear Stearns & Co., Inc. and Mission Community Capital Trust I (E) | |
4.10 | Certificate of Determination for Series D Preferred Stock (R) | |
10.1 | Purchase and Sale Agreement and Lease dated January, 1997, as amended (B) | |
10.2 | Intentionally omitted | |
10.3 | Lease Agreement – Paso Robles (B) | |
10.4 | Lease Agreement – San Luis Obispo (B) | |
10.5 | Lease Agreement – Arroyo Grande (B) | |
10.6 | 1998 Stock Option Plan, as amended (B) | |
10.7 | Lease Agreement – 569 Higuera, San Luis Obispo (D) | |
10.8 | Lease Agreement – 671 Tefft Street, Nipomo CA (C) | |
10.9 | Intentionally omitted | |
10.10 | Lease Agreement – 3480 S. Higuera, San Luis Obispo (F) | |
10.11 | Salary Protection Agreement — Mr. Pigeon (G) | |
10.12 | Salary Protection Agreement — Mr. Judge (H) | |
10.13 | Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J) | |
10.14 | Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J) | |
10.15 | Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K) | |
10.16 | Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M) |
Exhibit # | ||
10.17 | Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N) | |
10.18 | Lease Agreement – 1670 South Broadway, Santa Maria (O) | |
10.19 | Mission Community Bancorp 2008 Stock Incentive Plan (P) | |
10.20 | Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q) | |
10.21 | Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q) | |
10.22 | Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q) | |
10.23 | Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which includes the Securities Purchase Agreement—Standard Terms attached thereto, with respect to the issuance and sale of the Series D Preferred Stock (R) | |
10.24 | Side Letter Agreement dated January 9, 2009 amending the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R) | |
10.25 | Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R) | |
10.26 | Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R) | |
10.27 | Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (U) | |
10.28 | Form of Warrant to be issued in connection with the Securities Purchase Agreement (U) | |
10.29 | Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (V) | |
10.30 | Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (W) | |
(A) Included in the Company’s Form 8-K filed on December 18, 2000 (B) Included in the Company’s Form 10-KSB filed on April 2, 2001 (C) Included in the Company’s Form 10-QSB filed August 12, 2002 (D) Included in the Company’s Form 10-QSB filed on November 12, 2002 (E) Included in the Company’s Form 8-K filed on October 21, 2003 (F) Included in the Company’s Form 10-QSB filed on August 10, 2004 (G) Included in the Company’s Form 8-K filed on January 19, 2005 (H) Included in the Company’s Form 8-K filed on February 17, 2005 (I) Included in the Company’s Form 10-QSB filed on August 14, 2006 (J) Included in the Company’s Form 8-K filed on June 13, 2007 (K) Included in the Form SB-2 Registration Statement of the Company filed on June 13, 2007 (L) Included in Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement of the Company filed on July 24, 2007 (M) Included in the Company’s Form 8-K filed on August 14, 2007 (N) Included in the Company’s Form 8-K filed on October 23, 2007 (O) Included in the Company’s Form 10-KSB filed on March 28, 2008 (P) Included in the Company’s Form 10-Q filed on May 15, 2008 (Q)Included in the Company’s Form 8-K filed on December 30, 2008 (R)Included in the Company’s Form 8-K filed on January 14, 2009 (S)Included in the Company’s Form 10-Q filed on August 14, 2009 (T)Included in the Company’s Form 10-K filed on March 16, 2009 (U)Included in the Company’s From 8-K filed on December 24, 2009 (V)Included in the Company’s Form 8-K filed on March 22, 2010 (W)Included in the Company’s Form 8-K filed on March 26, 2010 |
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MISSION COMMUNITY BANCORP
By: /s/ Anita M. Robinson
ANITA M. ROBINSON
President and Chief Executive Officer
Dated: June 15, 2010
By: /s/ Ronald B. Pigeon
RONALD B. PIGEON
Executive Vice President and Chief Financial Officer
Dated: June 15, 2010