SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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: 6,345,602 shares of common stock outstanding as of November 12, 2010.
Mission Community Bancorp
September 30, 2010
Index
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PART II – OTHER INFORMATION
PART I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets | ||||||||||||
Unaudited | ||||||||||||
(dollars in thousands) | ||||||||||||
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 19,335 | $ | 8,595 | $ | 20,536 | ||||||
Federal funds sold | - | - | - | |||||||||
Total cash and cash equivalents | 19,335 | 8,595 | 20,536 | |||||||||
Interest-bearing deposits in other banks | 400 | 425 | 575 | |||||||||
Investment securities available for sale | 60,222 | 40,142 | 41,257 | |||||||||
Loans held for sale | 15,147 | 904 | 234 | |||||||||
Loans, net of unearned income | 107,716 | 135,506 | 142,609 | |||||||||
Less allowance for loan losses | (3,573 | ) | (5,537 | ) | (3,539 | ) | ||||||
Net loans | 104,143 | 129,969 | 139,070 | |||||||||
Federal Home Loan Bank stock and other stock, at cost | 2,733 | 3,003 | 3,002 | |||||||||
Premises and equipment | 3,282 | 3,255 | 3,012 | |||||||||
Other real estate owned | 2,480 | 2,206 | 2,042 | |||||||||
Company owned life insurance | 2,956 | 2,886 | 2,861 | |||||||||
Accrued interest and other assets | 1,507 | 1,721 | 2,934 | |||||||||
Total Assets | $ | 212,205 | $ | 193,106 | $ | 215,523 | ||||||
Liabilities and Shareholders' Equity | ||||||||||||
Deposits: | ||||||||||||
Noninterest-bearing demand | $ | 22,214 | $ | 24,616 | $ | 24,812 | ||||||
Money market, NOW and savings | 59,871 | 54,144 | 52,565 | |||||||||
Time certificates of deposit | 83,536 | 85,010 | 90,446 | |||||||||
Total deposits | 165,621 | 163,770 | 167,823 | |||||||||
Other borrowings | 4,470 | 6,000 | 19,300 | |||||||||
Junior subordinated debt securities | 3,093 | 3,093 | 3,093 | |||||||||
Accrued interest and other liabilities | 1,769 | 1,605 | 1,512 | |||||||||
Total liabilities | 174,953 | 174,468 | 191,728 | |||||||||
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 | 5,068 | |||||||||
Common stock - 50,000,000 shares authorized; | ||||||||||||
Issued and outstanding: 6,345,602 at September 30, 2010; | ||||||||||||
and 1,345,602 issued and outstanding | ||||||||||||
at December 31, 2009 and September 30, 2009 | 42,860 | 18,042 | 18,042 | |||||||||
Additional paid-in capital | 294 | 242 | 224 | |||||||||
Retained earnings (deficit) | (13,200 | ) | (6,280 | ) | (1,041 | ) | ||||||
Accumulated other comprehensive income | 1,146 | 482 | 418 | |||||||||
Total shareholders' equity | 37,252 | 18,638 | 23,795 | |||||||||
Total Liabilities and Shareholders' Equity | $ | 212,205 | $ | 193,106 | $ | 215,523 |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiaries | ||||||||||||||||
Condensed Consolidated Statements of Operations | ||||||||||||||||
Unaudited | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Interest Income | ||||||||||||||||
Interest and fees on loans | $ | 1,853 | $ | 2,193 | $ | 5,841 | $ | 6,812 | ||||||||
Interest on investment securities | 344 | 349 | 957 | 937 | ||||||||||||
Other interest income | 14 | 11 | 31 | 122 | ||||||||||||
Total interest income | 2,211 | 2,553 | 6,829 | 7,871 | ||||||||||||
Interest Expense | ||||||||||||||||
Interest on money market, NOW and savings deposits | 113 | 117 | 349 | 398 | ||||||||||||
Interest on time certificates of deposit | 296 | 496 | 927 | 1,769 | ||||||||||||
Other interest expense | 79 | 254 | 264 | 999 | ||||||||||||
Total interest expense | 488 | 867 | 1,540 | 3,166 | ||||||||||||
Net interest income | 1,723 | 1,686 | 5,289 | 4,705 | ||||||||||||
Provision for loan losses | 350 | 875 | 5,800 | 1,556 | ||||||||||||
Net interest income after provision for loan losses | 1,373 | 811 | (511 | ) | 3,149 | |||||||||||
Non-interest income | ||||||||||||||||
Service charges on deposit accounts | 101 | 95 | 275 | 256 | ||||||||||||
Gain on sale of loans | 126 | 143 | 307 | 317 | ||||||||||||
Loan servicing fees, net of amortization | 38 | 34 | 111 | 82 | ||||||||||||
Grants and awards | - | 74 | - | 81 | ||||||||||||
Gain on sale of available-for-sale securities | - | 7 | 58 | 246 | ||||||||||||
Other income and fees | 40 | 42 | 126 | 112 | ||||||||||||
Total non-interest income | 305 | 395 | 877 | 1,094 | ||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 1,029 | 886 | 2,873 | 2,779 | ||||||||||||
Occupancy expenses | 318 | 196 | 933 | 528 | ||||||||||||
Furniture and equipment | 116 | 103 | 352 | 340 | ||||||||||||
Data processing | 187 | 187 | 551 | 566 | ||||||||||||
Professional fees | 183 | 117 | 501 | 382 | ||||||||||||
Marketing and business development | 26 | 36 | 81 | 106 | ||||||||||||
Office supplies and expenses | 59 | 57 | 177 | 193 | ||||||||||||
Insurance and regulatory assessments | 187 | 164 | 583 | 462 | ||||||||||||
Loan and lease expenses | 41 | 38 | 127 | 104 | ||||||||||||
Loss or writedown of other real estate | 4 | 69 | 454 | 69 | ||||||||||||
Provision for unfunded commitments | - | - | - | 35 | ||||||||||||
Other expenses | 205 | 117 | 462 | 430 | ||||||||||||
Total non-interest expense | 2,355 | 1,970 | 7,094 | 5,994 | ||||||||||||
(Loss) before income taxes | (677 | ) | (764 | ) | (6,728 | ) | (1,751 | ) | ||||||||
Income tax expense (benefit) | - | - | - | - | ||||||||||||
Net (loss) | $ | (677 | ) | $ | (764 | ) | $ | (6,728 | ) | $ | (1,751 | ) | ||||
Net income (loss) applicable to common stock | $ | (827 | ) | $ | (760 | ) | $ | (6,700 | ) | $ | (1,748 | ) | ||||
Per Common Share Data: | ||||||||||||||||
Net Income (Loss) - Basic | $ | (0.11 | ) | $ | (0.57 | ) | $ | (1.82 | ) | $ | (1.30 | ) | ||||
Average common shares outstanding - basic | 6,345,602 | 1,345,602 | 3,682,598 | 1,345,602 | ||||||||||||
Average common shares outstanding - diluted | N/A | N/A | N/A | N/A |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiaries | ||||||||||||||||||||||||||||||||
Condensed Consolidated Statements of Changes in Shareholders' Equity | ||||||||||||||||||||||||||||||||
(Unaudited - dollars in thousands) | ||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Comprehensive | Retained | Other | |||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Income | Earnings | Comprehensive | |||||||||||||||||||||||||||
Stock | Shares | Amount | Capital | (Loss) | (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 $48 | 5,068 | 5,068 | ||||||||||||||||||||||||||||||
Dividends declared and paid | ||||||||||||||||||||||||||||||||
on Series D preferred stock | (154 | ) | (154 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 52 | 52 | ||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Net (loss) | $ | (1,751 | ) | (1,751 | ) | (1,751 | ) | |||||||||||||||||||||||||
Less beginning of year unrealized | ||||||||||||||||||||||||||||||||
gain on securities sold during | ||||||||||||||||||||||||||||||||
the period, net of taxes of $-0- | (271 | ) | (271 | ) | (271 | ) | ||||||||||||||||||||||||||
Net unrealized gain on remaining | ||||||||||||||||||||||||||||||||
available-for-sale securities, | ||||||||||||||||||||||||||||||||
net of taxes of $291 | - | - | - | - | 334 | - | 334 | 334 | ||||||||||||||||||||||||
Total comprehensive income (loss) | $ | (1,688 | ) | |||||||||||||||||||||||||||||
Balance at September 30, 2009 | $ | 6,152 | 1,345,602 | $ | 18,042 | $ | 224 | $ | (1,041 | ) | $ | 418 | $ | 23,795 | ||||||||||||||||||
Balance at January 1, 2010 | $ | 6,152 | 1,345,602 | $ | 18,042 | $ | 242 | $ | (6,280 | ) | $ | 482 | $ | 18,638 | ||||||||||||||||||
Issuance of common stock | ||||||||||||||||||||||||||||||||
in private placement, | ||||||||||||||||||||||||||||||||
net of issuance costs of $182 | 5,000,000 | 24,818 | 24,818 | |||||||||||||||||||||||||||||
Dividends declared and paid | ||||||||||||||||||||||||||||||||
on Series D preferred stock | (192 | ) | (192 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 52 | 52 | ||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Net (loss) | $ | (6,728 | ) | (6,728 | ) | (6,728 | ) | |||||||||||||||||||||||||
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- | - | - | - | - | 686 | - | 686 | 686 | ||||||||||||||||||||||||
Total comprehensive income (loss) | $ | (6,064 | ) | |||||||||||||||||||||||||||||
Balance at September 30, 2010 | $ | 6,152 | 6,345,602 | $ | 42,860 | $ | 294 | $ | (13,200 | ) | $ | 1,146 | $ | 37,252 |
The accompanying notes are an integral part of these consolidated financial statements.
Mission Community Bancorp and Subsidiaries | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
(Unaudited - dollars in thousands) | ||||||||
For the Nine Months Ended | ||||||||
September 30, 2010 | September 30, 2009 | |||||||
Operating Activities | ||||||||
Net (loss) | $ | (6,728 | ) | $ | (1,751 | ) | ||
Adjustments to reconcile net (loss) to net | ||||||||
cash provided by (used in) operating activities: | ||||||||
Depreciation | 384 | 326 | ||||||
Accretion of discount on securities and loans, net | 28 | (82 | ) | |||||
Provision for credit losses | 5,800 | 1,556 | ||||||
Provision for losses on unfunded loan commitments | - | 35 | ||||||
Stock-based compensation | 52 | 52 | ||||||
Gain on sale of securities | (58 | ) | (246 | ) | ||||
Gain on loan sales | (307 | ) | (317 | ) | ||||
Writedown of other real estate owned | 454 | 69 | ||||||
Increase in company-owned life insurance | (70 | ) | (72 | ) | ||||
Net increase in accrued taxes receivable | (3 | ) | - | |||||
Other, net | 381 | (409 | ) | |||||
Proceeds from loan sales | 6,363 | 5,691 | ||||||
Loans originated for sale | (5,108 | ) | (4,547 | ) | ||||
Net cash provided by operating activities | 1,188 | 305 | ||||||
Investing Activities | ||||||||
Net change in Federal Home Loan Bank and other stock | 269 | (246 | ) | |||||
Net decrease in deposits in other banks | 25 | 11,135 | ||||||
Purchase of available-for-sale securities | (39,822 | ) | (32,442 | ) | ||||
Proceeds from maturities, calls and paydowns of available-for-sale securities | 14,765 | 7,510 | ||||||
Proceeds from sales of available-for-sale securities | 5,622 | 9,134 | ||||||
Net decrease in loans | 3,134 | 6,622 | ||||||
Purchases of premises and equipment | (412 | ) | (739 | ) | ||||
Proceeds from sale of other real estate owned | 1,024 | - | ||||||
Net cash provided by (used in) investing activities | (15,395 | ) | 974 | |||||
Financing Activities | ||||||||
Net increase in demand deposits and savings accounts | 3,325 | 21,907 | ||||||
Net increase (decrease) in time deposits | (1,474 | ) | 1,112 | |||||
Net (decrease) in other borrowings | (1,530 | ) | (26,400 | ) | ||||
Proceeds from issuance of common stock in private placement, net | 24,818 | - | ||||||
Proceeds from issuance of preferred stock under TARP-CPP, net | - | 5,068 | ||||||
Payment of TARP-CPP dividends | (192 | ) | (154 | ) | ||||
Net cash provided by financing activities | 24,947 | 1,533 | ||||||
Net increase in cash and cash equivalents | 10,740 | 2,812 | ||||||
Cash and cash equivalents at beginning of year | 8,595 | 17,724 | ||||||
Cash and cash equivalents at end of period | $ | 19,335 | $ | 20,536 | ||||
Non-cash changes: | ||||||||
Real estate acquired by foreclosure | $ | 1,752 | 1,127 | |||||
Loans reclassified to held for sale | 16,689 | - | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | 1,595 | 3,312 | ||||||
Taxes paid | 2 | - |
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 subsidiaries, Mission Community Bank (“the Bank”) and Mission Asset Management, Inc. (“MAM”), 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 and nine-month periods ended September 30, 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.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits. The Bank is participating in the FDIC’s Transaction Account Guarantee Program (“TAGP”). Under the TAGP, through December 31, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules. On July 1, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently raised the current standard maximum deposit insurance amount to $250,000 and extended full deposit insurance coverage for non-interest bearing transaction accounts to December 31, 20 12.
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 nine-month periods ended September 30, 2010 and 2009, the Bank recognized pre-tax stock-based compensation expense of $52,000 and $52,000, respectively. As of September 30, 2010, the Company has unvested options outstanding with unrecognized compensation expense totaling $362,000, which is scheduled to be recognized as follows (in thousands):
October 1 through December 31, 2010 $ 33
2011 133
2012 133
2013 63
Total unrecognized compensation cost $362
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 | |||||||||||||
September 30, 2010: | ||||||||||||||||
U.S. Government agencies | $ | 15,911 | $ | 275 | $ | - | $ | 16,186 | ||||||||
Mortgage-backed securities | 37,294 | 753 | (73 | ) | 37,974 | |||||||||||
Municipal securities | 2,917 | 144 | - | 3,061 | ||||||||||||
Corporate debt securities | 2,954 | 47 | - | 3,001 | ||||||||||||
Asset-backed securities | - | - | - | - | ||||||||||||
$ | 59,076 | $ | 1,219 | $ | (73 | ) | $ | 60,222 | ||||||||
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 September 30, 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 | $ | 3,003 | $ | 3,049 | ||||
Due in one year to five years | 14,427 | 14,664 | ||||||
Due in five years to ten years | 13,806 | 14,132 | ||||||
Due in greater than ten years | 27,840 | 28,377 | ||||||
$ | 59,076 | $ | 60,222 |
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 | |||||||||||||||||||
September 30, 2010: | ||||||||||||||||||||||||
U.S. Government agencies | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Mortgage-backed securities | 11,307 | 73 | - | - | 11,307 | 73 | ||||||||||||||||||
Municipal securities | - | - | - | - | - | - | ||||||||||||||||||
Corporate debt securities | - | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | ||||||||||||||||||
$ | 11,307 | $ | 73 | $ | - | $ | - | $ | 11,307 | $ | 73 | |||||||||||||
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 September 30, 2010, seven 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 changes in market interest 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 September 30, 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 se curities 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 September 30, 2010 are other than temporarily impaired.
During the third quarter of 2009, the Bank sold $1,408,000 of investment securities for gross gains of $7,000. No securities were sold in the third quarter of 2010. For the first nine months of 2010 and 2009, $5,564,000 and $9,134,000 of securities were sold for gross gains of $58,000 and $246,000, respectively. None were sold at a loss in the first nine months of either 2010 or 2009.
As of September 30, 2010, investment securities carried at $6,510,000 and $4,790,000, were pledged to secure public deposits, as required by law, and borrowings from the Federal Home Loan Bank of San Francisco, respectively.
Note 4 — Loans
The Company’s loan portfolio consists primarily of loans to borrowers within the Central Coast area of California. Although the Company 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 Company’s market area and, as a result, the loan and collateral portfolios are concentrated in those industries and in that geographic area.
The following table shows the composition of the Company’s loans by type:
Loan Composition | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||
Commercial | $ | 19,728 | 16.1 | % | $ | 19,633 | 14.4 | % | $ | 21,458 | 15.0 | % | ||||||||||||
Agricultural | 403 | 0.3 | % | 750 | 0.5 | % | - | 0.0 | % | |||||||||||||||
Leases, net of unearned income | 1,110 | 0.9 | % | 1,335 | 1.0 | % | 1,452 | 1.0 | % | |||||||||||||||
Municipal loans | 2,991 | 2.4 | % | 3,476 | 2.5 | % | 2,483 | 1.8 | % | |||||||||||||||
Real estate | 88,408 | 72.0 | % | 96,956 | 71.1 | % | 102,082 | 71.5 | % | |||||||||||||||
Construction | 8,752 | 7.1 | % | 12,512 | 9.2 | % | 12,158 | 8.5 | % | |||||||||||||||
Consumer | 1,471 | 1.2 | % | 1,748 | 1.3 | % | 3,210 | 2.2 | % | |||||||||||||||
Total loans | $ | 122,863 | 100.0 | % | $ | 136,410 | 100.0 | % | $ | 142,843 | 100.0 | % |
Loans and leases, other than those held for sale, are carried at the principal amount outstanding, net of any deferred loan origination fee income and deferred direct loan origination costs, and net of any unearned interest on discounted loans. A separate allowance for loan and lease losses is provided for loans not held for sale. Loans held for sale are carried at the lower of cost or fair value, with no allowance for loan losses. The table above includes $15,147,000 of loans held for sale, as follows: commercial $63,000; real estate $10,333,000; and construction $4,751,000.
As of September 30, 2010, and December 31, 2009, loans totaling $68,020,000 and $114,308,000, were pledged to secure borrowings and potential borrowings from the Federal Home Loan Bank of San Francisco, respectively.
Included in commercial loans at September 30, 2010 are $1,469,000 in SBA loans that have been sold but are subject to a 90-day premium refund obligation. In accordance with new accounting standards for loan sales, as more fully described in Note 8, we have recorded the proceeds from the sale of those SBA loans as secured borrowings (included in other borrowings on the consolidated balance sheet). Once the premium refund obligation period has elapsed, the transaction will be recorded as a sale, with the sold loans and the secured borrowings removed from the balance sheet and the resulting gain on sale ($124,000) recorded in the consolidated statement of operations.
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:
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||
Impaired loans: | ||||||||||||
Impaired loans with a related allowance for loan losses | $ | 2,757,461 | $ | 672,355 | $ | 4,737,299 | ||||||
Impaired loans with no related allowance for loan losses | 6,162,748 | 5,721,257 | 1,501,726 | |||||||||
Total impaired loans | $ | 8,920,209 | $ | 6,393,612 | $ | 6,239,025 | ||||||
Related allowance for loan losses | $ | 114,308 | $ | 66,821 | $ | 647,980 | ||||||
Average recorded investment in impaired loans | 7,438,780 | 6,312,843 | 6,292,651 | |||||||||
Interest income recognized for cash payments while impaired | 163,540 | 184,492 | 163,299 | |||||||||
Total loans on non-accrual | 8,920,209 | 5,891,045 | 6,637,000 | |||||||||
Total loans past due 90 days or more and still accruing | - | - | 910,000 |
Following is a summary of the changes in the allowance for loan and lease losses for the nine-month periods ended September 30:
September 30, 2010 | September 30, 2009 | |||||||
Balance at beginning of year | $ | 5,536,929 | $ | 3,942,220 | ||||
Additions to the allowance charged to expense | 5,800,000 | 1,555,722 | ||||||
Less loans charged off | (7,803,805 | ) | (1,993,065 | ) | ||||
Plus recoveries on loans previously charged off | 39,815 | 34,274 | ||||||
Balance at end of period | $ | 3,572,939 | $ | 3,539,151 |
Note 5 — Shareholders’ Equity and Earnings Per Share
Common Stock
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 five years from issuance at an exercise price of $5.00 per share and contain customary anti-dilution provisions.
On June 15, 2010, the Investors purchased an aggregate of 3,000,000 additional 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 under the Securities Purchase Agreement (the “Second Closing”), for an aggregate purchase price of $15 million.
The Company used a substantial majority of the proceeds from the Second Closing 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.
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 Second Closing, the Manager is the beneficial owner of 5,333,334 shares of the common stock of the Company (not including warrants) or 84.0% of the issued and outstanding shares.
The Securities Purchase Agreement further provided that the Company would conduct a rights offering to its existing shareholders, pursuant to which each shareholder would 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 commenced on October 8, 2010, and is scheduled to close on December 15, 2010.
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.
Earnings per Share
The following table shows the calculation of earnings (loss) per common share and the allocation of the Company’s net loss among common stock and the various classes of preferred stock:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | |||||||||||||
Net income (loss) | $ | (678,122 | ) | $ | (764,478 | ) | $ | (6,727,524 | ) | $ | (1,751,362 | ) | ||||
Less net income (loss) allocated to preferred stock: | ||||||||||||||||
Convertible preferred (Series A & C) | (11,476 | ) | (56,505 | ) | (181,940 | ) | (129,926 | ) | ||||||||
Non-convertible preferred (Series B) | (2,353 | ) | (11,584 | ) | (37,298 | ) | (26,635 | ) | ||||||||
TARP preferred (Series D) | 63,950 | 63,950 | 191,850 | 153,480 | ||||||||||||
Net income (loss) allocated to all classes of preferred stock | 50,121 | (4,139 | ) | (27,388 | ) | (3,081 | ) | |||||||||
Income (loss) allocated to common stock | $ | (728,243 | ) | $ | (760,339 | ) | $ | (6,700,136 | ) | $ | (1,748,281 | ) | ||||
Average common shares outstanding | 6,345,602 | 1,345,602 | 3,682,598 | 1,345,602 | ||||||||||||
Basic earnings (loss) per common share | $ | (0.11 | ) | $ | (0.57 | ) | $ | (1.82 | ) | $ | (1.30 | ) |
No presentation of diluted earnings (loss) per common share has been presented because the result would be anti-dilutive.
Note 6 —Income taxes
The Company recognized no income tax expense or benefit for the nine months ended September 30, 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 Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company 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. Valuation techniques include management’s judgment, which may be a significant factor. |
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 Company’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 | |||||||||||||||
September 30, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government agencies | $ | - | $ | 16,186 | $ | - | $ | 16,186 | ||||||||
Mortgage-backed securities | - | 37,974 | - | 37,974 | ||||||||||||
Municipal securities | - | 3,061 | - | 3,061 | ||||||||||||
Corporate debt securities | - | 3,001 | - | 3,001 | ||||||||||||
Asset-backed securities | - | - | - | - | ||||||||||||
Total available-for-sale securities | - | 60,222 | - | 60,222 | ||||||||||||
Loans held for sale | - | - | 15,147 | 15,147 | ||||||||||||
December 31, 2009 | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government agencies | $ | - | $ | 15,468 | $ | - | $ | 15,468 | ||||||||
Mortgage-backed securities | - | 16,835 | - | 16,835 | ||||||||||||
Municipal securities | - | 2,973 | - | 2,973 | ||||||||||||
Corporate debt securities | - | 2,988 | - | 2,988 | ||||||||||||
Asset-backed securities | - | 1,869 | 9 | 1,878 | ||||||||||||
Total 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 nine mon ths ended September 30, 2010.
Loans held for sale that are carried at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary. Those loans are valued by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows to MAM, including collateral liquidation if repayment weaknesses exist.
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
(in thousands) | Current | |||||||||||||||||||
Period | ||||||||||||||||||||
Fair Value Measurements Using | Gains | |||||||||||||||||||
September 30, 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 | $ | - | $ | - | $ | 2,267 | $ | 2,267 | $ | (580 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | 2,480 | $ | 2,480 | $ | (454 | ) | ||||||||||
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 nine months of 2010 and 2009:
(in thousands) | Level 3 Securities Available for Sale and Loans Held for Sale | |||||||
Nine Months Ended September 30 | ||||||||
2010 | 2009 | |||||||
Balance at beginning of year | $ | 9 | $ | 32 | ||||
Securities transfered into Level 3 | - | 92 | ||||||
Loans held for sale transfered into Level 3 | 16,689 | - | ||||||
Unrealized gains (losses) | ||||||||
included in other comprehensive income (loss) | - | - | ||||||
Purchases | - | - | ||||||
Settlements - principal reductions in loans held for sale | (1,493 | ) | - | |||||
Securities valuation reserve | (9 | ) | (110 | ) | ||||
Loans held for sale valuation reserve | (49 | ) | - | |||||
Balance at end of period | $ | 15,147 | $ | 14 |
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 receivab le 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:
September 30, 2010 | December 31, 2009 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial Assets: | ||||||||||||||||
Cash and due from banks | $ | 19,335 | $ | 19,335 | $ | 8,595 | $ | 8,595 | ||||||||
Interest-bearing deposits in other banks | 400 | 400 | 425 | 425 | ||||||||||||
Investment securities | 60,222 | 60,222 | 40,142 | 40,142 | ||||||||||||
Loans held for sale | 15,147 | 15,147 | 904 | 904 | ||||||||||||
Loans, net of allowance for loan and lease losses | 104,143 | 106,524 | 129,969 | 131,859 | ||||||||||||
Federal Home Loan Bank and other stocks | 2,733 | 2,733 | 3,003 | 2,814 | ||||||||||||
Company owned life insurance | 2,956 | 2,956 | 2,886 | 2,932 | ||||||||||||
Accrued interest receivable | 770 | 770 | 824 | 876 | ||||||||||||
Financial Liabilities: | ||||||||||||||||
Deposits | 165,621 | 166,545 | 163,770 | 164,174 | ||||||||||||
Other borrowings | 4,469 | 4,813 | 6,000 | 6,259 | ||||||||||||
Junior subordinated debt securities | 3,093 | 1,323 | 3,093 | 3,090 | ||||||||||||
Accrued interest and other liabilities | 1,769 | 1,769 | 1,605 | 1,605 |
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 was effective as of the beginning of the first annual reporting period th at began 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.
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’s response to issues entities have encountered when applying ASC 860, including: (1) requiring that all arrangements made in connection with a transfer of financial assets be considered in the derecognition analysis, (2) clarifying when a transferred asset is considered legally isolated from the transferor, (3) modifying the requirements related to a
transferee’s ability to freely pledge or exchange transferred financial assets, and (4) providing guidance on when a portion of a financial asset can be derecognized. This update was effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that began 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 an d 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 impact 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.
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued Accounting Standards Update 2010-20, “Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This standard will require the Company to expand disclosures about the credit quality of the Company’s loans and the related reserves against them. The extra disclosures will include disaggregated matters related to our past due loans, credit quality indicators, and modifications of loans. The Company will adopt the standard beginning with the December 31, 2010 financial statements. This standard will not have an impact on the Company’s financial position or results of operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Overview of Results of Operations and Financial Condition
· | The Company incurred a net loss of $(677) thousand for the third quarter of 2010, as compared with a net loss of $(695) thousand for the third quarter of 2009. For the first nine months of 2010 the Company’s net loss was $(6.728) million, as compared to $(1.682) million for the first nine months of 2009. The factors resulting in these losses will be discussed below. |
· | During the first half of 2010 the Bank reclassified $22.2 million of lower-quality loans (including $10.1 million of nonaccrual loans) to “held for sale,” writing down the value of those loans by $5.488 million through charge-offs to the allowance for loan losses. |
· | The third quarter 2010 provision for loan losses represents a decrease of $525 thousand from the third quarter of 2009. For the first nine months of 2010 the loan loss provision increased $4.244 million over the comparable period in 2009. |
· | Net interest income for the three-month period ended September 30, 2010, was $1.723 million, an increase of $38 thousand, or 2%, from the same period in 2009, primarily due to a $18 million decrease in the average balance of borrowed funds, but also due to declining rates on certificates of deposit. For the first nine months of 2010 net interest income increased by $584 thousand, or 12%, from the first nine months of 2009. |
· | The net interest margin (net interest income as a percentage of average interest earning assets) increased by 22 basis points, to 3.48%, for the three-month period ended |
September 30, 2010, as compared to the same period in 2009. For the nine-month period the net interest margin increased by 75 basis points. |
· | For the three months ended September 30, 2010, non-interest income decreased by $90 thousand (or 23%) from the same period in 2009. Non-interest income for the first nine months of 2010 was down $217 thousand (20%) from the first nine months of 2009. The decreases were primarily due to reduced sales of securities, as well as decreases in gains on sales of loans. |
· | Non-interest expense increased by $454 thousand (24%) for the third quarter of 2010, as compared to the third quarter of 2009. For the first nine months of 2010, non-interest expense increased $1.169 million (20%) as compared to the same period a year ago. Principal factors relating to the increase were losses and writedowns on other foreclosed real estate, increased occupancy expenses, FDIC insurance assessments and salaries and benefits. |
· | During the second quarter of 2010 the Company issued 5,000,000 shares of common stock in a private placement, raising $24.8 million of new capital (net of issuance costs). |
· | Total assets increased by $19.1 million from December 31, 2009 to September 30, 2010. Total loans decreased by $13.5 million over that period, while deposits increased by $1.9 million. |
· | Non-performing assets increased from $8.4 million as of December 31, 2009 to $10.8 million on September 30, 2010. |
Income Summary
For the three months ended September 30, 2010, the Company incurred a net loss of $(677) thousand. This compares with a net loss of $(695) thousand for the comparable period of 2009. For the first nine months of 2010 the Company’s net loss was $(6.728) million, as compared to $(1.682) million for the first nine months of 2009.
Return (loss) on average assets (annualized) was (0.65)% for the third quarter of 2010, as compared with (0.71)% for the third quarter of 2009. For the first nine months of 2010 the return (loss) on average assets was (4.47)%, as compared to (1.07)% for the first nine months of 2009.
Annualized return (loss) on average equity was (3.56)% for the third quarter of 2010 as compared with (6.21)% for the comparable 2009 period. For the nine months, the (loss) on average assets was (31.41)% in 2010, as compared to (9.53)% for the first nine months of 2009.
Net Interest Income
Net interest income is the largest source of the Bank’s operating income. For the three-month period ended September 30, 2010, net interest income was $1.723 million, an increase of $38 thousand, or 2%, from the same period in 2009, primarily due to a $18 million decrease in the volume of borrowed funds, but also due to declining rates on certificates of deposit. For the first
nine months of 2010 net interest income increased by $584 thousand, or 12%, from the first nine months of 2009, primarily due to lower funding costs.
The net interest margin (net interest income as a percentage of average interest earning assets) was 3.48% for the three-month period ended September 30, 2010, an increase of 22 basis points as compared to the same period in 2009. For the nine-month period the net interest margin increased by 75 basis points. Short-term interest rates dropped steeply in 2008, stabilized in 2009 and have remained 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. Partially offsetting the beneficial impact of lower interest expense has been a reduction in interest income on loans, as demand for quality credits has d iminished and the balance of non-accrual loans has increased during the recession.
The following tables show 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 and nine-month periods ended September 30, 2010 and 2009:
(Dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income* | $ | 125,352 | $ | 1,853 | 5.87 | % * | $ | 147,411 | $ | 2,193 | 5.90 | % * | ||||||||||||
Investment securities* | 50,228 | 344 | 2.72 | % * | 42,452 | 349 | 3.26 | % * | ||||||||||||||||
Federal funds sold | - | - | - | 9 | - | 0.51 | % | |||||||||||||||||
Other interest income | 21,180 | 15 | 0.27 | % | 15,405 | 11 | 0.29 | % | ||||||||||||||||
Total interest-earning assets / interest income | 196,760 | 2,212 | 4.46 | % | 205,277 | 2,553 | 4.93 | % | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (3,612 | ) | (3,404 | ) | ||||||||||||||||||||
Cash and due from banks | 3,077 | 2,878 | ||||||||||||||||||||||
Premises and equipment | 3,312 | 2,864 | ||||||||||||||||||||||
Other assets | 8,704 | 8,532 | ||||||||||||||||||||||
Total assets | $ | 208,241 | $ | 216,147 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Transaction accounts | $ | 15,520 | $ | 29 | 0.74 | % | $ | 14,147 | $ | 34 | 0.95 | % | ||||||||||||
Savings and Money Market deposit accounts | 37,760 | 85 | 0.89 | % | 33,327 | 83 | 0.99 | % | ||||||||||||||||
Certificates of deposit | 86,459 | 296 | 1.36 | % | 93,296 | 496 | 2.11 | % | ||||||||||||||||
Total interest-bearing deposits | 139,739 | 410 | 1.16 | % | 140,770 | 613 | 1.73 | % | ||||||||||||||||
Other short-tems borrowings | 1,106 | 14 | 4.91 | % | 10 | - | 0.00 | % | ||||||||||||||||
Federal Home Loan Bank advances | 3,000 | 37 | 4.89 | % | 21,963 | 227 | 4.10 | % | ||||||||||||||||
Trust preferred securities | 3,093 | 27 | 3.52 | % | 3,093 | 27 | 3.51 | % | ||||||||||||||||
Total borrowed funds | 7,199 | 78 | 4.31 | % | 25,066 | 254 | 4.03 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense | 146,938 | 488 | 1.32 | % | 165,836 | 867 | 2.07 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 21,839 | 23,968 | ||||||||||||||||||||||
Other liabilities | 1,554 | 1,313 | ||||||||||||||||||||||
Total liabilities | 170,331 | 191,117 | ||||||||||||||||||||||
Shareholders' equity | 37,910 | 25,030 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 208,241 | $ | 216,147 | ||||||||||||||||||||
Net interest-rate spread | 3.14 | % | 2.86 | % | ||||||||||||||||||||
Impact of non-interest-bearing | ||||||||||||||||||||||||
sources and other changes in | ||||||||||||||||||||||||
balance sheet composition | 0.34 | % | 0.40 | % | ||||||||||||||||||||
Net interest income / margin on earning assets | $ | 1,724 | 3.48 | % ** | $ | 1,686 | 3.26 | % ** | ||||||||||||||||
*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 |
Net Interest Analysis | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Nine Months Ended | ||||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income* | $ | 130,740 | $ | 5,841 | 5.97 | % * | $ | 151,708 | $ | 6,812 | 6.00 | % * | ||||||||||||
Investment securities* | 43,321 | 957 | 2.95 | % * | 34,375 | 937 | 3.64 | % * | ||||||||||||||||
Federal funds sold | - | - | - | 9,919 | 16 | 0.21 | % | |||||||||||||||||
Other interest income | 15,017 | 31 | 0.28 | % | 14,588 | 107 | 0.98 | % | ||||||||||||||||
Total interest-earning assets / interest income | 189,078 | 6,829 | 4.83 | % | 210,590 | 7,872 | 5.00 | % | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (4,501 | ) | (3,697 | ) | ||||||||||||||||||||
Cash and due from banks | 3,799 | 2,751 | ||||||||||||||||||||||
Premises and equipment | 3,341 | 2,721 | ||||||||||||||||||||||
Other assets | 9,510 | 7,407 | ||||||||||||||||||||||
Total assets | $ | 201,227 | $ | 219,772 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 18,483 | $ | 107 | 0.77 | % | $ | 10,652 | $ | 108 | 1.35 | % | ||||||||||||
Savings and Money Market deposit accounts | 36,025 | 242 | 0.90 | % | 29,131 | 290 | 1.33 | % | ||||||||||||||||
Certificates of deposit | 85,369 | 927 | 1.45 | % | 96,420 | 1,769 | 2.45 | % | ||||||||||||||||
Total interest-bearing deposits | 139,877 | 1,276 | 1.22 | % | 136,203 | 2,167 | 2.13 | % | ||||||||||||||||
Other short-tems borrowings | 413 | 15 | 5.02 | % | 13 | - | 0.61 | % | ||||||||||||||||
Federal Home Loan Bank advances | 4,571 | 171 | 4.99 | % | 31,886 | 909 | 3.81 | % | ||||||||||||||||
Trust preferred securities | 3,093 | 78 | 3.36 | % | 3,093 | 91 | 3.91 | % | ||||||||||||||||
Total borrowed funds | 8,077 | 264 | 4.36 | % | 34,992 | 1,000 | 3.82 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense | 147,954 | 1,540 | 1.39 | % | 171,195 | 3,167 | 2.47 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 22,914 | 22,288 | ||||||||||||||||||||||
Other liabilities | 1,720 | 1,203 | ||||||||||||||||||||||
Total liabilities | 172,588 | 194,686 | ||||||||||||||||||||||
Shareholders' equity | 28,639 | 25,086 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 201,227 | $ | 219,772 | ||||||||||||||||||||
Net interest-rate spread | 3.44 | % | 2.53 | % | ||||||||||||||||||||
Impact of non-interest-bearing | ||||||||||||||||||||||||
sources and other changes in | ||||||||||||||||||||||||
balance sheet composition | 0.30 | % | 0.46 | % | ||||||||||||||||||||
Net interest income / margin on earning assets | $ | 5,289 | 3.74 | % ** | $ | 4,705 | 2.99 | % ** | ||||||||||||||||
*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 tables 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 and nine-month periods ended September 30, 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 September 30, 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 | $ | (327 | ) | $ | (13 | ) | $ | (340 | ) | |||
Investment securities | 58 | (63 | ) | (5 | ) | |||||||
Federal funds sold | - | - | - | |||||||||
Other interest income | 4 | - | 4 | |||||||||
Total increase (decrease) in interest income | (265 | ) | (76 | ) | (341 | ) | ||||||
Interest-bearing liabilities: | ||||||||||||
Transaction accounts | 3 | (8 | ) | (5 | ) | |||||||
Savings deposits | 10 | (8 | ) | 2 | ||||||||
Certificates of deposit | (34 | ) | (166 | ) | (200 | ) | ||||||
Total interest-bearing deposits | (21 | ) | (182 | ) | (203 | ) | ||||||
Other short-term borrowings | - | 14 | 14 | |||||||||
FHLB advances | (227 | ) | 37 | (190 | ) | |||||||
Trust preferred securities | - | - | - | |||||||||
Total borrowed funds | (227 | ) | 51 | (176 | ) | |||||||
Total increase (decrease) in interest expense | (248 | ) | (131 | ) | (379 | ) | ||||||
Increase (decrease) in net interest income | $ | (17 | ) | $ | 55 | $ | 38 |
Rate / Volume Variance Analysis | ||||||||||||
(In thousands) | Nine Months Ended September 30, 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 | $ | (937 | ) | $ | (34 | ) | $ | (971 | ) | |||
Investment securities | 217 | (197 | ) | 20 | ||||||||
Federal funds sold | (16 | ) | - | (16 | ) | |||||||
Other interest income | 3 | (79 | ) | (76 | ) | |||||||
Total increase (decrease) in interest income | (733 | ) | (310 | ) | (1,043 | ) | ||||||
Interest-bearing liabilities: | ||||||||||||
Transaction accounts | 58 | (59 | ) | (1 | ) | |||||||
Savings deposits | 59 | (107 | ) | (48 | ) | |||||||
Certificates of deposit | (185 | ) | (657 | ) | (842 | ) | ||||||
Total interest-bearing deposits | (68 | ) | (823 | ) | (891 | ) | ||||||
Other short-term borrowings | 12 | 3 | 15 | |||||||||
FHLB advances | (955 | ) | 217 | (738 | ) | |||||||
Trust preferred securities | - | (13 | ) | (13 | ) | |||||||
Total borrowed funds | (943 | ) | 207 | (736 | ) | |||||||
Total increase (decrease) in interest expense | (1,011 | ) | (616 | ) | (1,627 | ) | ||||||
Increase (decrease) in net interest income | $ | 278 | $ | 306 | $ | 584 |
The tables above reflect the impact of lower rates paid on deposit accounts, the $19 million reduction in average FHLB borrowings ($27 million reduction for the nine months) and the $7 million reduction in average certificates of deposit over the past year ($11 million for the nine months), partially 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 $4 million in core deposit growth ($15 million for the nine months) and a $22 million contraction in outstanding loans ($21 million for the nine months). 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 the remainder of 2010 and well into 2011. If so, we expect to see certificate of deposit rates continue to decline to a greater degree than loan rates, continuing to improve our 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. A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the comi ng months. Additional non-accrual loans would put downward pressure on the net interest margin.
Provision for Loan Losses
The Bank recorded a $350 thousand provision for loan losses for the three months ended September 30, 2010, as compared with a $875 thousand provision for the third quarter of 2009. For the first nine months of 2010 the loan loss provision was $5.800 million, as compared to $1.556 million for the comparable period in 2009.
During the second quarter of 2010 the Bank reclassified $22.2 million of lower-quality loans (including $10.1 million of nonaccrual loans) to “held for sale.” Generally accepted accounting principles call for loans held for sale to be carried at the lower of cost or fair value. Therefore, in conjunction with the reclassification, the Bank wrote down the value of those loans by $5.488 million, through charge-offs to the allowance for loan losses.
The loan charge-offs did not directly affect net income but $5.250 million in loan loss provision was required to replenish the allowance for loan and lease losses to the appropriate level following the substantial level of charge-offs as a result of the reclassification to held for sale.
Loan charge-offs totaled $516 thousand (with $8 thousand in recoveries) for the third quarter of 2010, as compared with $850 thousand of charge-offs and $10 thousand of recoveries for the same period in 2009. The ratio of allowance for loan losses to total loans was 2.91% at September 30, 2010, as compared to 2.48% a year ago and 4.06% as of December 31, 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 collectability of loans in the portfolio.
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 September 30, 2010, non-interest income was $305 thousand, a decrease of $90 thousand, or 23%, from the same period in 2009. For the first nine months of 2010, non-interest income totaled $877 thousand, as compared to $1.094 million for 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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
$ Amount | Change | $ Amount | Change | |||||||||||||||||||||||||||||
2010 | 2009 | $ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 101 | $ | 95 | $ | 6 | 6 | % | $ | 275 | $ | 256 | $ | 19 | 7 | % | ||||||||||||||||
Gain on sale of loans | 126 | 143 | (17 | ) | -12 | % | 307 | 317 | (10 | ) | -3 | % | ||||||||||||||||||||
Loan servicing fees, net of amortization | 38 | 34 | 4 | 12 | % | 111 | 82 | 29 | 35 | % | ||||||||||||||||||||||
Grants and awards | - | 74 | (74 | ) | -100 | % | - | 81 | (81 | ) | -100 | % | ||||||||||||||||||||
Gain on sale of available-for-sale securities | - | 7 | (7 | ) | -100 | % | 58 | 246 | (188 | ) | -76 | % | ||||||||||||||||||||
Other income and fees | 40 | 42 | (2 | ) | -5 | % | 126 | 112 | 14 | 13 | % | |||||||||||||||||||||
Total non-interest income | $ | 305 | $ | 395 | $ | (90 | ) | -23 | % | $ | 877 | $ | 1,094 | $ | (217 | ) | -20 | % |
The decrease in non-interest income for the nine-month period was principally due to reduced sales of securities, resulting in a $188 thousand decrease in gains on security sales for the nine months. No securities were sold in the third quarter of 2010, although the Bank recognized $7 thousand in security gains in the third quarter of 2009.
During the first nine months of 2010 the Company recorded a gain on sale of SBA loans of $307 thousand, representing the sale of $3.6 million in loans. Additional SBA loans totaling $1.8 million were sold in the third quarter of 2010; however, the gain on sale generated in the third quarter will not be recorded until the 90-day premium recourse period on SBA loan sales has expired. During the fourth quarter, assuming no premiums are refunded, the Company will recognize a gain on sale of approximately $124 thousand. No gains on sales of SBA loans were recognized in the first quarter of 2010 due to the limited recourse period, as noted above in Note 8 to the consolidated financial statements.
The majority of the service charge income shown in the non-interest income table relates to NSF fee income, as well as 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 $39 thousand increase in maintenance fees assessed on demand and savings accounts for the first nine months of 2010 as compared to the same period in 2009, while NSF fees declined by $33 thousand over the same period.
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 $454 thousand, or 24%, for the three months ended September 30, 2010, as compared to the third quarter of 2009. For the first nine months of 2010, non-interest expense increased $1.169 million, or 20%, as compared to the same period in 2009.
The following table shows the major components of non-interest expenses:
Non-Interest Expense | ||||||||||||||||||||||||||||||||
(In thousands) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
$ Amount | Change | $ Amount | Change | |||||||||||||||||||||||||||||
2010 | 2009 | $ | % | 2010 | 2009 | $ | % | |||||||||||||||||||||||||
Salaries and employee benefits | $ | 1,029 | $ | 886 | $ | 143 | 16 | % | $ | 2,873 | $ | 2,779 | $ | 94 | 3 | % | ||||||||||||||||
Occupancy expenses | 318 | 196 | 122 | 62 | % | 933 | 528 | 405 | 77 | % | ||||||||||||||||||||||
Furniture and equipment | 116 | 103 | 13 | 13 | % | 352 | 340 | 12 | 4 | % | ||||||||||||||||||||||
Data processing | 187 | 187 | - | 0 | % | 551 | 566 | (15 | ) | -3 | % | |||||||||||||||||||||
Professional fees | 183 | 117 | 66 | 56 | % | 501 | 382 | 119 | 31 | % | ||||||||||||||||||||||
Marketing and business development | 26 | 36 | (10 | ) | -28 | % | 81 | 106 | (25 | ) | -24 | % | ||||||||||||||||||||
Office supplies and expenses | 59 | 57 | 2 | 4 | % | 177 | 193 | (16 | ) | -8 | % | |||||||||||||||||||||
Insurance and regulatory assessments | 187 | 164 | 23 | 14 | % | 583 | 462 | 121 | 26 | % | ||||||||||||||||||||||
Loan and lease expenses | 41 | 38 | 3 | 8 | % | 127 | 104 | 23 | 22 | % | ||||||||||||||||||||||
Loss or writedown of other real estate | 4 | - | 4 | nm | 454 | - | 454 | nm | ||||||||||||||||||||||||
Provision for unfunded loan commitments | - | - | - | nm | - | 35 | (35 | ) | -100 | % | ||||||||||||||||||||||
Other | 205 | 117 | 88 | 75 | % | 462 | 430 | 32 | 7 | % | ||||||||||||||||||||||
Total non-interest expense | $ | 2,355 | $ | 1,901 | $ | 454 | 24 | % | $ | 7,094 | $ | 5,925 | $ | 1,169 | 20 | % | ||||||||||||||||
nm = not meaningful |
The increase in non-interest expense for the nine-month period was principally from:
· | Losses on sales of other real estate and writedowns on the value of certain other real estate properties held (total of $4 thousand for the third quarter of 2010 and $454 thousand for the nine months), |
· | Increased occupancy expenses due to the lease cost of the Bank’s new administrative office in San Luis Obispo, |
· | Material increases in FDIC insurance assessments (FDIC insurance increased $131 thousand for the first nine months of 2010 vs. 2009), |
· | Increased professional fees, primarily related to the level of non-performing assets and the formation of the Company’s MAM subsidiary, |
· | An increase in salaries and benefits, due to additional officers hired in the third quarter, including the Company’s new chief executive officer, in preparation for future growth. |
· | These increased expenses were partially offset by cost containment measures taken in most other categories of non-interest expense. |
Income Taxes
The Company recognized no income tax expense or benefit for the nine months ended September 30, 2010 or 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.
Balance Sheet Analysis
At September 30, 2010, consolidated assets totaled $212.2 million, as compared with $193.1 million at December 31, 2009, and $215.5 million at the end of 2009’s third quarter. This represents a decrease of $3.3 million (1.5%) over the past twelve months. Total loans decreased $20.0 million (14%) over that period, while securities and cash equivalents increased $17.6 million (28%), deposits decreased $2.2 million (1.3%), borrowed funds decreased $14.8 million
(77%) and shareholders’ equity increased $13.5 million (57%). The increases in securities, cash equivalents and shareholders’ equity were principally due to the issuance of 5,000,000 shares of common stock in a private placement during the second quarter of 2010, for net proceeds of $24.8 million. The Company’s net losses over the past year partially offset the increase in capital from the stock issuance. See also the Capital 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* | |||||||||||||||||||||||||||||||||||||||
September 30, 2010 | June 30, 2010 | March 31, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||
Total Assets | $ | 3,423 | 6.5 | % | $ | 13,821 | 28.4 | % | $ | 1,855 | 3.9 | % | $ | (22,417 | ) | -41.3 | % | $ | (3,800 | ) | -6.9 | % | ||||||||||||||||||
Earning Assets | 2,489 | 5.0 | % | 12,337 | 26.7 | % | 1,894 | 4.2 | % | (19,722 | ) | -38.5 | % | (2,821 | ) | -5.4 | % | |||||||||||||||||||||||
Loans | (3,033 | ) | -9.6 | % | (6,589 | ) | -19.9 | % | (3,925 | ) | -11.7 | % | (6,433 | ) | -17.9 | % | (8,600 | ) | -22.5 | % | ||||||||||||||||||||
Deposits | 4,495 | 11.1 | % | (4,225 | ) | -10.2 | % | 1,581 | 3.9 | % | (4,053 | ) | -9.6 | % | 7,138 | 17.6 | % | |||||||||||||||||||||||
Borrowings | 328 | 31.4 | % | (1,858 | ) | -124.2 | % | - | 0.0 | % | (13,300 | ) | -273.4 | % | (10,744 | ) | -141.9 | % | ||||||||||||||||||||||
Shareholders' Equity | (562 | ) | -5.9 | % | 19,531 | 428.5 | % | (355 | ) | -7.7 | % | (5,157 | ) | -86.0 | % | (389 | ) | -6.4 | % | |||||||||||||||||||||
*Percentages shown as annualized rates |
Loans
The following table shows the composition of our loans by type of loan:
Loan Composition | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
September 30, 2010 | December 31, 2009 | September 30, 2009 | ||||||||||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||
Commercial | $ | 19,728 | 16.1 | % | $ | 19,633 | 14.4 | % | $ | 21,458 | 15.0 | % | ||||||||||||
Agricultural | 403 | 0.3 | % | 750 | 0.5 | % | - | 0.0 | % | |||||||||||||||
Leases, net of unearned income | 1,110 | 0.9 | % | 1,335 | 1.0 | % | 1,452 | 1.0 | % | |||||||||||||||
Municipal loans | 2,991 | 2.4 | % | 3,476 | 2.5 | % | 2,483 | 1.8 | % | |||||||||||||||
Real estate | 88,408 | 72.0 | % | 96,956 | 71.1 | % | 102,082 | 71.5 | % | |||||||||||||||
Construction | 8,752 | 7.1 | % | 12,512 | 9.2 | % | 12,158 | 8.5 | % | |||||||||||||||
Consumer | 1,471 | 1.2 | % | 1,748 | 1.3 | % | 3,210 | 2.2 | % | |||||||||||||||
Total loans | $ | 122,863 | 100.0 | % | $ | 136,410 | 100.0 | % | $ | 142,843 | 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 September 30, 2010, 73% are commercial mortgage loans, and 49% of those are owner-occupied properties. Approximately 2% of the owner-occupied commercial mortgage loans contain SBA guarantees.
Asset Quality
Non-accrual loans totaled $8.9 million at September 30, 2010, as compared to $5.9 million at December 31, 2009 and $6.6 million at September 30, 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 September 30, 2010, December 31, 2009 and September 30, 2009:
Non-Performing Assets | ||||||||||||
(in thousands) | September 30 | December 31 | September 30 | |||||||||
2010 | 2009 | 2009 | ||||||||||
Loans in nonaccrual status: | ||||||||||||
Nonaccrual loans held for investment | $ | 3,952 | $ | 5,891 | $ | 6,637 | ||||||
Nonaccrual loans held for sale* | 4,968 | - | - | |||||||||
Loans past due 90 days or more and accruing | - | - | 910 | |||||||||
Restructured loans in accruing status | - | 831 | 843 | |||||||||
Total nonperforming loans | 8,920 | 6,722 | 8,390 | |||||||||
Foreclosed real estate | 1,915 | 1,641 | 1,142 | |||||||||
Total nonperforming assets | $ | 10,835 | $ | 8,363 | $ | 9,532 | ||||||
Allowance for loan losses allocated to impaired loans | $ | 223 | $ | 67 | $ | 876 | ||||||
Allowance for loan losses allocated to loans held for sale* | - | - | - | |||||||||
Allowance for loan losses allocated to all other loans | 3,350 | 5,470 | 2,663 | |||||||||
Total allowance for loan losses | $ | 3,573 | $ | 5,537 | $ | 3,539 | ||||||
Asset quality ratios: | ||||||||||||
Non-performing assets to total assets | 5.11 | % | 4.33 | % | 4.44 | % | ||||||
Excluding loans held for sale* | 2.98 | % | 4.35 | % | 4.44 | % | ||||||
Non-performing loans to total loans | 7.26 | % | 4.93 | % | 5.87 | % | ||||||
Excluding loans held for sale* | 3.67 | % | 4.96 | % | 5.88 | % | ||||||
Allowance for loan losses to total loans | 2.91 | % | 4.06 | % | 2.48 | % | ||||||
Excluding loans held for sale* | 3.32 | % | 4.09 | % | 2.48 | % | ||||||
Allowance for loan losses to total non-performing loans | 40 | % | 82 | % | 42 | % | ||||||
Excluding non-performing loans held for sale* | 90 | % | 82 | % | 42 | % | ||||||
* Loans held for sale are carried at fair value |
For comparison, ratios in the table above are presented both with and without loans held for sale. Although most of the loans held for sale as of September 30, 2010, are of lower credit quality, all loans held for sale loans have been written down to the lower of cost or fair value, so no
allowance for loan losses is appropriate, and none has been provided, for the balance remaining on those loans.
The high level of non-performing loans over the past two years has been due to the significant downturn in the economy and reduction in real estate collateral values in 2008, 2009 and into 2010. The $8.9 million of non-performing loans as of September 30, 2010, includes $3.1 million of SBA loans, which are supported by $2.7 million of SBA loan guarantees. The remaining $5.8 million of non-performing loans are loans which management has 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 $114 thousand, and has been provided in the allowance for loan and lease losses.
Nonperforming assets (which are comprised of nonperforming loans and foreclosed real estate) at September 30, 2010 were $10.8 million, an increase of $2.4 million from the $8.4 million balance at December 31, 2009. Foreclosed real estate represents real property taken by the Bank from the borrower either through foreclosure or through a deed in lieu of foreclosure, and is carried at the lesser of cost or fair market value, less estimated selling costs.
The following table provides a summary of the change in the balance of other real estate owned for the nine months ended September 30, 2010:
Other Real Estate Owned | ||||
(dollars in thousands) | Nine Months Ended | |||
September 30, 2010 | ||||
Balance of foreclosed real estate at beginning of year | $ | 1,641 | ||
Real estate held for possible future branch office | 565 | |||
Total other real estate owned at beginning of year | $ | 2,206 | ||
Foreclosures during the period | 1,752 | |||
Sales of other real estate | (1,024 | ) | ||
Writedowns and losses on sales of other real estate | (454 | ) | ||
Balance of other real estate owned at end of period | $ | 2,480 |
Potential Problem Loans
At September 30, 2010, the Bank had approximately $19.3 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 $1.2 million increase from the $18.1 million of potential problem loans at June 30, 2010, primarily due to one residential lot loan being downgraded to a substandard risk grade. The $19.3 million of potential problem loans includes $956 thousand of SBA loans, which are supported by $711 thousand of SBA loan guarantees, and $17.2 million of the potential problem loans 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 September 30, 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 September 30, 2010 totaled $3.6 million, a decrease of $1.9 million from December 31, 2009. The ratio of ALLL to total loans at September 30, 2010, was 2.91%, as compared with 4.06% at December 31, 2009, and 2.48% at September 30, 2009. The decrease in the ALLL in 2010 is attributable to the second quarter reclassification of lower-quality loans to held for sale, which has resulted in a reduction of specific reserves now that these loans are valued on a recurring basis at the lower of cost or fair value. At September 30, 2010 and 2009, the ratio of ALLL to total non-performing loans was 37% and 42%, respectively.
The following table provides an analysis of the changes in the ALLL for the three-month and nine-month periods ended September 30, 2010 and 2009:
Allowance for Loan and Lease Losses | ||||||||||||||||
(dollars in thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at beginning of period | $ | 3,731 | $ | 3,474 | $ | 5,537 | $ | 3,942 | ||||||||
Provision for loan losses | 350 | 875 | 5,800 | 1,556 | ||||||||||||
Loans charged off | (516 | ) | (820 | ) | (7,804 | ) | (1,993 | ) | ||||||||
Recoveries of previous charge-offs | 8 | 10 | 40 | 34 | ||||||||||||
Net (charge-offs) | (508 | ) | (810 | ) | (7,764 | ) | (1,959 | ) | ||||||||
Balance at end of period | $ | 3,573 | $ | 3,539 | $ | 3,573 | $ | 3,539 | ||||||||
Allowance for loan losses as a percentage of: | ||||||||||||||||
Period end loans | 2.91 | % | 2.48 | % | 2.91 | % | 2.48 | % | ||||||||
Total non-performing loans | 37 | % | 42 | % | 37 | % | 42 | % | ||||||||
Non-performing loans excluding loans held for sale* | 114 | % | 42 | % | 114 | % | 42 | % | ||||||||
As a percentage of average loans (annualized): | ||||||||||||||||
Net charge-offs (recoveries) | 1.61 | % | 2.18 | % | 7.94 | % | 1.73 | % | ||||||||
Provision for loan losses | 1.11 | % | 2.35 | % | 5.93 | % | 1.37 | % | ||||||||
* Loans held for sale are carried at fair value |
As mentioned above, during the second quarter of 2010 the Bank reclassified $22.2 million of lower-quality loans to “held for sale.” In conjunction with the reclassification, the Bank wrote down the value of those loans by $5.488 million, through charge-offs to the allowance for loan losses. After those charge-offs, a $5.250 million second quarter loan loss provision was needed to replenish the allowance for loan and lease losses to the appropriate level, as the level of classified loans and total loans both decreased during that quarter.
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 collectability of loans in the portfolio.
Based on its quarterly review, management believes that the allowance for loan losses at September 30, 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 September 30, 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 has been in non-accrual status, with interest payments, which have been received to date on a regular basis, being credited to the reserve. As of September 30, 2010, this security was carried on the books of the Bank at zero ($292 thousand amortized cost less the loss reserve, which now totals $292 thousand). Therefore, all current interest payments are being credited to interest income.
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 (24%), fixed-rate mortgage-backed securities (31%), floating-rate mortgage-backed securities (29%), fixed-rate tax-exempt municipal securities (5%), floating-rate corporate debt securities (5%) and fixed-rate CMO’s (6%). 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 July 2011. The average life of the portfolio is projected to be 3.3 years, with a duration of 3 .0 years.
Deposits
Deposits are the primary source of funding for lending and investing needs. Total deposits were $165.6 million as of September 30, 2010, as compared with $163.8 million at December 31, 2009, and $167.8 million at September 30, 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 nine 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 more than 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 September 30, 201 0, the Bank had issued $37.5 million of certificates of deposit to local customers through the CDARS program, as compared with $46.5 million as of September 30, 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. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, permanently increased the maximum deposit insurance amount to $250,000. See also Effects of Inflation and Economic Issues below, for a discussion of the Emergency Economic S tabilization Act of 2008 (“EESA”), and its impact on the Company.
On October 14, 2008, the FDIC announced another temporary program 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 temporary FDIC program is scheduled to expire on December 31, 2010. The Dodd-Frank Act has extended full deposit insurance coverage for non-interest bearing transaction accounts for two years starting December 31, 2010. Under the Dodd-Frank Act, participation in this program is mandatory for all insured depository institutions.
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 $16.3 million over the past twelve months.
As of September 30, 2010, borrowings from the FHLB totaled $3.0 million, with a weighted average interest rate of 4.89%. The $3.0 million matures in the fourth quarter of 2013.
Capital
Total shareholders’ equity has increased $13.5 million, or 57%, over the past twelve months. The increase was due to the issuance of 5,000,000 shares of the Company’s common stock in a private placement during the second quarter of 2010, for net proceeds of $24.8 million. The Company’s net losses over the past year partially offset the increase in capital from the stock issuance.
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 September 30, 2010, December 31, 2009, and September 30, 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 September 30, 2010: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 20,998 | 16.75 | % | $ | 12,538 | 10.0 | % | $ | 10,031 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 19,405 | 15.48 | % | $ | 7,523 | 6.0 | % | $ | 5,015 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 19,405 | 10.21 | % | $ | 9,500 | 5.0 | % | $ | 7,600 | 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 September 30, 2009: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 26,373 | 16.29 | % | $ | 16,192 | 10.0 | % | $ | 12,954 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 24,329 | 15.03 | % | $ | 9,715 | 6.0 | % | $ | 6,477 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 24,329 | 11.31 | % | $ | 10,754 | 5.0 | % | $ | 8,604 | 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 $19.3 million in cash and cash equivalents on September 30, 2010, as compared with $8.6 million as of December 31, 2009, and $20.5 million on September 30, 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. As of September 30, 2010, the Company’s loans-to-deposits ratio was 74%, as compared with 83% as of December 31, 2009, and 85% on September 30, 2009. This ratio has been declining over the past several quarters, as demand for quality credits has been weak through the economic downturn, while deposits have grown during this period. A low loans-to-deposits ratio indicates that the Bank has liquidity in place to meet potential needs for loan funding or deposit withdrawals. The Bank’s sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 40% as of September 30, 2010, as compared with 32% as of December 31, 2009, and 33% as of September 30, 2009.
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 September 30, 2010, the Bank had outstanding borrowings from the FHLB totaling $3.0 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 September 30, 2010, an additional $28.5 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) | September 30 | December 31 | September 30 | |||||||||
2010 | 2009 | 2009 | ||||||||||
Commitments to Extend Credit | $ | 20,864 | $ | 18,219 | $ | 18,372 | ||||||
Standby Letters of Credit | 901 | 301 | 329 | |||||||||
$ | 21,765 | $ | 18,520 | $ | 18,701 |
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 September 30, 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 th e potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.
The National Bureau of Economic Research (NBER) has now officially declared that the recession ended and the national economy began a recovery phase in June 2009. After a 20-consecutive-month downward trend, the Index of Leading Indicators has been positive for sixteen of the past seventeen months (thru August). The Index of Coincident Indicators turned positive in July 2009 (0.1%) after six consecutive monthly declines, and has been flat or slightly positive each subsequent month through August. However, that recovery has slowed over the past few months. Real (inflation-adjusted) GDP grew by 1.6% in the third quarter 2009, 5.0% in the fourth quarter, 3.7% in the first quarter 2010 and 1.6% in the second quarter.
California’s statewide unemployment rate (seasonally adjusted) rose from 10.6% in March 2009 to 12.6% in March 2010, and then decreased slightly but has remained above 12%. In August, the California unemployment rate was 12.4%, as the state lost 33,500 non-farm payroll jobs in August. The unemployment rates for San Luis Obispo (10.3%) and Santa Barbara (8.9%) counties are below the state average, but SLO County’s rate remains above the national average. The two counties in our primary market have the 10th and 2th lowest unemployment rates in the state. San Luis Obispo's rate is down from a high of 10.6% six months ago, while Santa Barbara County is down from 10.1%.
Although there has been some improvement national economy, as well as in California and our local economy, there is also continued weakness and the recovery is far from robust. Local economic conditions are favorable, as compared to the state as a whole, but the unemployment rate remains high. Because loan losses tend to lag turning points in economic activity, we cannot expect that minor improvements in the economy will lead to reductions in loan charge-offs. 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.
On July 1, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting large and small financial institutions alike, including several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, permanently raise the current standard maximum deposit insurance amount to $250,000, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. The Company’s management is actively reviewing the provisions of the Dodd-Frank Act, many of which are phased-in over the next several months and years, and assessing its probable impact on the operations of the company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, is uncertain at this time.
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 include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in th e 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, and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
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 September 30, 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 | Certificate of Amendment to Articles of Incorporation (Y) | |
3.4 | 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) | |
4.11 | Form of Common Stock Purchase Warrant (Z) | |
4.12 | Form of Warrant Agreement for warrants issued pursuant to subscription rights (AA) | |
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 | Intentionally omitted | |
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) | |
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) | |
10.31 | Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (X) | |
10.32 | Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (Y) | |
(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) Intentionally omitted (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 (X)Included in the Company’s Form 8-K filed on June 1, 2010 (Y)Included in the Company’s Form 8-K filed on August 2, 2010 (Z)Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010 (AA)Included in Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on October 1, 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
Dated: November 15, 2010
By: /s/ Ronald B. Pigeon
RONALD B. PIGEON
Executive Vice President and Chief Financial Officer
Dated: November 15, 2010