SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 30, 2013
OR
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number333-12892
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 ☑No☐
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).
☑ Yes☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐ | Accelerated filer☐ |
Non-accelerated filer☐ (Do not check if a smaller reporting company) | Smaller reporting company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes☐No ☑
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:8,755,066 shares of common stock outstanding as of November 1, 2013.
Mission Community Bancorp
September 30, 2013
Index
PART I – FINANCIAL INFORMATION | |
Item 1. Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets at September 30, 2013, December 31, 2012, and September 30, 2012 | 3 |
Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2013 and 2012 | 4 |
Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Nine-Month Periods Ended September 30, 2013 and 2012 | 5 |
Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Nine-Month Period Ended September 30, 2013 | 5 |
Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2013 and 2012 | 6 |
Notes to Consolidated Financial Statements | 7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 52 |
Item 4. Controls and Procedures | 52 |
PART II – OTHER INFORMATION | |
Item 1. Legal Proceedings | 53 |
Item 1A. Risk Factors | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 53 |
Item 3. Defaults Upon Senior Securities | |
Item 4. Mine Safety Disclosures | 53 |
Item 5. Other Information | |
Item 6. Exhibits | 53 |
PART I
Item 1. Financial Statements
Mission Community Bancorp and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(dollars in thousands)
September 30, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 22,423 | $ | 25,635 | $ | 21,197 | ||||||
Total cash and cash equivalents | 22,423 | 25,635 | 21,197 | |||||||||
Certificates of deposit in other banks | 1,979 | 3,706 | 5,176 | |||||||||
Investment securities available for sale | 107,918 | 127,822 | 147,066 | |||||||||
Loans held for sale | 5,113 | 1,548 | 3,490 | |||||||||
Loans, net of unearned income | 272,432 | 243,741 | 233,537 | |||||||||
Less allowance for loan and lease losses | (4,397 | ) | (4,242 | ) | (4,100 | ) | ||||||
Net loans | 268,035 | 239,499 | 229,437 | |||||||||
Federal Home Loan Bank stock and other investments | 6,974 | 6,822 | 6,699 | |||||||||
Premises and equipment | 15,514 | 16,131 | 15,978 | |||||||||
Other real estate owned | 861 | 818 | 1,463 | |||||||||
Company owned life insurance | 8,177 | 8,015 | 7,958 | |||||||||
Core deposit intangible asset, net of accumulated amortization | 2,461 | 2,765 | 2,866 | |||||||||
Accrued interest and other assets | 1,775 | 2,446 | 1,988 | |||||||||
Total Assets | $ | 441,230 | $ | 435,207 | $ | 443,318 | ||||||
Liabilities and Shareholders' Equity | ||||||||||||
Deposits: | ||||||||||||
Noninterest-bearing demand | $ | 137,077 | $ | 130,694 | $ | 125,778 | ||||||
Money market, NOW and savings | 151,219 | 154,074 | 153,332 | |||||||||
Time certificates of deposit | 100,516 | 102,500 | 110,298 | |||||||||
Total deposits | 388,812 | 387,268 | 389,408 | |||||||||
Other borrowings | 6,000 | - | 3,800 | |||||||||
Junior subordinated debt securities | 5,688 | 5,604 | 5,576 | |||||||||
Accrued interest and other liabilities | 2,384 | 2,063 | 2,668 | |||||||||
Total liabilities | 402,884 | 394,935 | 401,452 | |||||||||
Mezzanine financing: | ||||||||||||
Redeemable Bancorp-issued preferred stock, Series A, B and C;liquidation value of $1,000 at December 31, 2012, and$1,205 at September 30, 2012 | - | 1,000 | 1,205 | |||||||||
Redeemable subsidiary-issued preferred stock;liquidation value of $2,000 at December 31, 2012, and$4,800 at September 30, 2012 | - | 2,000 | 4,800 | |||||||||
Shareholders' equity: | ||||||||||||
Common stock - 50,000,000 shares authorized;issued and outstanding: 8,755,066 at September 30, 2013,8,155,066 at December 31, 2012,and 7,855,066 at September 30, 2012 | 45,825 | 42,825 | 41,325 | |||||||||
Additional paid-in capital | 8,871 | 8,768 | 8,730 | |||||||||
Accumulated deficit | (14,457 | ) | (16,122 | ) | (16,487 | ) | ||||||
Accumulated other comprehensive income (loss) | (1,893 | ) | 1,801 | 2,293 | ||||||||
Total shareholders' equity | 38,346 | 37,272 | 35,861 | |||||||||
Total Liabilities and Shareholders' Equity | $ | 441,230 | $ | 435,207 | $ | 443,318 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(dollars in thousands, except per share data)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Interest Income | ||||||||||||||||
Interest and fees on loans | $ | 4,528 | $ | 3,739 | $ | 12,456 | $ | 12,389 | ||||||||
Interest on investment securities | 525 | 696 | 1,761 | 2,035 | ||||||||||||
Other interest income | 16 | 17 | 39 | 85 | ||||||||||||
Total interest income | 5,069 | 4,452 | 14,256 | 14,509 | ||||||||||||
Interest Expense | ||||||||||||||||
Interest on money market, NOW and savings deposits | 64 | 71 | 198 | 212 | ||||||||||||
Interest on time certificates of deposit | 95 | 149 | 291 | 601 | ||||||||||||
Other interest expense | 89 | 82 | 247 | 246 | ||||||||||||
Total interest expense | 248 | 302 | 736 | 1,059 | ||||||||||||
Net interest income | 4,821 | 4,150 | 13,520 | 13,450 | ||||||||||||
Provision for loan and lease losses | 210 | 225 | 310 | 675 | ||||||||||||
Net interest income after provision for loan and lease losses | 4,611 | 3,925 | 13,210 | 12,775 | ||||||||||||
Non-interest income | ||||||||||||||||
Service charges on deposit accounts | 292 | 236 | 849 | 691 | ||||||||||||
Gain on sale ofGovernment-guaranteed loans | 351 | - | 351 | 8 | ||||||||||||
Net gains on disposition of other loans held for sale | - | 685 | 609 | 711 | ||||||||||||
Loan servicing fees, net of amortization | 18 | 37 | 96 | 119 | ||||||||||||
Gain (loss) on sale or call of available-for-sale securities, net | (1,521 | ) | 407 | (1,347 | ) | 934 | ||||||||||
Gain (loss) or (writedown) of other real estate owned, net | 599 | (170 | ) | 571 | (458 | ) | ||||||||||
Change in fair value of warrant liability | - | (11 | ) | - | 68 | |||||||||||
Increase in cash surrender value of life insurance | 54 | 57 | 162 | 172 | ||||||||||||
Other income and fees | 141 | 71 | 398 | 169 | ||||||||||||
Total non-interest income | (66 | ) | 1,312 | 1,689 | 2,414 | |||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 2,267 | 2,237 | 7,000 | 7,090 | ||||||||||||
Occupancy expenses | 415 | 431 | 1,233 | 1,353 | ||||||||||||
Furniture and equipment | 207 | 162 | 627 | 597 | ||||||||||||
Data processing | 467 | 464 | 1,295 | 1,805 | ||||||||||||
Professional fees | 199 | 265 | 534 | 1,000 | ||||||||||||
Marketing and business development | 101 | 96 | 270 | 312 | ||||||||||||
Office supplies and expenses | 145 | 145 | 446 | 537 | ||||||||||||
Insurance and regulatory assessments | 139 | 162 | 423 | 485 | ||||||||||||
Loan and lease expenses | 62 | 56 | 275 | 246 | ||||||||||||
Other real estate expenses | (14 | ) | 89 | (5 | ) | 238 | ||||||||||
Provision for unfunded loan commitments | 25 | 25 | 50 | 25 | ||||||||||||
Amortization of core deposit intangible asset | 101 | 101 | 303 | 303 | ||||||||||||
Other expenses | 198 | 244 | 652 | 744 | ||||||||||||
Total non-interest expense | 4,312 | 4,477 | 13,103 | 14,735 | ||||||||||||
Income before income taxes | 233 | 760 | 1,796 | 454 | ||||||||||||
Income tax (benefit) expense | 6 | - | 45 | 3 | ||||||||||||
Net income | $ | 227 | $ | 760 | $ | 1,751 | $ | 451 | ||||||||
Less earnings and dividends attributable to preferred stock | 18 | 151 | 105 | 500 | ||||||||||||
Net income (loss) attributable to common stock | $ | 209 | $ | 609 | $ | 1,646 | $ | (49 | ) | |||||||
Per Common Share Data: | ||||||||||||||||
Net income (loss) - basic | $ | 0.02 | $ | 0.08 | $ | 0.20 | $ | (0.01 | ) | |||||||
Net income (loss) - diluted | $ | 0.02 | $ | 0.08 | $ | 0.20 | $ | (0.01 | ) | |||||||
Average common shares outstanding - basic | 8,755,066 | 7,855,066 | 8,418,253 | 7,792,292 | ||||||||||||
Average common shares outstanding - diluted | 8,771,942 | 7,855,066 | 8,430,121 | 7,792,292 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited - dollars in thousands)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | $ | 227 | $ | 760 | $ | 1,751 | $ | 451 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gains (losses) arising during the period on available-for-sale securities, net of taxes of $-0- | (416 | ) | 565 | (5,041 | ) | 1,532 | ||||||||||
Less reclassification adjustment for securities losses (gains) included in net income, net of taxes of $-0- | 1,521 | (407 | ) | 1,347 | (934 | ) | ||||||||||
Other comprehensive income (loss) | 1,105 | 158 | (3,694 | ) | 598 | |||||||||||
Comprehensive income (loss) | $ | 1,332 | $ | 918 | $ | (1,943 | ) | $ | 1,049 |
Mission Community Bancorp and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(Unaudited - dollars in thousands)
Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Total | |||||||||||||||||||
Balance at January 1, 2013 | 8,155,066 | $ | 42,825 | $ | 8,768 | $ | (16,122 | ) | $ | 1,801 | $ | 37,272 | ||||||||||||
Exercise of common stock warrants | 600,000 | 3,000 | 3,000 | |||||||||||||||||||||
Dividends declared onsubsidiary-issued preferred stock | (86 | ) | (86 | ) | ||||||||||||||||||||
Stock-based compensation | 103 | 103 | ||||||||||||||||||||||
Net income | 1,751 | 1,751 | ||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (3,694 | ) | (3,694 | ) | ||||||||||||||||
Balance at September 30, 2013 | 8,755,066 | $ | 45,825 | $ | 8,871 | $ | (14,457 | ) | $ | (1,893 | ) | $ | 38,346 |
The accompanying notes are an integral part of these unaudited condensed 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, 2013 | September 30, 2012 | |||||||
Operating Activities | ||||||||
Net income | $ | 1,751 | $ | 451 | ||||
Adjustments to reconcile net income to netcash provided by operating activities: | ||||||||
Depreciation | 736 | 695 | ||||||
Amortization of premium on securities and loans, net | 1,016 | 1,016 | ||||||
Amortization of core deposit intangible asset | 303 | 303 | ||||||
Accretion of discount on assets acquired in merger | (2,711 | ) | (2,186 | ) | ||||
Amortization of discount on liabilities assumed in merger | 84 | 84 | ||||||
Provision for loan and lease losses | 310 | 675 | ||||||
Provision for losses on unfunded loan commitments | 50 | 25 | ||||||
Stock-based compensation | 103 | 109 | ||||||
Loss (gain) on sale or call of available-for-sale securities | 1,347 | (934 | ) | |||||
Gain on sale of loans | (351 | ) | (8 | ) | ||||
Gains on disposition of loans held for sale | (609 | ) | (711 | ) | ||||
Change in the fair value of warrant liability | - | (68 | ) | |||||
Net (gains) losses and writedowns of other real estate owned | (571 | ) | 458 | |||||
Increase in company-owned life insurance | (162 | ) | (172 | ) | ||||
Reinvested earnings from FHLB stock and other investments | (171 | ) | - | |||||
Net increase in accrued taxes receivable | (5 | ) | - | |||||
Other, net | 991 | 538 | ||||||
Proceeds from sale of loans originated for sale | 371 | 101 | ||||||
Loans originated for sale | (343 | ) | - | |||||
Net cash provided by operating activities | 2,139 | 376 | ||||||
Investing Activities | ||||||||
Net decrease (increase) in deposits in other banks | 1,727 | (1,584 | ) | |||||
Purchase of available-for-sale securities | (78,005 | ) | (106,091 | ) | ||||
Proceeds from maturities, calls and paydowns of available-for-sale securities | 26,909 | 33,021 | ||||||
Proceeds from sales of available-for-sale securities | 64,914 | 54,788 | ||||||
Net increase in loans held for investment | (35,458 | ) | (6,971 | ) | ||||
Net decrease in loans held for sale | 143 | 3,962 | ||||||
Proceeds from sale of loans originated for investment | 6,564 | - | ||||||
Net decrease (increase) in FHLB stock and other investments | 20 | (2,751 | ) | |||||
Purchases of premises and equipment | (118 | ) | (431 | ) | ||||
Proceeds from sale of premises and equipment | - | 21 | ||||||
Additional investments in other real estate owned | (71 | ) | - | |||||
Proceeds from sale of other real estate owned | 599 | 4,780 | ||||||
Net cash used in investing activities | (12,776 | ) | (21,256 | ) | ||||
Financing Activities | ||||||||
Net increase in demand deposits and savings accounts | 3,528 | 17,732 | ||||||
Net decrease in time deposits | (1,984 | ) | (38,898 | ) | ||||
Net increase in other borrowings and mezzanine financing | 3,000 | 1,600 | ||||||
Proceeds from exercise of common stock warrants | 3,000 | 500 | ||||||
Payment of dividends on preferred stock | (119 | ) | (478 | ) | ||||
Net cash provided by (used in) financing activities | 7,425 | (19,544 | ) | |||||
Net decrease in cash and cash equivalents | (3,212 | ) | (40,424 | ) | ||||
Cash and cash equivalents at beginning of period | 25,635 | 61,621 | ||||||
Cash and cash equivalents at end of period | $ | 22,423 | $ | 21,197 | ||||
Non-cash changes: | ||||||||
Change in unrealized (losses) gains on available-for-sale securities | $ | (3,694 | ) | $ | 598 | |||
Loans reclassified to held for sale | 10,034 | 4,583 | ||||||
Real estate acquired by foreclosure | - | 1,462 | ||||||
Adjustments to net contribution from shareholder recognized in additional paid-in capital for Santa Lucia merger | - | 1,130 | ||||||
Cancellation of warrants accounted for as liabilities | - | (5,116 | ) | |||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | 735 | 1,249 | ||||||
Taxes paid | 50 | 3 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiary
Notes to Condensed Consolidated Financial Statements (unaudited)
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, 2012, which was filed on March 27, 2013.
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, 2013 and 2012 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.
The Bank has been organized as a single reporting segment and operates five branches in the Central Coast area of California (in the cities of San Luis Obispo, Paso Robles, Atascadero, Arroyo Grande and Santa Maria). In addition, the Bank operates a loan production office in San Luis Obispo, with a primary focus on Small Business Administration (“SBA”) lending, and a Food and Agriculture Division, operating through a loan production office in Oxnard, California.
The Bank’s primary source of revenue is providing real estate, commercial and industrial (including SBA-guaranteed loans) and agricultural loans to customers, who are predominately small and middle-market businesses and individuals.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.
Certain reclassifications have been made to prior period balances to conform to classifications in 2013, with no impact to previously reported net income (loss) or shareholders’ equity.
Note 2 – Stock Based Compensation Plans
The Company has three stock compensation plans—the 1998 Stock Option Plan, the 2008 Stock Incentive Plan and the 2011 Equity Incentive Plan (the “2011 Plan”)—which are more fully described in Note J to the consolidated financial statements in the Company’s Annual Report on Form 10-K.
The 2011 Plan provides for the issuance of both “incentive” and “nonqualified” stock options, restricted stock awards, stock appreciation rights and stock awards. Awards under the 2011 Plan may be made to salaried officers and employees of the Company and its affiliates, to non-employee directors of the Company and its affiliates, and to consultants providing services to the Company and its affiliates. Awards under the 2011 Plan may be granted on such terms and conditions as are established by the Board of Directors or an authorized Committee of the Board of Directors in its discretion. Awards may be granted as performance-based compensation under section 162(m) of the Internal Revenue Code.
The Company determines the fair value of options granted on the date of grant using a Black-Scholes-Merton option pricing model, which uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. The Company also makes assumptions regarding estimated forfeitures that will impact the total compensation expenses recognized.
No options were granted in either of the nine-month periods ended September 30, 2013 and 2012.
During the nine-month periods ended September 30, 2013 and 2012, the Company recognized pre-tax stock-based compensation expense of $103,000 and $109,000, respectively. As of September 30, 2013, the Company has unvested options outstanding with unrecognized compensation expense totaling $201,000, which is scheduled to be recognized as follows (in thousands):
October 1 through December 31, 2013 | $ | 16 | ||
2014 | 62 | |||
2015 | 62 | |||
2016 | 51 | |||
2017 | 10 | |||
Total unrecognized compensation cost | $ | 201 |
No options outstanding were “in the money” as of September 30, 2013.
The following table summarizes information about stock option activity for the nine months ended September 30, 2013:
Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value of In-the-Money Options | |||||||||||||
Outstanding at beginning of period | 456,900 | $ | 6.12 | |||||||||||||
Options granted | - | |||||||||||||||
Options exercised | - | |||||||||||||||
Options expired unexercised | - | |||||||||||||||
Options forfeited | (6,500 | ) | 12.88 | |||||||||||||
Outstanding at end of period | 450,400 | $ | 6.03 | 8.0 | $ | - | ||||||||||
Options exercisable at end of period | 217,400 | $ | 7.12 | 7.0 | $ | - | ||||||||||
Options Vested or Expected to Vest | 450,400 | $ | 6.03 | 8.0 | $ | - | ||||||||||
Note 3 — Investment Securities
Investment securities have been classified in the consolidated balance sheets as available for sale 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) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
September 30, 2013: | ||||||||||||||||
U.S. Government agencies | $ | 18,944 | $ | 83 | $ | (463 | ) | $ | 18,564 | |||||||
Residential mortgage-backed securities | 52,841 | 182 | (1,147 | ) | 51,876 | |||||||||||
Municipal securities | 15,253 | 59 | (171 | ) | 15,141 | |||||||||||
Corporate debt securities | 3,250 | 3 | (19 | ) | 3,234 | |||||||||||
Asset-backed securities | 19,523 | - | (420 | ) | 19,103 | |||||||||||
$ | 109,811 | $ | 327 | $ | (2,220 | ) | $ | 107,918 | ||||||||
December 31, 2012: | ||||||||||||||||
U.S. Government agencies | $ | 30,007 | $ | 589 | $ | (7 | ) | $ | 30,589 | |||||||
Residential mortgage-backed securities | 60,550 | 1,159 | (49 | ) | 61,660 | |||||||||||
Municipal securities | 19,247 | 132 | (106 | ) | 19,273 | |||||||||||
Corporate debt securities | 3,015 | 2 | (21 | ) | 2,996 | |||||||||||
Asset-backed securities | 13,202 | 112 | (10 | ) | 13,304 | |||||||||||
$ | 126,021 | $ | 1,994 | $ | (193 | ) | $ | 127,822 | ||||||||
September 30, 2012: | ||||||||||||||||
U.S. Government agencies | $ | 42,686 | $ | 561 | $ | - | $ | 43,247 | ||||||||
Residential mortgage-backed securities | 68,968 | 1,527 | (16 | ) | 70,479 | |||||||||||
Municipal securities | 16,445 | 202 | (55 | ) | 16,592 | |||||||||||
Corporate debt securities | 3,026 | 4 | (6 | ) | 3,024 | |||||||||||
Asset-backed securities | 13,647 | 77 | - | 13,724 | ||||||||||||
$ | 144,772 | $ | 2,371 | $ | (77 | ) | $ | 147,066 | ||||||||
The scheduled maturities of investment securities at September 30, 2013, 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 Cost | Fair Value | |||||||
Within one year | $ | 241 | $ | 241 | ||||
Due in one year to five years | 7,104 | 7,068 | ||||||
Due in five years to ten years | 30,865 | 30,563 | ||||||
Due in greater than ten years | 71,601 | 70,046 | ||||||
$ | 109,811 | $ | 107,918 | |||||
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 Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
September 30, 2013: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 11,379 | $ | 463 | $ | - | $ | - | $ | 11,379 | $ | 463 | ||||||||||||
Residential mortgage-backed securities | 46,380 | 1,147 | - | - | 46,380 | 1,147 | ||||||||||||||||||
Municipal securities | 9,797 | 132 | 1,525 | 39 | 11,322 | 171 | ||||||||||||||||||
Corporate debt securities | 2,231 | 19 | - | - | 2,231 | 19 | ||||||||||||||||||
Asset-backed securities | 19,102 | 420 | - | - | 19,102 | 420 | ||||||||||||||||||
$ | 88,889 | $ | 2,181 | $ | 1,525 | $ | 39 | $ | 90,414 | $ | 2,220 | |||||||||||||
December 31, 2012: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 3,005 | $ | 7 | $ | - | $ | - | $ | 3,005 | $ | 7 | ||||||||||||
Residential mortgage-backed securities | 7,605 | 49 | - | - | 7,605 | 49 | ||||||||||||||||||
Municipal securities | 12,168 | 106 | - | - | 12,168 | 106 | ||||||||||||||||||
Corporate debt securities | 1,979 | 21 | - | - | 1,979 | 21 | ||||||||||||||||||
Asset-backed securities | 3,174 | 10 | - | - | 3,174 | 10 | ||||||||||||||||||
$ | 27,931 | $ | 193 | $ | - | $ | - | $ | 27,931 | $ | 193 | |||||||||||||
September 30, 2012: | ||||||||||||||||||||||||
U.S. Government agencies | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
Residential mortgage-backed securities | 9,601 | $ | 16 | $ | - | $ | - | $ | 9,601 | $ | 16 | |||||||||||||
Municipal securities | 4,986 | 55 | - | - | 4,986 | 55 | ||||||||||||||||||
Corporate debt securities | 1,994 | 6 | - | - | 1,994 | 6 | ||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | ||||||||||||||||||
$ | 16,581 | $ | 77 | $ | - | $ | - | $ | 16,581 | $ | 77 | |||||||||||||
As of September 30, 2013, the Company held 69 securities that had been in an unrealized loss position for less than 12 months. Five securities have been in an unrealized loss position for 12 months or longer as of September 30, 2013. 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, 2013, management did not have the intent to sell these securities nor did it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of September 30, 2013, are other than temporarily impaired. However, in light of continued declines in the fair values of these securities, as a result of increases in long- and intermediate-term market interest rates, management may reevaluate its intention to hold all of these securities until maturity or until recovery of its amortized cost basis.
Gross gains totaling $324,000 and losses of $1,671,000 were recognized in the first nine months of 2013 on sales of $66,260,000 of securities. During the first nine months of 2012, $53,854,000 of securities were sold, resulting in gains of $936,000 and $2,000 of losses.
As of September 30, 2013, investment securities carried at $24,638,000 were pledged to secure public deposits, as required by law. Investment securities carried at $10,589,000 as of September 30, 2013, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco. Securities carried at $4,460,000 as of September 30, 2013, were pledged to secure potential intra-day overdrafts at the Federal Reserve Bank of San Francisco (“FRB”) and $1,484,000 of securities were pledged to secure standby letter of credit agreements issued by an unaffiliated bank.
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, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||
Construction and land development | $ | 12,915 | 4.6 | % | $ | 11,995 | 4.9 | % | $ | 11,695 | 4.9 | % | ||||||||||||
Commercial real estate - owner-occupied | 72,425 | 26.1 | % | 72,036 | 29.4 | % | 69,410 | 29.3 | % | |||||||||||||||
Commercial real estate - non-owner-occupied | 69,080 | 24.9 | % | 69,145 | 28.2 | % | 75,020 | 31.7 | % | |||||||||||||||
Residential real estate | 42,227 | 15.2 | % | 31,501 | 12.8 | % | 32,120 | 13.6 | % | |||||||||||||||
Farnland and all other real estate loans | 19,775 | 7.1 | % | 8,299 | 3.4 | % | 7,764 | 3.3 | % | |||||||||||||||
Commercial and industrial loans | 38,996 | 14.1 | % | 33,580 | 13.7 | % | 32,826 | 13.8 | % | |||||||||||||||
Agricultural loans | 11,638 | 4.2 | % | 14,252 | 5.8 | % | 3,369 | 1.4 | % | |||||||||||||||
Municipal loans | 2,293 | 0.8 | % | 2,347 | 1.0 | % | 2,352 | 1.0 | % | |||||||||||||||
Leases, net of unearned income | 793 | 0.3 | % | 1,057 | 0.4 | % | 1,277 | 0.5 | % | |||||||||||||||
Consumer loans | 7,403 | 2.7 | % | 1,077 | 0.4 | % | 1,194 | 0.5 | % | |||||||||||||||
Total loans | $ | 277,545 | 100.0 | % | $ | 245,289 | 100.0 | % | $ | 237,027 | 100.0 | % | ||||||||||||
The table above includes loans held for sale as follows:
Loans Held for Sale* | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
September 30, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||||||||||||||
Type of Loan | Amount | % of Total Loans | Amount | % of Total Loans | Amount | % of Total Loans | ||||||||||||||||||
Commercial and industrial | $ | 292 | 0.1 | % | $ | 346 | 0.1 | % | $ | 278 | 0.1 | % | ||||||||||||
Real estate | 4,821 | 1.7 | % | 1,202 | 0.5 | % | 1,656 | 0.7 | % | |||||||||||||||
Construction and land development | - | 0.0 | % | - | 0.0 | % | 1,556 | 0.7 | % | |||||||||||||||
Total loans held for sale | $ | 5,113 | 1.8 | % | $ | 1,548 | 0.6 | % | $ | 3,490 | 1.5 | % | ||||||||||||
* Consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank |
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 held for investment. Loans held for sale, including $612,000 of impaired loans, are carried at the lower of cost or fair value, with no allowance for loan losses.
As of September 30, 2013, and December 31, 2012, loans totaling $230,363,000 and $198,553,000, respectively, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco.
Note 5 — Credit Quality and the Allowance for Loan and Lease Losses
An allowance for loan and lease losses is provided for loans held for investment (i.e., not held for sale). Loans held for sale are carried on the consolidated balance sheets at the lower of cost or fair value, therefore no related allowance for loan losses is provided.
Following is a summary of the changes in the allowance for loan and lease losses for the three-month and nine-month periods ended September 30:
(in thousands) | Three Months Ended September 30, | Nine Months Ended September 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Balance at beginning of period | $ | 4,232 | $ | 3,781 | $ | 4,242 | $ | 3,326 | ||||||||
Provision for loan and lease losses charged to expense | 210 | 225 | 310 | 675 | ||||||||||||
Loans charged off | (68 | ) | (22 | ) | (261 | ) | (144 | ) | ||||||||
Recoveries on loans previously charged off | 23 | 116 | 106 | 243 | ||||||||||||
Balance at end of period | $ | 4,397 | $ | 4,100 | $ | 4,397 | $ | 4,100 | ||||||||
Changes in the allowance for loan and lease losses for the three-month periods ended September 30, 2013 and 2012, are shown below disaggregated by portfolio segment:
Three Months Ended September 30, 2013 | ||||||||||||||||||||
Loan Portfolio Segment | Balance at Beginning of Period | Provision for Loan Losses Charged (Credited) to Expense | Less Loans Charged Off | Plus Recoveries on Loans Previously Charged Off | Balance at End of Period | |||||||||||||||
Construction and land development | $ | 427 | $ | 81 | $ | - | $ | - | $ | 508 | ||||||||||
Commercial real estate - owner-occupied | 345 | 148 | - | 2 | 495 | |||||||||||||||
Commercial real estate - non-owner-occupied | 637 | (7 | ) | - | - | 630 | ||||||||||||||
Residential real estate | 1,001 | (160 | ) | - | 9 | 850 | ||||||||||||||
All other real estate loans | 89 | 14 | - | - | 103 | |||||||||||||||
Commercial and industrial loans | 1,497 | (21 | ) | (60 | ) | 12 | 1,428 | |||||||||||||
Consumer and all other loans and lease financing | 104 | 47 | (8 | ) | - | 143 | ||||||||||||||
Unallocated | 132 | 108 | - | - | 240 | |||||||||||||||
Totals | $ | 4,232 | $ | 210 | $ | (68 | ) | $ | 23 | $ | 4,397 | |||||||||
Three Months Ended September 30, 2012 | ||||||||||||||||||||
Loan Portfolio Segment | Balance at Beginning of Period | Provision for Loan Losses Charged (Credited) to Expense | Less Loans Charged Off | Plus Recoveries on Loans Previously Charged Off | Balance at End of Period | |||||||||||||||
Construction and land development | $ | 366 | $ | (97 | ) | $ | - | $ | - | $ | 269 | |||||||||
Commercial real estate - owner-occupied | 505 | 85 | - | 28 | 618 | |||||||||||||||
Commercial real estate - non-owner-occupied | 883 | 73 | - | - | 956 | |||||||||||||||
Residential real estate | 658 | 154 | - | - | 812 | |||||||||||||||
All other real estate loans | 6 | 33 | - | - | 39 | |||||||||||||||
Commercial and industrial loans | 1,197 | 70 | - | 13 | 1,280 | |||||||||||||||
Consumer and all other loans and lease financing | 134 | (76 | ) | (22 | ) | 75 | 111 | |||||||||||||
Unallocated | 32 | (17 | ) | - | - | 15 | ||||||||||||||
Totals | $ | 3,781 | $ | 225 | $ | (22 | ) | $ | 116 | $ | 4,100 | |||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Loan Portfolio Segment | Balance at Beginning of Period | Provision for Loan Losses Charged (Credited) to Expense | Less Loans Charged Off | Plus Recoveries on Loans Previously Charged Off | Balance at End of Period | |||||||||||||||
Construction and land development | $ | 321 | $ | 187 | $ | - | $ | - | $ | 508 | ||||||||||
Commercial real estate - owner-occupied | 463 | 30 | - | 2 | 495 | |||||||||||||||
Commercial real estate - non-owner-occupied | 730 | (100 | ) | - | - | 630 | ||||||||||||||
Residential real estate | 906 | 47 | (117 | ) | 14 | 850 | ||||||||||||||
All other real estate loans | 35 | 68 | - | - | 103 | |||||||||||||||
Commercial and industrial loans | 1,735 | (315 | ) | (82 | ) | 90 | 1,428 | |||||||||||||
Consumer and all other loans and lease financing | 51 | 154 | (62 | ) | - | 143 | ||||||||||||||
Unallocated | 1 | 239 | - | - | 240 | |||||||||||||||
Totals | $ | 4,242 | $ | 310 | $ | (261 | ) | $ | 106 | $ | 4,397 | |||||||||
Nine Months Ended September 30, 2012 | ||||||||||||||||||||
Loan Portfolio Segment | Balance at Beginning of Year | Provision for Loan Losses Charged (Credited) to Expense | Less Loans Charged Off | Plus Recoveries on Loans Previously Charged Off | Balance at End of Period | |||||||||||||||
Construction and land development | $ | 157 | $ | 112 | $ | - | $ | - | $ | 269 | ||||||||||
Commercial real estate - owner-occupied | 253 | 335 | - | 30 | 618 | |||||||||||||||
Commercial real estate - non-owner-occupied | 675 | 281 | - | - | 956 | |||||||||||||||
Residential real estate | 640 | 172 | - | - | 812 | |||||||||||||||
All other real estate loans | 4 | 35 | - | - | 39 | |||||||||||||||
Commercial and industrial loans | 1,363 | (70 | ) | (101 | ) | 88 | 1,280 | |||||||||||||
Consumer and all other loans and lease financing | 124 | (95 | ) | (43 | ) | 125 | 111 | |||||||||||||
Unallocated | 110 | (95 | ) | - | - | 15 | ||||||||||||||
Totals | $ | 3,326 | $ | 675 | $ | (144 | ) | $ | 243 | $ | 4,100 | |||||||||
The Company assigns an asset quality rating to all loans except pools of homogeneous loans and those asset quality ratings are continuously reviewed and updated by management at least quarterly or as conditions dictate. These asset quality ratings are subject to semi-annual examination by independent specialists engaged by the Company and also by its regulators. During its internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign an asset quality rating to each individual loan. The asset quality ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan meets all of the Company’s underwriting criteria and provides adequate protection for the Bank through the paying capacity of the borrower and/or the value and marketability of the collateral.
Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans have a high probability of payment default, or they have other well defined weaknesses, and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.
Loss – Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future. Loans classified as loss are charged off immediately.
The following table shows the Company’s loan portfolio (excluding loans held for sale) allocated by management’s internal asset quality ratings as of the dates indicated:
Loans by Asset Quality Rating (excluding loans held for sale*) | Asset Quality Ratings | |||||||||||||||||||
(in thousands) | Pass | Special Mention | Substandard | Doubtful | Total Loans | |||||||||||||||
As of September 30, 2013: | ||||||||||||||||||||
Construction and land development | $ | 12,045 | $ | - | $ | 951 | $ | - | $ | 12,996 | ||||||||||
Commercial real estate - owner-occupied | 66,698 | - | 5,143 | - | 71,841 | |||||||||||||||
Commercial real estate - non-owner-occupied | 68,407 | - | 1,236 | - | 69,643 | |||||||||||||||
Residential real estate | 40,605 | 85 | 630 | 182 | 41,502 | |||||||||||||||
All other real estate | 19,782 | - | 20 | - | 19,802 | |||||||||||||||
Commercial and industrial | 45,285 | 57 | 3,177 | - | 48,519 | |||||||||||||||
Consumer and all other loans and lease financing | 8,129 | - | - | - | 8,129 | |||||||||||||||
Total loans, net of unearned income | $ | 260,951 | $ | 142 | $ | 11,157 | $ | 182 | $ | 272,432 | ||||||||||
As of December 31, 2012: | ||||||||||||||||||||
Construction and land development | $ | 11,440 | $ | - | $ | 555 | $ | - | $ | 11,995 | ||||||||||
Commercial real estate - owner-occupied | 65,132 | - | 5,896 | - | 71,028 | |||||||||||||||
Commercial real estate - non-owner-occupied | 66,799 | 1,396 | 1,166 | - | 69,361 | |||||||||||||||
Residential real estate | 28,588 | - | 2,268 | 185 | 31,041 | |||||||||||||||
All other real estate | 8,319 | - | 29 | - | 8,348 | |||||||||||||||
Commercial and industrial | 44,921 | 161 | 4,272 | - | 49,354 | |||||||||||||||
Consumer and all other loans and lease financing | 2,614 | - | - | - | 2,614 | |||||||||||||||
Total loans, net of unearned income | $ | 227,813 | $ | 1,557 | $ | 14,186 | $ | 185 | $ | 243,741 | ||||||||||
As of September 30, 2012: | ||||||||||||||||||||
Construction and land development | $ | 9,455 | $ | 100 | $ | 585 | $ | - | $ | 10,140 | ||||||||||
Commercial real estate - owner-occupied | 62,593 | - | 5,831 | - | 68,424 | |||||||||||||||
Commercial real estate - non-owner-occupied | 71,595 | 2,409 | 1,178 | - | 75,182 | |||||||||||||||
Residential real estate | 28,621 | - | 2,284 | 185 | 31,090 | |||||||||||||||
All other real estate | 7,732 | - | 32 | - | 7,764 | |||||||||||||||
Commercial and industrial | 34,122 | 324 | 3,765 | - | 38,211 | |||||||||||||||
Consumer and all other loans and lease financing | 2,726 | - | - | - | 2,726 | |||||||||||||||
Total loans, net of unearned income | $ | 216,844 | $ | 2,833 | $ | 13,675 | $ | 185 | $ | 233,537 | ||||||||||
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank |
The following table shows an aging analysis of the loan portfolio (excluding loans held for sale) as of the dates indicated. Also shown are loans on non-accrual, those that are past due and still accruing interest and troubled debt restructurings:
(in thousands) | Construction | Commercial Real Estate | Commercial | Consumer andAll Other | ||||||||||||||||||||||||||||
and Land Development | Owner-Occupied | Non-Owner-Occupied | Residential Real Estate | All Other Real Estate | and Industrial | Loans and Leases | Total Loans | |||||||||||||||||||||||||
As of September 30, 2013: | ||||||||||||||||||||||||||||||||
Recorded Balance of Loans Past Due: | ||||||||||||||||||||||||||||||||
30-59 Days | $ | 121 | $ | 116 | $ | - | $ | - | $ | - | $ | 182 | $ | - | $ | 419 | ||||||||||||||||
60-89 Days | - | 1,073 | - | - | - | 62 | - | 1,135 | ||||||||||||||||||||||||
90+ Days | - | 650 | - | 241 | - | 149 | - | 1,040 | ||||||||||||||||||||||||
Total Past Due | 121 | 1,839 | - | 241 | - | 393 | - | 2,594 | ||||||||||||||||||||||||
Loans in Current Payment Status | 12,875 | 70,002 | 69,643 | 41,261 | 19,802 | 48,126 | 8,129 | 269,838 | ||||||||||||||||||||||||
Total Loans | $ | 12,996 | $ | 71,841 | $ | 69,643 | $ | 41,502 | $ | 19,802 | $ | 48,519 | $ | 8,129 | $ | 272,432 | ||||||||||||||||
Loans 90+ Days Past Due and Accruing1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Accruing Troubled Debt Restructurings | - | - | - | 702 | - | - | - | 702 | ||||||||||||||||||||||||
Loans in Non-accrual Status | 731 | 1,219 | 3,547 | 756 | 20 | 2,470 | - | 8,743 | ||||||||||||||||||||||||
As of December 31, 2012: | ||||||||||||||||||||||||||||||||
Recorded Balance of Loans Past Due: | ||||||||||||||||||||||||||||||||
30-59 Days | $ | - | $ | 55 | $ | - | $ | 325 | $ | - | $ | 620 | $ | 69 | $ | 1,069 | ||||||||||||||||
60-89 Days | - | 916 | - | - | - | 44 | - | 960 | ||||||||||||||||||||||||
90+ Days | - | 820 | - | 343 | - | 227 | - | 1,390 | ||||||||||||||||||||||||
Total Past Due | - | 1,791 | - | 668 | - | 891 | 69 | 3,419 | ||||||||||||||||||||||||
Loans in Current Payment Status | 11,995 | 69,237 | 69,361 | 30,373 | 8,348 | 48,463 | 2,545 | 240,322 | ||||||||||||||||||||||||
Total Loans | $ | 11,995 | $ | 71,028 | $ | 69,361 | $ | 31,041 | $ | 8,348 | $ | 49,354 | $ | 2,614 | $ | 243,741 | ||||||||||||||||
Loans 90+ Days Past Due and Accruing1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Accruing Troubled Debt Restructurings | - | 13 | - | 709 | - | - | - | 722 | ||||||||||||||||||||||||
Loans in Non-accrual Status | 555 | 3,779 | 845 | 842 | 29 | 3,018 | - | 9,068 | ||||||||||||||||||||||||
As of September 30, 2012: | ||||||||||||||||||||||||||||||||
Recorded Balance of Loans Past Due: | ||||||||||||||||||||||||||||||||
30-59 Days | $ | - | $ | 59 | $ | - | $ | 158 | $ | - | $ | 427 | $ | 174 | $ | 818 | ||||||||||||||||
60-89 Days | 268 | 1,000 | - | - | - | 57 | - | 1,325 | ||||||||||||||||||||||||
90+ Days | - | 771 | - | 185 | - | 265 | - | 1,221 | ||||||||||||||||||||||||
Total Past Due | 268 | 1,830 | - | 343 | - | 749 | 174 | 3,364 | ||||||||||||||||||||||||
Loans in Current Payment Status | 9,872 | 66,594 | 75,182 | 30,747 | 7,764 | 37,462 | 2,552 | 230,173 | ||||||||||||||||||||||||
Total Loans | $ | 10,140 | $ | 68,424 | $ | 75,182 | $ | 31,090 | $ | 7,764 | $ | 38,211 | $ | 2,726 | $ | 233,537 | ||||||||||||||||
Loans 90+ Days Past Due and Accruing1 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 120 | $ | 7 | $ | 127 | ||||||||||||||||
Accruing Troubled Debt Restructurings | - | - | - | - | - | 711 | - | 711 | ||||||||||||||||||||||||
Loans in Non-accrual Status | 317 | 2,267 | 866 | 851 | 32 | 1,608 | - | 5,941 |
1 Includes pooled loans acquired with deteriorated credit quality. Management evaluates estimated cash flows subsequent to acquisition. If cash flows have not decreased, the pooled acquired loans remain in performing status.
The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are generally considered to be troubled debt restructurings (“TDR’s”). TDR’s typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Both non-accrual loans and TDR’s are generally considered to be impaired.
Concessions granted in TDR’s typically are intended to reduce the borrower’s cash requirements, such as an extension of the payment terms or a change in the interest rate charged. TDR’s with extended payment terms are accounted for as impaired until adequate performance is established. A reduction in the interest rate for a borrower experiencing financial difficulties would result in a change to TDR status if the restructured loan yield is below the yield for a new loan with comparable risk. TDR’s with below-market rates are considered impaired until fully collected. TDR’s may be reported as non-accrual, rather than TDR, if they are not performing under the restructured terms or if adequate payment performance under the restructured terms has yet to be established.
Fourteen loans totaling $2,201,000 were restructured in TDR’s during the first nine months of 2013 and ten loans totaling $1,153,000 were restructured in the first nine months of 2012. No TDR’s were in accruing status and more than 90 days past due as of September 30, 2013 or December 31, 2012. The Bank has no commitments to lend additional funds under loans classified as TDR’s as of September 30, 2013.
Following are summaries of the investment in loans (by impairment method, excluding loans held for sale) as of the dates indicated, including the related allowance for loan losses and cash-basis income recognized:
(in thousands) | Construction | Commercial Real Estate | All | Consumer and All Other | ||||||||||||||||||||||||||||||||
and Land Development | Owner-Occupied | Non- Owner-Occupied | Residential Real Estate | Other Real Estate | Commercial and Industrial | Loans and Leases | Unallocated | Total Loans | ||||||||||||||||||||||||||||
Loans Held for Investment as of September 30, 2013: | ||||||||||||||||||||||||||||||||||||
Recorded Investment: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance Recorded | $ | 275 | $ | 928 | $ | 701 | $ | 182 | $ | 20 | $ | 818 | $ | - | $ | 2,924 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | 1,359 | 155 | 777 | - | 1,391 | - | 3,682 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 275 | 2,287 | 856 | 959 | 20 | 2,209 | - | 6,606 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 10,709 | 54,217 | 57,186 | 38,425 | 19,782 | 45,738 | 7,954 | 234,011 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 2,012 | 15,337 | 11,601 | 2,118 | - | 572 | 175 | 31,815 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 12,996 | $ | 71,841 | $ | 69,643 | $ | 41,502 | $ | 19,802 | $ | 48,519 | $ | 8,129 | $ | 272,432 | ||||||||||||||||||||
Unpaid Principal Balance: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 302 | $ | 1,040 | $ | 755 | $ | 197 | $ | 23 | $ | 1,321 | $ | - | $ | 3,638 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | 1,542 | 175 | 802 | - | 1,950 | - | 4,469 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 302 | 2,582 | 930 | 999 | 23 | 3,271 | - | 8,107 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 10,709 | 54,217 | 57,186 | 38,425 | 19,782 | 45,738 | 7,954 | 234,011 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 2,238 | 16,840 | 12,546 | 2,550 | - | 1,505 | 178 | 35,857 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 13,249 | $ | 73,639 | $ | 70,662 | $ | 41,974 | $ | 19,805 | $ | 50,514 | $ | 8,132 | $ | 277,975 | ||||||||||||||||||||
Related Allowance for Loan and Lease Losses: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 138 | $ | 117 | $ | 30 | $ | 126 | $ | 4 | $ | 230 | $ | - | $ | 645 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 138 | 117 | 30 | 126 | 4 | 230 | - | 645 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 370 | 353 | 600 | 724 | 99 | 1,178 | 143 | $ | 240 | 3,707 | ||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | - | 25 | - | - | - | 20 | - | 45 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 508 | $ | 495 | $ | 630 | $ | 850 | $ | 103 | $ | 1,428 | $ | 143 | $ | 240 | $ | 4,397 | ||||||||||||||||||
For the Nine Months Ended September 30, 2013: | ||||||||||||||||||||||||||||||||||||
Average Recorded Investment in Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 311 | $ | 827 | $ | 725 | $ | 965 | $ | 24 | $ | 1,494 | $ | - | $ | 4,346 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | 1,534 | - | - | - | 1,000 | - | 2,534 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | 311 | $ | 2,361 | $ | 725 | $ | 965 | $ | 24 | $ | 2,494 | $ | - | $ | 6,880 | ||||||||||||||||||||
Interest Income Recognized on Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | - | $ | - | $ | - | $ | 29 | $ | - | $ | - | $ | - | $ | 29 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | 1 | - | - | - | - | - | 1 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | - | $ | 1 | $ | - | $ | 29 | $ | - | $ | - | $ | - | $ | 30 | ||||||||||||||||||||
(in thousands) | Construction | Commercial Real Estate | All | Consumer and All Other | ||||||||||||||||||||||||||||||||
and Land Development | Owner-Occupied | Non- Owner-Occupied | Residential Real Estate | Other Real Estate | Commercial and Industrial | Loans and Leases | Unallocated | Total Loans | ||||||||||||||||||||||||||||
Loans Held for Investment as of December 31, 2012: | ||||||||||||||||||||||||||||||||||||
Recorded Investment: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance Recorded | $ | 385 | $ | 686 | $ | 749 | $ | 894 | $ | 29 | $ | 1,354 | $ | - | $ | 4,097 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 170 | 1,599 | - | - | - | 1,298 | - | 3,067 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 555 | 2,285 | 749 | 894 | 29 | 2,652 | - | 7,164 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 8,985 | 51,837 | 57,058 | 25,613 | 8,319 | 45,735 | 2,435 | 199,982 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 2,455 | 16,906 | 11,554 | 4,534 | - | 967 | 179 | 36,595 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 11,995 | $ | 71,028 | $ | 69,361 | $ | 31,041 | $ | 8,348 | $ | 49,354 | $ | 2,614 | $ | 243,741 | ||||||||||||||||||||
Unpaid Principal Balance: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 404 | $ | 731 | $ | 763 | $ | 899 | $ | 30 | $ | 2,040 | $ | - | $ | 4,867 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 177 | 1,745 | - | - | - | 1,427 | - | 3,349 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 581 | 2,476 | 763 | 899 | 30 | 3,467 | - | 8,216 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 8,985 | 51,837 | 57,058 | 25,613 | 8,319 | 45,735 | 2,435 | 199,982 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 6,264 | 18,575 | 13,184 | 6,468 | - | 2,489 | 183 | 47,163 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 15,830 | $ | 72,888 | $ | 71,005 | $ | 32,980 | $ | 8,349 | $ | 51,691 | $ | 2,618 | $ | 255,361 | ||||||||||||||||||||
Related Allowance for Loan and Lease Losses: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 103 | $ | 53 | $ | 66 | $ | 324 | $ | 2 | $ | 683 | $ | - | $ | 1,231 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 103 | 53 | 66 | 324 | 2 | 683 | - | 1,231 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 218 | 410 | 664 | 582 | 33 | 1,052 | 51 | $ | 1 | 3,011 | ||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 321 | $ | 463 | $ | 730 | $ | 906 | $ | 35 | $ | 1,735 | $ | 51 | $ | 1 | $ | 4,242 | ||||||||||||||||||
For the Year Ended December 31, 2012: | ||||||||||||||||||||||||||||||||||||
Average Recorded Investment in Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 198 | $ | 655 | $ | 303 | $ | 291 | $ | 6 | $ | 791 | $ | - | $ | 2,244 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 533 | 1,378 | 109 | 782 | - | 1,425 | - | 4,227 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | 731 | $ | 2,033 | $ | 412 | $ | 1,073 | $ | 6 | $ | 2,216 | $ | - | $ | 6,471 | ||||||||||||||||||||
Interest Income Recognized on Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | - | $ | - | $ | - | $ | 10 | $ | - | $ | - | $ | - | $ | 10 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | - | 1 | - | - | - | - | 1 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | - | $ | - | $ | 1 | $ | 10 | $ | - | $ | - | $ | - | $ | 11 | ||||||||||||||||||||
(in thousands) | Construction | Commercial Real Estate | All | Consumer and All Other | ||||||||||||||||||||||||||||||||
and Land Development | Owner-Occupied | Non- Owner-Occupied | Residential Real Estate | Other Real Estate | Commercial and Industrial | Loans and Leases | Unallocated | Total Loans | ||||||||||||||||||||||||||||
Loans Held for Investment as of September 30, 2012: | ||||||||||||||||||||||||||||||||||||
Recorded Investment: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance Recorded | $ | 214 | $ | - | $ | 765 | $ | 897 | $ | - | $ | 293 | $ | - | $ | 2,169 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 372 | 1,893 | - | - | - | 823 | - | 3,088 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 586 | 1,893 | 765 | 897 | - | 1,116 | - | 5,257 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 7,079 | 49,524 | 62,865 | 25,655 | 7,764 | 35,964 | 2,543 | 191,394 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 2,475 | 17,007 | 11,552 | 4,538 | - | 1,131 | 183 | 36,886 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 10,140 | $ | 68,424 | $ | 75,182 | $ | 31,090 | $ | 7,764 | $ | 38,211 | $ | 2,726 | $ | 233,537 | ||||||||||||||||||||
Unpaid Principal Balance: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 223 | $ | - | $ | 765 | $ | 901 | $ | - | $ | 120 | $ | - | $ | 2,009 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 378 | 2,025 | - | - | - | 817 | - | 3,220 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 601 | 2,025 | 765 | 901 | - | 937 | - | 5,229 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 7,079 | 49,524 | 62,865 | 25,655 | 7,764 | 35,964 | 2,543 | 191,394 | ||||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | 6,288 | 18,749 | 13,251 | 6,498 | - | 2,914 | 187 | 47,887 | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 113,968 | $ | 70,298 | $ | 76,881 | $ | 33,054 | $ | 7,764 | $ | 39,815 | $ | 2,730 | $ | 244,510 | ||||||||||||||||||||
Related Allowance for Loan and Lease Losses: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 86 | $ | - | $ | 79 | $ | 213 | $ | - | $ | 126 | $ | - | $ | 504 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | 86 | - | 79 | 213 | - | 126 | - | 504 | ||||||||||||||||||||||||||||
Loans Collectively Evaluated For Impairment | 183 | 619 | 877 | 599 | 39 | 1,153 | 111 | $ | 15 | 3,596 | ||||||||||||||||||||||||||
Loans Acquired With Deteriorated Credit Quality | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Total Loans Held for Investment | $ | 269 | $ | 619 | $ | 956 | $ | 812 | $ | 39 | $ | 1,279 | $ | 111 | $ | 15 | $ | 4,100 | ||||||||||||||||||
For the Nine Months Ended September 30, 2012: | ||||||||||||||||||||||||||||||||||||
Average Recorded Investment in Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | 103 | $ | 145 | $ | 191 | $ | 318 | $ | - | $ | 366 | $ | - | $ | 1,123 | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 229 | 1,447 | - | - | - | 558 | - | 2,234 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | 332 | $ | 1,592 | $ | 191 | $ | 318 | $ | - | $ | 924 | $ | - | $ | 3,357 | ||||||||||||||||||||
Interest Income Recognized on Impaired Loans: | ||||||||||||||||||||||||||||||||||||
Impaired Loans With An Allowance Recorded | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Impaired Loans With No Allowance Recorded | 13 | - | - | 38 | - | 6 | - | 57 | ||||||||||||||||||||||||||||
Total Loans Individually Evaluated For Impairment | $ | 13 | $ | - | $ | - | $ | 38 | $ | - | $ | 6 | $ | - | $ | 57 | ||||||||||||||||||||
The amount of the allowance for loan losses provided for impaired loans represents the aggregate amount by which the recorded investment in each impaired loan exceeds its fair value. Fair value for this purpose is determined by computing either the present value of expected future cash flows discounted at the loan’s effective interest rate or, if repayment is expected solely from the collateral, the fair value of the underlying collateral less estimated costs to sell, based on current appraisals. In some cases, impaired loans are partially charged off, such that there is no excess of the recorded investment over the fair value of the loan, as determined above.
Changes in the accretable discount for loans purchased with credit quality deterioration follows:
For the Nine Months Ended September 30, | ||||||||
(in thousands) | 2013 | 2012 | ||||||
Balance at beginning of year | $ | 1,734 | $ | 3,289 | ||||
Measurement period adustments to Santa Lucia Bank fair values | - | (428 | ) | |||||
Accretion to interest income | (2,046 | ) | (844 | ) | ||||
Loans reclassified to held for sale | - | (355 | ) | |||||
Loans charged off | 50 | - | ||||||
Transfers from non-accretable discount to accretable | 2,329 | 125 | ||||||
Balance at end of period | $ | 2,067 | $ | 1,787 | ||||
Note 6 —Common and Preferred Stock and Earnings (Loss) per Share
Common Stock
During 2010, the Company issued an aggregate of 5,000,000 shares of its common stock paired with warrants to purchase an additional 5,000,000 shares of its common stock (the “2010 Warrants”) for an aggregate purchase price of $25 million. These securities were sold pursuant to the terms of a Securities Purchase Agreement dated December 22, 2009, as amended, 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”)(the “Securities Purchase Agreement”). The 2010 Warrants were issued for a term of five years at an exercise price of $5.00 per share and contained customary anti-dilution provisions. The Company used a substantial majority of the proceeds from the sale of securities under the Securities Purchase Agreement to enable a newly-formed wholly-owned subsidiary, Mission Asset Management, Inc., to purchase from the Bank certain non-performing loans and other real estate owned assets.
The Securities Purchase Agreement further provided that the Company would conduct a rights offering to its existing shareholders, pursuant to which each shareholder was offered the right to purchase 15 additional shares of common stock, paired with a warrant (the “Public Warrants”), for each share held, at a price of $5.00 per unit of common stock and warrant. The rights offering closed on December 15, 2010, with 748,672 shares being issued. Net proceeds from the rights offering totaled $3,527,000. On September 5, 2012, the expiration date of the Public Warrants was extended from December 17, 2015 to March 21, 2017. No other terms or conditions of the Public Warrants were modified and no consideration was transferred.
Bancorp-Issued Preferred Stock
As a result of a change in control in 2010, the Company lost its status as a Community Development Financial Institution (“CDFI”) in 2012. Accordingly, the Company redeemed the Company’s Series A and C preferred stock during the third quarter of 2013 at a total redemption price of $1,000,000. Those series of preferred stock were carried at their redemption values in the consolidated balance sheets and were classified as mezzanine financing rather than equity.
Mission Asset Management, Inc. Preferred Stock and Company Warrants
On October 21, 2011, for an aggregate purchase price of $10 million, Mission Asset Management, Inc. issued 10,000 shares of its newly authorized Series A Non-Cumulative Perpetual Preferred Stock (“MAM Preferred Stock”) and the Company issued warrants to purchase an aggregate of 2,202,641 shares of the Company’s common stock (the “2011 Warrants”). The 2011 Warrants were issued for a term of 10 years from issuance at an exercise price of $4.54 per share. In December 2011, 660,792 of the 2011 Warrants were exercised and $3,000,000 of the MAM Preferred Stock was liquidated. From June 2012 through December 2012 an additional $5,000,000 of the MAM Preferred Stock was liquidated, and in the first nine months of 2013 the final $2,000,000 was liquidated. These preferred shares included redemption provisions that are outside the control of the Company. Accordingly, these preferred shares were presented as mezzanine financing at their redemption value.
In addition to customary anti-dilution provisions, the 2010 Warrants and the 2011 Warrants referred to above contain certain anti-dilution features that caused these warrants to be reflected as derivative liabilities pursuant to ASC 815—at their fair values—in the consolidated balance sheets rather than as components of equity. Subsequent changes in their fair values were recognized as gains or losses through non-interest income, which impacted net loss and loss per share in the consolidated statement of operations. In March 2012 all 2010 Warrants and substantially all of the 2011 Warrants (i.e., those issued to the Investors) were cancelled and replaced with 6,487,800 five-year warrants having approximately the equivalent aggregate fair value as the cancelled warrants but without the anti-dilution features that call for derivative accounting treatment. Accordingly, $4,955,000 (the fair value of the cancelled warrants immediately prior to cancellation) was transferred from warrant liability to additional paid-in capital in March 2012. In September 2012 the remaining 153,876 of the 2011 Warrants were cancelled and replaced with 171,980 warrants having substantially identical terms as those issued in March 2012 and aggregate fair value equivalent to the cancelled warrants. The remaining $161,000 of warrant liability at that date was transferred to additional paid-in capital.
Activity in the Company’s outstanding warrants follows:
Shares | Weighted Average Exercise Price | |||||||
Outstanding December 31, 2011 | 7,290,521 | $ | 4.90 | |||||
Warrants cancelled in 2012 | (6,541,849 | ) | 4.89 | |||||
Warrants issued in 2012 | 6,659,780 | 5.00 | ||||||
Warrants exercised in 2012 | (400,000 | ) | 5.00 | |||||
Outstanding December 31, 2012 | 7,008,452 | 5.00 | ||||||
Warrants issued in 1st nine months 2013 | - | |||||||
Warrants exercised 1st nine months 2013 | (600,000 | ) | 5.00 | |||||
Outstanding September 30, 2013 | 6,408,452 | $ | 5.00 |
Prior to the consummation of the transactions under the Securities Purchase Agreement, 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. As of September 30, 2013, following the consummation of the transactions under the Securities Purchase Agreement, the rights offering, and the 2011, 2012 and 2013 warrants exercises, the Manager is the beneficial owner of 6,928,179 shares of the common stock of the Company (not including warrants), or 79.1% of the issued and outstanding shares.
Earnings (Loss) per Share
The following table shows the calculation of earnings (loss) per common share and the allocation of the Company’s net income (loss) among common stock and the various classes of preferred stock:
(in thousands, except per share data) | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income (loss) | $ | 227 | $ | 760 | $ | 1,751 | $ | 451 | ||||||||
Less earnings and dividends applicable to preferred stock: | ||||||||||||||||
Convertible preferred (Series A & C) | 2 | - | 19 | - | ||||||||||||
Non-convertible subsidiary-issued preferred stock | 16 | 151 | 86 | 500 | ||||||||||||
Net income allocated to all classes of preferred stock | 18 | 151 | 105 | 500 | ||||||||||||
Net income (loss) attributable to common stock | $ | 209 | $ | 609 | $ | 1,646 | $ | (49 | ) | |||||||
Average common shares outstanding | 8,755,066 | 7,855,066 | 8,418,253 | 7,792,292 | ||||||||||||
Dilutive effect of outstanding stock-based awards and other potential common shares | 16,876 | - | 11,868 | - | ||||||||||||
Average common shares used for diluted EPS | 8,771,942 | 7,855,066 | 8,430,121 | 7,792,292 | ||||||||||||
Basic earnings (loss) per common share | $ | 0.02 | $ | 0.08 | $ | 0.20 | $ | (0.01 | ) | |||||||
Diluted earnings (loss) per common share | $ | 0.02 | $ | 0.08 | $ | 0.20 | $ | (0.01 | ) |
Excluded from diluted EPS in 2013 were the following potential common shares: 450,400 outstanding stock options and 6,408,452 outstanding warrants. Excluded from diluted EPS in 2012 were 267,900 outstanding stock options; 7,308,452 outstanding warrants and 220,264 shares related to convertible preferred shares. In all periods presented in these financial statements the exercise or conversion price of these warrants and options exceeded the average market price of the Company’s common shares.
Note 7 —Income taxes
The Company recognized income tax expense of $45,000 in the first nine months of 2013 and $3,000 in the comparable period of 2012. In both those periods, the provision for income tax was offset by available tax loss carry-forwards originating from 2008 through 2011. The $45,000 income tax recorded in 2013 represents an accrual for alternative minimum tax related to utilizing those tax loss carry-forwards.
Total deferred tax assets as of September 30, 2013, are approximately $11,189,000 (including $8,377,000 of tax loss carry-forwards) and deferred tax liabilities total approximately $2,191,000. The Company continues to maintain a full valuation allowance against the net deferred tax asset of $8,998,000, as a result of the Company being in a cumulative loss position as of September 30, 2013.
Note 8 — 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, 2013 and December 31, 2012, 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.
No warrants were subject to fair value accounting as of September 30, 2013 or December 31, 2012.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
(in thousands) | Fair Value Measurements Using | |||||||||||||||
September 30, 2013 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government agencies | $ | - | $ | 18,564 | $ | - | $ | 18,564 | ||||||||
Residential mortgage-backed securities | - | 51,876 | - | 51,876 | ||||||||||||
Municipal securities | - | 15,141 | - | 15,141 | ||||||||||||
Corporate debt securities | - | 3,234 | - | 3,234 | ||||||||||||
Asset-backed securities | - | 19,103 | - | 19,103 | ||||||||||||
Total available-for-sale securities | - | 107,918 | - | 107,918 | ||||||||||||
Loans held for sale | - | - | 5,113 | 5,113 | ||||||||||||
Total net assets measured at fair value on a recurring basis | $ | - | $ | 107,918 | $ | 5,113 | $ | 113,031 | ||||||||
December 31, 2012 | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government agencies | $ | - | $ | 30,589 | $ | - | $ | 30,589 | ||||||||
Residential mortgage-backed securities | - | 61,660 | - | 61,660 | ||||||||||||
Municipal securities | - | 19,273 | - | 19,273 | ||||||||||||
Corporate debt securities | - | 2,996 | - | 2,996 | ||||||||||||
Asset-backed securities | - | 13,304 | - | 13,304 | ||||||||||||
Total available-for-sale securities | - | 127,822 | - | 127,822 | ||||||||||||
Loans held for sale | - | - | 1,548 | 1,548 | ||||||||||||
Total net assets measured at fair value on a recurring basis | $ | - | $ | 127,822 | $ | 1,548 | $ | 129,370 | ||||||||
September 30, 2012 | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
U.S. Government agencies | $ | - | $ | 43,247 | $ | - | $ | 43,247 | ||||||||
Residential mortgage-backed securities | - | 70,479 | - | 70,479 | ||||||||||||
Municipal securities | - | 16,592 | - | 16,592 | ||||||||||||
Corporate debt securities | - | 3,024 | - | 3,024 | ||||||||||||
Asset-backed securities | - | 13,724 | - | 13,724 | ||||||||||||
Total available-for-sale securities | - | 147,066 | - | 147,066 | ||||||||||||
Loans held for sale | - | - | 3,490 | 3,490 | ||||||||||||
Warrant liability | - | - | (150 | ) | (150 | ) | ||||||||||
Total net assets measured at fair value on a recurring basis | $ | - | $ | 147,066 | $ | 3,340 | $ | 150,406 | ||||||||
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. There were no changes in the valuation techniques used during 2013 or 2012 and there were no transfers into or out of Levels 1, 2 or 3 of the fair value hierarchy during the nine months ended September 30, 2013.
Loans held for sale that are measured at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary. Those loans are carried at the lower of cost or fair value and, accordingly, have been subject to recurring fair value adjustments. Fair value for those loans is determined 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.
Management monitors the availability of observable market data to assess the appropriate classifications of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
(in thousands) | Fair Value Measurements Using | Current Period Gains | ||||||||||||||||||
September 30, 2013 | 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-- | ||||||||||||||||||||
Commercial and industrial | $ | - | $ | - | $ | 1,979 | $ | 1,979 | $ | 21 | ||||||||||
Residential real estate | - | - | 833 | 833 | 199 | |||||||||||||||
Commercial real estate - owner-occupied | - | - | 2,170 | 2,170 | (2 | ) | ||||||||||||||
Commercial real estate - non-owner-occupied | - | - | 826 | 826 | 36 | |||||||||||||||
All other real estate | - | - | 16 | 16 | (2 | ) | ||||||||||||||
Construction and land development | - | - | 137 | 137 | (42 | ) | ||||||||||||||
Total impaired loans, net of charge-offs and specific reserves | $ | - | $ | - | $ | 5,961 | $ | 5,961 | $ | 210 | ||||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | $ | 861 | $ | 861 | $ | 571 |
Fair Value Measurements Using | Full Year Gains | |||||||||||||||||||
December 31, 2012 | 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-- | ||||||||||||||||||||
Commercial and industrial | $ | - | $ | - | $ | 1,969 | $ | 1,969 | $ | 7 | ||||||||||
Residential real estate | - | - | 570 | 570 | (324 | ) | ||||||||||||||
Commercial real estate - owner-occupied | - | - | 2,232 | 2,232 | (20 | ) | ||||||||||||||
Commercial real estate - non-owner-occupied | - | - | 683 | 683 | (66 | ) | ||||||||||||||
All other real estate | - | �� | - | 27 | 27 | (2 | ) | |||||||||||||
Construction and land development | - | - | 452 | 452 | (96 | ) | ||||||||||||||
Total impaired loans, net of charge-offs and specific reserves | $ | - | $ | - | $ | 5,933 | $ | 5,933 | $ | (501 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | $ | 818 | $ | 818 | $ | (463 | ) |
Fair Value Measurements Using | Current Period Gains | |||||||||||||||||||
September 30, 2012 | 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-- | ||||||||||||||||||||
Commercial and industrial | $ | - | $ | - | $ | 990 | $ | 990 | $ | (60 | ) | |||||||||
Residential real estate | - | - | 684 | 684 | (213 | ) | ||||||||||||||
Commercial real estate - owner-occupied | - | - | 1,893 | 1,893 | - | |||||||||||||||
Commercial real estate - non-owner-occupied | - | - | 686 | 686 | (79 | ) | ||||||||||||||
Construction and land development | - | - | 500 | 500 | (86 | ) | ||||||||||||||
Total impaired loans, net of charge-offs and specific reserves | $ | - | $ | - | $ | 4,753 | $ | 4,753 | $ | (438 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis: | ||||||||||||||||||||
Other real estate owned | $ | - | $ | - | $ | 1,463 | $ | 1,463 | $ | (458 | ) | |||||||||
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. Collateral-dependent impaired loans 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. Impaired loans were measured and reported at fair value through specific valuation allocations of the allowance for loan and lease losses and/or partial charge-offs of the impaired loans.
The fair value of other real estate owned is based on the values obtained through property appraisals, which can include observable and unobservable inputs. Other real estate owned fair values are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data which required the use of unobservable inputs and assumptions in fair value measurements.
The following table presents a reconciliation of net assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first nine months of 2013 and 2012:
(in thousands) | Level 3 Securities Available for Sale, Loans Held for Sale and Warrant Liability | |||||||
Nine Months Ended September 30 | ||||||||
2013 | 2012 | |||||||
Balance at beginning of year | $ | 1,548 | $ | (1,464 | ) | |||
Net increase (decrease) in Gov't guaranteed loans held for sale | 4,099 | (115 | ) | |||||
Loans held for sale transfered into Level 3 | - | 4,283 | ||||||
Settlements - principal reductions in loans held for sale | (848 | ) | (1,857 | ) | ||||
Loan participations sold to related party | - | (1,952 | ) | |||||
Loans held for sale transferred to other real estate owned | - | (589 | ) | |||||
Reduction in loans held for sale valuation reserve | 314 | - | ||||||
Cancellation of warrants accounted for as liabilities | - | 5,116 | ||||||
Changes in fair value of warrant liability | - | 68 | ||||||
Balance at end of period | $ | 5,113 | $ | 3,490 | ||||
“Settlements” in the above table relate to actual cash payments received from borrowers on loans held for sale and do not represent refinancings or write-downs to fair value. 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 other observable data, which may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available, and are considered to be within Level 2. Impaired loans are within Level 3 of the fair value hierarchy. The carrying value of accrued interest receivable approximates fair value. The carrying amounts of stock in the Federal Home Loan Bank of San Francisco (“FHLB”) and in the FRB approximate their fair value.
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 (i.e., time) deposits, which are within Level 2 of the fair value hierarchy, fair value is estimated by discounting estimated future contractual cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of junior subordinated debt securities (Level 2) 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:
(in thousands) | September 30, 2013 | December 31, 2012 | September 30, 2012 | |||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||
Cash and due from banks | $ | 22,423 | $ | 22,423 | $ | 25,635 | $ | 25,635 | $ | 21,197 | $ | 21,197 | ||||||||||||
Interest-bearing deposits in other banks | 1,979 | 1,979 | 3,706 | 3,706 | 5,176 | 5,176 | ||||||||||||||||||
Investment securities | 107,918 | 107,918 | 127,822 | 127,822 | 147,066 | 147,066 | ||||||||||||||||||
Loans held for sale | 5,113 | 5,113 | 1,548 | 1,548 | 3,490 | 3,490 | ||||||||||||||||||
Loans, net of allowance for loan and lease losses | 268,035 | 267,015 | 239,499 | 244,979 | 229,437 | 225,338 | ||||||||||||||||||
Federal Home Loan Bank stock and other investments | 6,974 | 6,974 | 6,822 | 6,822 | 6,699 | 6,699 | ||||||||||||||||||
Accrued interest receivable | 1,217 | 1,217 | 1,361 | 1,361 | 1,353 | 1,353 | ||||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||
Deposits | 388,812 | 389,228 | 387,268 | 387,589 | 389,408 | 389,641 | ||||||||||||||||||
Other borrowings | 6,000 | 5,506 | - | - | 3,800 | 3,800 | ||||||||||||||||||
Junior subordinated debt securities | 5,688 | 4,634 | 5,604 | 4,607 | 5,576 | 4,188 | ||||||||||||||||||
Accrued interest payable | 128 | 128 | 111 | 111 | 140 | 140 | ||||||||||||||||||
Note 9 — Related Party Transactions
During the third quarter of 2013 the Bank and MAM entered into separate agreements with CGB Asset Management (“CGB”), a wholly-owned subsidiary of the Company’s majority shareholder, Carpenter Fund Manager GP, LLC, under which a participation in a fully-discounted loan was sold to CGB for cash proceeds of $344,000 and a fully-written down other real estate owned (“OREO”) property was sold to CGB for $599,000. These values were determined by an independent assessment of fair value for each asset and resulted in the acceleration of $344,000 of accretion income on loans acquired with deteriorated credit quality and $599,000 of net gains on the sale of OREO property in the third quarter.
Note 10 — Recent Accounting Pronouncements
Adoption of New Accounting Standards
Offsetting Assets and Liabilities
In January 2013, the FASB issued guidance within ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2013-01 to Topic 210,Balance Sheet, clarify that the scope of ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities,” would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse agreements, and securities borrowing and securities lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated statement of cash flows.
Reclassifications Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued guidance within ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in ASU 2013-02 to Topic 220,Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and 2011-12. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated statement of cash flows and only impacts the presentation of other comprehensive income in the consolidated financial statements.
Note 11 — Subsequent Event
On October 21, 2013, the Company and Heritage Oaks Bancorp, a California corporation (“Heritage”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for the acquisition by Heritage of the Company pursuant to the merger of the Company with and into Heritage, with Heritage being the surviving corporation (the “Merger”). Immediately after the Merger, Mission Community Bank will be merged with and into Heritage Oaks Bank, Heritage’s wholly-owned banking subsidiary, with Heritage Oaks Bank being the surviving banking corporation.
Pursuant to the terms and subject to the conditions of the Merger Agreement, which has been approved by the Board of Directors of each of the Company and Heritage, holders of shares of the Company’s common stock, warrants and options will receive aggregate cash consideration of $8.0 million and aggregate stock consideration of 7,541,353 shares of the common stock of Heritage. Based on the Company’s shares outstanding on October 21, 2013, each share of common stock of the Company would be exchanged for approximately (i) 0.8614 shares of the common stock of Heritage and (ii) cash consideration of approximately $0.19. Based on the closing price of Heritage common stock of $6.42 per share on October 18, 2013, the total value of the merger consideration would be $56.4 million. The actual value received by the Company’s shareholders on a per share basis will fluctuate based on the price of the common stock of Heritage.
Each holder of the Company’s warrants (other than warrants issued in the Company’s public rights offering which warrants will terminate if not exercised prior to the Merger) will enter into a warrant holder agreement agreeing not to exercise his, her or its warrants prior to the Merger and receiving at the effective time of the Merger cash in the amount of $0.92 per share of common stock that would have been received upon exercise of the warrants. Each holder of the Company’s options will enter into an option holder agreement, agreeing to cash out his or her Company stock options and cancel them. In the money option holders will receive the spread between the exercise price of such options and $5.92, while out of the money option holders will receive a flat $500 for cancellation of all of their respective options.
The Merger Agreement contains customary representations, warranties and covenants made by each of the Company and Heritage. In addition, the Company has agreed not to solicit certain acquisition proposals. However, under certain circumstances specified in the Merger Agreement, the Company is entitled to enter into discussions and negotiate with third parties who submit to the Company certain unsolicited acquisition proposals which the Board of Directors of the Company determines are “Superior Proposals,” as such term is defined in the Merger Agreement.
Completion of the Merger is subject to certain conditions, including, among others, the (i) approval of the Merger by the shareholders of the Company and Heritage, (ii) listing on NASDAQ of the shares of Heritage to be issued in the Merger, (iii) receipt of all governmental consents and approvals required to consummate the Merger, (iv) U.S. Securities and Exchange Commission having declared effective under the Securities Act of 1933, as amended, Heritage’s registration statement covering the issuance of shares of Heritage in the Merger, (v) absence of any injunction, order or legal restraint prohibiting consummation of the Merger, and (vi) receipt by Heritage and the Company of opinions from their respective legal counsel that the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. The obligation of each party to consummate the Merger is also conditioned upon the other party’s representations and warranties being true and correct to the extent provided in the Merger Agreement and the other party having performed in all material respects it obligations under the Merger Agreement. Heritage’s obligation to consummate the Merger is also subject to certain additional conditions, including, among others, (i) the Company’s “Adjusted Shareholders’ Equity,” as defined in the Merger Agreement, not being less than 95% of the shareholders’ equity of the Company as of June 30, 2013 as of the “Shareholders’ Equity Measurement Date,” as such term is defined in the Merger Agreement, and (ii) the Company’s “Core Deposits,” as defined in the Merger Agreement, not being less than 80% of the balance of such Core Deposits on September 30, 2013 as of the date of the “Closing Financial Statement,” as such term is defined in the Merger Agreement.
The Merger Agreement contains certain termination rights for both the Company and Heritage, including, among others, the right to terminate the Merger Agreement if (i) the Merger is not consummated on or before the nine month anniversary of the date of the Merger Agreement, subject to an extension of up to 90 days in certain circumstances, (ii) if any required regulatory approvals are not obtained or (iii) if the requisite approval of the shareholders of the Company or Heritage is not obtained. In addition, Heritage is entitled to a termination fee of $2,500,000 plus reimbursement of out-of-pocket expenses with respect to the termination of the Merger Agreement in certain instances, including, among other things, (i) the failure of the Company’s shareholders to approve the Merger Agreement, (ii) the failure of the Company to recommend approval of the Merger to its shareholders in certain instances and (iii) in the event that an “Acquisition Proposal,” as such term is defined in the Merger Agreement, has been made known to the shareholders, senior management or board of directors of the Company or any person shall have publicly announced an intention to make an Acquisition Proposal, and thereafter the Merger Agreement is terminated, and prior to the date that is 12 months from the date of such termination, the Company consummates an “Alternative Transaction,” as such term if defined in the Merger Agreement, or enters into any letter of intent or similar agreement related to an Alternative Transaction.
The Merger is expected to be consummated in the first quarter of 2014.
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
Overview
The Company
Mission Community Bancorp (“Bancorp”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in San Luis Obispo, California. It was incorporated on September 22, 2000 and acquired all the outstanding shares of Mission Community Bank (“the Bank”) in a one bank holding company organization effective December 15, 2000. The Bancorp’s principal activity is the ownership of all of the outstanding common stock of Mission Community Bank and any other subsidiaries it may acquire or establish. The Bancorp formed a wholly-owned subsidiary, Mission Community Capital Trust I, in 2003 solely to facilitate the issuance of trust preferred securities, and in conjunction with the 2011 acquisition of Santa Lucia Bank, Santa Lucia Bancorp (CA) Capital Trust was acquired by the Bancorp. In May 2010, the Bancorp formed its only other direct subsidiary, Mission Asset Management, Inc. (“MAM”), in order to purchase certain of the non-performing assets of the Bank, which assets were purchased in June 2010. In March 2012, MAM purchased from the Bank certain non-performing assets acquired in the Santa Lucia Bank acquisition.
Mission Community Bank, a wholly-owned subsidiary of the Bancorp, is a California state-chartered bank headquartered in San Luis Obispo, California. It is a member of the Federal Reserve System. The Bank operates five branches in the Central Coast area of California serving the cities of San Luis Obispo, Paso Robles, Atascadero, Arroyo Grande and Santa Maria. In addition, the Bank operates two loan production offices, one in San Luis Obispo with a primary focus on Small Business Administration lending and the other is focused on agricultural lending and is located in the city of Oxnard, in Ventura County. The Bank’s primary source of revenue is providing real estate loans, commercial loans and lines of credit and agricultural loans to customers, who are predominately small and middle-market businesses. The Bank also provides loans, deposits, and other banking services to consumers through the branches and internet banking.
Executive Summary of Operating Results
The third quarter, 2013 marks the sixth consecutive quarter of profitability for the Company. Net income for the three months ended September 30, 2013 was $227 thousand as compared to $760 thousand for the same period of 2012. The decrease of $533thousand is primarily due to a $1.521 million loss realized on the sale of investment securities in August in order to minimize the potential for further deterioration in the value of these securities should interest rates increase. This loss was partially offset by income derived from gains recognized through sale of loans and an OREO property and higher loan discount accretion income on loans acquired through the Santa Lucia Bank merger in 2010. Net income applicable to common stock was $209 thousand this quarter as compared to $609 thousand for the same three month period in 2012.
Net interest income was $4.821 million, $671 thousand above third quarter, 2012 primarily due to higher interest and fees on loans which included higher discount accretion on loans acquired in the Santa Lucia Bank merger. Non-interest income this quarter was $1.378 million lower than third quarter, 2012 primarily due to the loss realized on the sale of securities.
Non-interest expenses declined $165 thousand in the quarter due to reductions in various expense categories including professional fees, other real estate related costs, insurance, and other expenses as operating costs continue to be reduced.
The credit quality and performance of the loan portfolio have improved significantly over the last year contributing to lower provision for loan losses in 2013 as compared to 2012. At the same time, the loan portfolio increased 17% or $38.9 million above September, 2012. Consequently, in third quarter the Company recorded a provision for loan loss of $210 thousand, $15 thousand less than the same quarter of 2012. In addition, expenses associated with other real estate owned declined by $103 thousand, as the balance of other real estate owned declined $602 thousand since September 30, 2012.
In first nine months of 2013 return on average assets (annualized) was 0.53% and return on average equity (annualized) was 6.23%, as compared to the same nine-month period in 2012 where return on average assets was 0.13% and return on average equity was 1.82%.
For the first nine months of 2013, net income was $1.751 million, an increase of $1.300 million over the comparable period of 2012. Reductions in non-interest expenses ($1.632 million, including $616 thousand less one-time costs related to the Santa Lucia Bank acquisition), lower provision for loan losses ($365 thousand) and higher net interest income ($70 thousand) were the primary contributors to the improved performance for the first nine months of 2013. These favorable variances were partially offset by lower non-interest income ($725 thousand) primarily due to losses on the sale of securities.
Income Summary
Net Interest Income
Net interest income is the largest source of the Bank’s operating income. For the three-month period ended September 30, 2013, net interest income was $4.821 million, representing an increase of $671 thousand from the third quarter of 2012. For the nine months ended September 30, 2013, net interest income was $13.520 million, up $70 thousand from the comparable period in 2012. These increases in net interest income in 2013 were primarily due to higher loan discount accretion income, as discounted loans acquired through the Santa Lucia Bank merger either paid-off or were sold and by loan growth in the third quarter of 2013.
The net interest margin (net interest income as a percentage of average interest earning assets) was 4.00% for the three-month period ended September 30, 2013, an increase of 0.02% from the third quarter of 2012. Loan discount accretion accounted for 0.51% of the 4.00% net interest margin in the third quarter of 2013 and 0.59% of the 3.98% net interest margin in 2012’s third quarter.
For the nine months ended September 30, 2013, net interest margin was 4.45%, an increase of 0.18% from the same period in 2012. Loan discount accretion accounted for 0.98% of the 4.45% net interest margin in the first nine months of 2013 and 0.81% of the 4.27% net interest margin in the first nine months of 2012.
The tables that follow provide the relative impact of changes in average balance sheet information, interest earned and paid, average yields/rates and net interest income and margin 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, 2013 and 2012:
Consolidated Net Interest Analysis | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||||||
September 30, 2013 | September 30, 2012 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income* | $ | 259,651 | $ | 4,528 | 5.73 | %* | $ | 223,299 | $ | 3,738 | 6.64 | %* | ||||||||||||
Investment securities* | 128,599 | 525 | 2.15 | %* | 166,351 | 696 | 1.66 | %* | ||||||||||||||||
Other interest income | 24,652 | 16 | 0.29 | % | 24,076 | 18 | 0.29 | % | ||||||||||||||||
Total interest-earning assets / interest income | 412,902 | 5,069 | 4.29 | % | 413,726 | 4,452 | 4.27 | % | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (4,216 | ) | (3,949 | ) | ||||||||||||||||||||
Cash and due from banks | 4,714 | 6,887 | ||||||||||||||||||||||
Premises and equipment | 15,666 | 16,080 | ||||||||||||||||||||||
Other assets | 16,376 | 16,025 | ||||||||||||||||||||||
Total assets | $ | 445,442 | $ | 448,769 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Transaction accounts | $ | 26,336 | $ | 9 | 0.16 | % | $ | 27,142 | $ | 10 | 0.15 | % | ||||||||||||
Savings and Money Market deposit accounts | 129,056 | 55 | 0.19 | % | 128,308 | 60 | 0.19 | % | ||||||||||||||||
Certificates of deposit | 105,909 | 95 | 0.56 | % | 115,881 | 150 | 0.51 | % | ||||||||||||||||
Total interest-bearing deposits | 261,301 | 159 | 0.34 | % | 271,331 | 220 | 0.32 | % | ||||||||||||||||
Federal Home Loan Bank advances | 5,337 | 13 | 0.11 | % | 2,495 | 1 | 0.23 | % | ||||||||||||||||
Juniior subordinated debt securities | 5,671 | 76 | 5.65 | % | 5,559 | 81 | 5.75 | % | ||||||||||||||||
Total borrowed funds | 11,008 | 89 | 2.96 | % | 8,054 | 82 | 4.04 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense | 272,309 | 248 | 0.44 | % | 279,385 | 302 | 0.43 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 133,026 | 124,080 | ||||||||||||||||||||||
Other liabilities | 3,540 | 9,522 | ||||||||||||||||||||||
Total liabilities | 408,875 | 412,987 | ||||||||||||||||||||||
Shareholders' equity | 36,567 | 35,782 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 445,442 | $ | 448,769 | ||||||||||||||||||||
Net interest-rate spread | 3.85 | % | 3.84 | % | ||||||||||||||||||||
Impact of non-interest-bearingsources and other changes inbalance sheet composition | 0.15 | % | 0.14 | % | ||||||||||||||||||||
Net interest income / margin on earning assets | $ | 4,821 | 4.00 | %** | $ | 4,150 | 3.98 | %** | ||||||||||||||||
*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Net loan accretion and fees (costs) included in loan interest income for the three-month periods ended September 30, 2013 and 2012, were $1.073 million and $490 thousand, respectively. | ||||||||||||||||||||||||
** Net interest income as a % of earning assets |
Consolidated Net Interest Analysis | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
For the Nine Months Ended | ||||||||||||||||||||||||
September 30, 2013 | September 30, 2012 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of unearned income* | $ | 250,158 | $ | 12,456 | 6.66 | %* | $ | 228,782 | $ | 12,389 | 7.23 | %* | ||||||||||||
Investment securities* | 135,800 | 1,761 | 1.73 | %* | 151,103 | 2,035 | 1.80 | %* | ||||||||||||||||
Other interest income | 19,974 | 39 | 0.26 | % | 40,467 | 85 | 0.28 | % | ||||||||||||||||
Total interest-earning assets / interest income | 405,932 | 14,256 | 4.70 | % | 420,352 | 14,509 | 4.61 | % | ||||||||||||||||
Non-interest-earning assets: | ||||||||||||||||||||||||
Allowance for loan losses | (4,236 | ) | (3,678 | ) | ||||||||||||||||||||
Cash and due from banks | 3,918 | 3,986 | ||||||||||||||||||||||
Premises and equipment | 15,874 | 15,892 | ||||||||||||||||||||||
Other assets | 16,434 | 16,642 | ||||||||||||||||||||||
Total assets | $ | 437,922 | $ | 453,194 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 28,918 | $ | 30 | 0.14 | % | $ | 27,084 | $ | 32 | 0.16 | % | ||||||||||||
Savings and Money Market deposit accounts | 129,111 | 168 | 0.17 | % | 128,817 | 180 | 0.19 | % | ||||||||||||||||
Certificates of deposit | 101,862 | 291 | 0.38 | % | 128,694 | 601 | 0.62 | % | ||||||||||||||||
Total interest-bearing deposits | 259,891 | 489 | 0.25 | % | 284,595 | 813 | 0.38 | % | ||||||||||||||||
Other short-term borrowings | - | - | 1.00 | % | 4 | - | 1.09 | % | ||||||||||||||||
Federal Home Loan Bank advances | 2,772 | 18 | 0.85 | % | 1,343 | 3 | 0.24 | % | ||||||||||||||||
Junior subordinated debt securities | 5,644 | 229 | 5.43 | % | 5,531 | 243 | 5.87 | % | ||||||||||||||||
Total borrowed funds | 8,416 | 247 | 3.92 | % | 6,878 | 246 | 4.77 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense | 268,307 | 736 | 0.37 | % | 291,473 | 1,059 | 0.49 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 128,202 | 116,772 | ||||||||||||||||||||||
Other liabilities | 3,951 | 11,807 | ||||||||||||||||||||||
Total liabilities | 400,460 | 420,052 | ||||||||||||||||||||||
Shareholders' equity | 37,462 | 33,142 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 437,922 | $ | 453,194 | ||||||||||||||||||||
Net interest-rate spread | 4.33 | % | 4.12 | % | ||||||||||||||||||||
Impact of non-interest-bearingsources and other changes inbalance sheet composition | 0.12 | % | 0.15 | % | ||||||||||||||||||||
Net interest income / margin on earning assets | $ | 13,520 | 4.45 | %** | $ | 13,450 | 4.27 | %** | ||||||||||||||||
*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Loan accretion and loan fees (net of loan origination costs) included in loan interest income for the nine-month periods ended September 30, 2013 and 2012, were $2.655 million and $2.158 million, respectively. | ||||||||||||||||||||||||
** Net interest income as a % of earning assets |
Excluding the merger-related discount accretion from the above tables, the average rates for the three-month and nine-month periods of 2013 and 2012 would have been as follows:
Excluding Merger-Related Discount Accretion | ||||||||||||||||
For the Periods Ended September 30 | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Loans, net of unearned income | 5.05 | % | 5.44 | % | 5.00 | % | 5.62 | % | ||||||||
Total interest-earning assets | 3.72 | % | 3.67 | % | 3.71 | % | 3.79 | % | ||||||||
Certificates of deposit | 0.48 | % | 0.63 | % | 0.51 | % | 0.73 | % | ||||||||
Total interest-bearing deposits | 0.29 | % | 0.37 | % | 0.30 | % | 0.43 | % | ||||||||
Junior subordinated debt securities | 2.23 | % | 2.53 | % | 2.35 | % | 2.57 | % | ||||||||
Total interest-bearing liabilities | 0.37 | % | 0.43 | % | 0.37 | % | 0.49 | % | ||||||||
Net interest margin on earning assets | 3.49 | % | 3.39 | % | 3.47 | % | 3.46 | % |
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, together with changes in 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, 2013 and 2012. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.
Consolidated Rate / Volume Variance Analysis | ||||||||||||
(In thousands) | Three Months Ended September 30, 2013 | |||||||||||
Compared to 2012 | ||||||||||||
Increase (Decrease) | ||||||||||||
in interest income and expense | ||||||||||||
due to changes in: | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest-earning assets: | ||||||||||||
Loans, net of unearned income | $ | 629 | $ | 161 | $ | 790 | ||||||
Investment securities | (155 | ) | (16 | ) | (171 | ) | ||||||
Other interest income | 1 | (3 | ) | (2 | ) | |||||||
Total increase (decrease) in interest income | 475 | 142 | 617 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Transaction accounts | - | (1 | ) | (1 | ) | |||||||
Savings deposits | - | (5 | ) | (5 | ) | |||||||
Certificates of deposit | (13 | ) | (42 | ) | (55 | ) | ||||||
Total interest-bearing deposits | (13 | ) | (48 | ) | (61 | ) | ||||||
FHLB advances | 4 | 8 | 12 | |||||||||
Junior subordinated debt securities | 1 | (6 | ) | (5 | ) | |||||||
Total borrowed funds | 5 | 2 | 7 | |||||||||
Total increase (decrease) in interest expense | (8 | ) | (46 | ) | (54 | ) | ||||||
Increase (decrease) in net interest income | $ | 483 | $ | 188 | $ | 671 | ||||||
Consolidated Rate / Volume Variance Analysis | ||||||||||||
(In thousands) | Nine Months Ended September 30, 2013 | |||||||||||
Compared to 2012 | ||||||||||||
Increase (Decrease) | ||||||||||||
in interest income and expense | ||||||||||||
due to changes in: | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest-earning assets: | ||||||||||||
Loans, net of unearned income | $ | 1,107 | $ | (1,040 | ) | $ | 67 | |||||
Investment securities | (200 | ) | (74 | ) | (274 | ) | ||||||
Other interest income | (40 | ) | (6 | ) | (46 | ) | ||||||
Total increase (decrease) in interest income | 867 | (1,120 | ) | (253 | ) | |||||||
Interest-bearing liabilities: | ||||||||||||
Transaction accounts | 2 | (4 | ) | (2 | ) | |||||||
Savings deposits | - | (12 | ) | (12 | ) | |||||||
Certificates of deposit | (108 | ) | (202 | ) | (310 | ) | ||||||
Total interest-bearing deposits | (106 | ) | (218 | ) | (324 | ) | ||||||
FHLB advances | 4 | 11 | 15 | |||||||||
Junior subordinated debt securities | 5 | (19 | ) | (14 | ) | |||||||
Total borrowed funds | 9 | (8 | ) | 1 | ||||||||
Total decrease in interest expense | (97 | ) | (226 | ) | (323 | ) | ||||||
Increase (decrease) in net interest income | $ | 964 | $ | (894 | ) | $ | 70 | |||||
Based on current economic forecasts, the Company anticipates that interest rates will likely remain at very low levels through 2013 and into 2014, with a bias toward increasing thereafter. The Bank’s balance sheet is positioned to be asset-sensitive, such that earnings are expected to benefit if or when interest rates begin to rise. However, minimum, or “floor” rates, have been implemented on approximately 73% or $93 million of the variable rate loan portfolio and many of the floor rates are higher than the loan rate would be without the floor, which has the effect of reducing asset sensitivity in a rising rate environment. The remaining 27% of variable rate loans will respond to rising rates more quickly. A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months, any significant shortening of the duration of the security portfolio, and any possible decline in low cost deposit balances.
Provision for Loan Losses
The Bank recorded $210 thousand provision for loan losses in the third quarter, 2013 as compared to $225 thousand in the third quarter, 2012. Loan charge-offs totaled $67 thousand, with $22 thousand in recoveries for the third quarter 2013, as compared with $22 thousand of charge-offs and $116 thousand of recoveries for the same period in 2012. The ratio of allowance for loan losses to total loans was 1.61% at September 30, 2013, as compared with 1.73% as of December 31, 2012 and 1.76% at September 30, 2012.
The Bank provides 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 theAsset Quality, Potential Problem Loans andAllowance 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 gains and servicing fees from the sale of loans and gains or losses on sales of securities and other real estate owned. For the three-month period ended September 30, 2013, non-interest income was $(66) thousand, a decrease of $1.378 million from the same period in 2012, primarily due to losses on sales of investment securities.Management decided to sell certain securities at a loss in order to minimize the potential for further deterioration in the value of the securities portfolio, as interest rates are likely to rise in the future.
The following table shows the major components of and changes in 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 | |||||||||||||||||||||||||||||
2013 | 2012 | $ | % | 2013 | 2012 | $ | % | |||||||||||||||||||||||||
Service charges on deposit accounts | $ | 292 | $ | 236 | $ | 56 | 24 | % | $ | 849 | $ | 691 | $ | 158 | 23 | % | ||||||||||||||||
Gain on sale of SBA-guaranteed loans | 351 | - | 351 | nm | 351 | 8 | 343 | 4288 | % | |||||||||||||||||||||||
Net gains on disposition of other loans held for sale | - | 685 | (685 | ) | -100 | % | 609 | 711 | (102 | ) | -14 | % | ||||||||||||||||||||
Loan servicing fees, net of amortization | 18 | 37 | (19 | ) | -51 | % | 96 | 119 | (23 | ) | -19 | % | ||||||||||||||||||||
Gain on sale or call of available-for-sale securities | (1,521 | ) | 407 | (1,928 | ) | -474 | % | (1,347 | ) | 934 | (2,281 | ) | -244 | % | ||||||||||||||||||
Net losses or writedowns of fixed assets or other real estate | 599 | (170 | ) | 769 | nm | 571 | (458 | ) | 1,029 | nm | ||||||||||||||||||||||
Change in fair value of warrant liability | - | (11 | ) | 11 | nm | - | 68 | (68 | ) | -100 | % | |||||||||||||||||||||
Increase in cash surrender value of life insurance | 54 | 57 | (3 | ) | -5 | % | 162 | 172 | (10 | ) | -6 | % | ||||||||||||||||||||
Other income and fees | 141 | 71 | 70 | 99 | % | 398 | 169 | 229 | 136 | % | ||||||||||||||||||||||
Total non-interest income | $ | (66 | ) | $ | 1,312 | $ | (1,378 | ) | -105 | % | $ | 1,689 | $ | 2,414 | $ | (725 | ) | -30 | % | |||||||||||||
nm - not meaningful |
For the nine months, non-interest income decreased by $725 thousand, from $2.414 million in 2012 to $1.689 million in the first nine months of 2013, due to losses taken on the sale of securities which were partially offset by gains realized on the sale of other real estate owned property, gains on the sale of SBA-guaranteed loans, and higher fee income.
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 decreased by $165 thousand for the three months ended September 30, 2013 as compared to the third quarter of 2012. For the nine months, non-interest expenses decreased $1.632 million as compared to same period in 2012.
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 | |||||||||||||||||||||||||||||
2013 | 2012 | $ | % | 2013 | 2012 | $ | % | |||||||||||||||||||||||||
Salaries and employee benefits | $ | 2,267 | $ | 2,237 | $ | 30 | 1 | % | $ | 7,000 | $ | 7,090 | $ | (90 | ) | -1 | % | |||||||||||||||
Occupancy expenses | 415 | 431 | (16 | ) | -4 | % | 1,233 | 1,353 | (120 | ) | -9 | % | ||||||||||||||||||||
Furniture and equipment | 207 | 162 | 45 | 28 | % | 627 | 597 | 30 | 5 | % | ||||||||||||||||||||||
Data processing | 467 | 464 | 3 | 1 | % | 1,295 | 1,805 | (510 | ) | -28 | % | |||||||||||||||||||||
Professional fees | 199 | 265 | (66 | ) | -25 | % | 534 | 1,000 | (466 | ) | -47 | % | ||||||||||||||||||||
Marketing and business development | 101 | 96 | 5 | 5 | % | 270 | 312 | (42 | ) | -13 | % | |||||||||||||||||||||
Office supplies and expenses | 145 | 145 | - | 0 | % | 446 | 537 | (91 | ) | -17 | % | |||||||||||||||||||||
Insurance and regulatory assessments | 139 | 162 | (23 | ) | -14 | % | 423 | 485 | (62 | ) | -13 | % | ||||||||||||||||||||
Loan and lease expenses | 62 | 56 | 6 | 11 | % | 275 | 246 | 29 | 12 | % | ||||||||||||||||||||||
Other real estate expenses | (14 | ) | 89 | (103 | ) | -116 | % | (5 | ) | 238 | (243 | ) | -102 | % | ||||||||||||||||||
Provision for unfunded loan commitments | 25 | 25 | - | 0 | % | 50 | 25 | 25 | 100 | % | ||||||||||||||||||||||
Amortization of core deposit intangible asset | 101 | 101 | - | 0 | % | 303 | 303 | - | 0 | % | ||||||||||||||||||||||
Other | 198 | 244 | (46 | ) | -19 | % | 652 | 744 | (92 | ) | -12 | % | ||||||||||||||||||||
Total non-interest expense | $ | 4,312 | $ | 4,477 | $ | (165 | ) | -4 | % | $ | 13,103 | $ | 14,735 | $ | (1,632 | ) | -11 | % | ||||||||||||||
The decreases in non-interest expense in 2013 were principally due to $642 thousand lower severance, data processing and professional fees that were incurred in the first half of 2012 related to the Santa Lucia Bank acquisition that did not repeat in 2013. In addition, various other expenses were also less as the Company continued to identify opportunities for greater efficiency. Costs incurred related to other real estate owned also decreased as the balance of OREOs declined and write-downs were less.
Income Taxes
In the first nine months of 2013, despite pre-tax earnings of $1.796 million, the provision for income tax expense was offset by utilizing available tax loss carry-forwards originating from 2008 through 2011. The $45 thousand of income tax recorded in the first nine months of 2013 represents an accrual for alternative minimum tax related to utilization of those tax loss carry-forwards.
Total deferred tax assets as of September 30, 2013, are approximately $11,189,000 (including $8,377,000 of tax loss carry-forwards) and deferred tax liabilities total approximately $2,191,000. The Company continues to maintain a full valuation allowance against the net deferred tax asset of $8,998,000, as a result of the Company being in a cumulative loss position as of September 30, 2013. The valuation allowance was first established in 2010. The Company will continue to assess the likelihood of its ability to realize the deferred tax asset each quarter until such time that earnings evidence and projections demonstrate that it is more likely than not that the deferred tax asset can be fully utilized.
Balance Sheet Analysis
At September 30, 2013, consolidated assets totaled $441.2 million as compared with $435.2 million at December 31, 2012 and $443.3 million as of September 30, 2012. This represents an increase of $6.0 million over the past nine months. Total loans increased $32.3 million from year-end 2012 and increased $40.5 million or 17.1% from a year ago. Securities, cash and cash equivalents decreased $24.8 million from December 31, 2012 and decreased $41.1 million from September 30, 2012, due to the increase in the better yielding loan portfolio. Overall deposits increased $1.5 million from December 31, 2012 and declined $0.6 million from a year ago, mainly due to a decrease in the higher rate time and money market account deposits. The mix of deposits improved over third quarter, 2012 as non-interest bearing demand deposits increased 9.0% while higher cost time deposits and money market account balances declined 4.5%. Overall shareholders’ equity increased $1.074 million from year-end 2012 and increased $2.485 million over third quarter, 2012. Higher net income, as well as $3.0 million of additional common stock issued in the second quarter of 2013 provided additional capital to the company. Partly offsetting was the sharp increase in long-term interest rates in the second quarter of 2013 that drove the unrealized gain on the securities portfolio at December 31, 2012 into an unrealized loss position, negatively impacting shareholders’ equity. See also theCapital section of this report.
The following table below set forth quarterly balance sheet changes over the past five quarters:
Balance Sheet Growth | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Increase(Decrease) From Previous Quarter End | |||||||||||||||||||||||||||||||||||||||
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||
Total Assets | $ | (5,726 | ) | -1.3 | % | $ | 13,293 | 3.1 | % | $ | (1,544 | ) | -0.4 | % | $ | (8,110 | ) | -1.8 | % | $ | (15,659 | ) | -3.4 | % | ||||||||||||||||
Earning Assets | (4,157 | ) | -1.0 | % | 12,056 | 3.0 | % | (570 | ) | -0.1 | % | (3,873 | ) | -1.0 | % | (20,495 | ) | -4.8 | % | |||||||||||||||||||||
Loans | 26,706 | 10.6 | % | 5,349 | 2.2 | % | 201 | 0.1 | % | 8,263 | 3.5 | % | 13,395 | 6.0 | % | |||||||||||||||||||||||||
Deposits | (8,863 | ) | -2.2 | % | 11,328 | 2.9 | % | (921 | ) | -0.2 | % | (2,140 | ) | -0.5 | % | (19,237 | ) | -4.7 | % | |||||||||||||||||||||
Borrowings | 3,000 | 100.0 | % | 3,000 | - | - | - | (3,800 | ) | -100.0 | % | 3,800 | - | |||||||||||||||||||||||||||
Shareholders' Equity | 1,331 | 3.6 | % | (569 | ) | -1.5 | % | 312 | 0.8 | % | 1,411 | 3.9 | % | 963 | 2.8 | % | ||||||||||||||||||||||||
Loans
The following table shows the composition of our loan portfolio by type of loan (including loans held for sale) and the changes in their balances. The loan portfolio has grown by $28.7 million since December 2012, and by $38.9 million since a year ago. In third quarter, 2013 Mission Community Bank sourced $46.6 million of new loan commitments of which $9.8 million were purchase participations through Carpenter Community BancFund affiliated banks and $10.4 million of the new loans were acquired in a multifamily pool of performing loans from a third party. The increased loan portfolio volume in 2013 has improved loan portfolio diversification, as the concentration of commercial real estate loans is less, while residential real estate, farmland, commercial and industrial loans, multifamily and consumer loans all increased as a percentage of the total loan portfolio as observed in the chart below.
Agricultural production loans have the greatest seasonality, with the summer months normally being a low point in the cycle and winter months being the high point.
Loan Composition | ||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
September 30, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||||||||||||||
Type of Loan | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||||||||
Construction and land development | $ | 12,915 | 4.6 | % | $ | 11,995 | 4.9 | % | $ | 11,695 | 4.9 | % | ||||||||||||
Commercial real estate - owner-occupied | 72,425 | 26.1 | % | 72,036 | 29.4 | % | 69,410 | 29.3 | % | |||||||||||||||
Commercial real estate - non-owner-occupied | 69,080 | 24.9 | % | 69,145 | 28.2 | % | 75,020 | 31.7 | % | |||||||||||||||
Residential real estate | 42,227 | 15.2 | % | 31,501 | 12.8 | % | 32,120 | 13.6 | % | |||||||||||||||
Farnland and all other real estate loans | 19,775 | 7.1 | % | 8,299 | 3.4 | % | 7,764 | 3.3 | % | |||||||||||||||
Commercial and industrial loans | 38,996 | 14.1 | % | 33,580 | 13.7 | % | 32,826 | 13.8 | % | |||||||||||||||
Agricultural loans | 11,638 | 4.2 | % | 14,252 | 5.8 | % | 3,369 | 1.4 | % | |||||||||||||||
Municipal loans | 2,293 | 0.8 | % | 2,347 | 1.0 | % | 2,352 | 1.0 | % | |||||||||||||||
Leases, net of unearned income | 793 | 0.3 | % | 1,057 | 0.4 | % | 1,277 | 0.5 | % | |||||||||||||||
Consumer loans | 7,403 | 2.7 | % | 1,077 | 0.4 | % | 1,194 | 0.5 | % | |||||||||||||||
Total loans | $ | 277,545 | 100.0 | % | $ | 245,289 | 100.0 | % | $ | 237,027 | 100.0 | % | ||||||||||||
Asset Quality
Non-accrual loans (including loans held for sale) totaled $8.7 million at September 30, 2013 down from $10.2 million at December 31, 2012 and higher than September 30, 2012’s balance of $7.5 million.
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 financial difficulties 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 provides information about the Company’s non-performing loans, including quality ratios as of September 30, 2013, December 31, 2012, and September 30, 2012:
Non-Performing Assets* | ||||||||||||
(in thousands) | September 30 | December 31 | September 30 | |||||||||
2013 | 2012 | 2012 | ||||||||||
Loans in nonaccrual status: | ||||||||||||
Nonaccrual loans held for investment | $ | 8,131 | $ | 9,068 | $ | 5,941 | ||||||
Nonaccrual loans held for sale** | 612 | 1,142 | 1,580 | |||||||||
Loans past due 90 days or more and accruing | - | - | 127 | |||||||||
Restructured loans in accruing status | 702 | 722 | 711 | |||||||||
Total nonperforming loans | 9,445 | 10,932 | 8,359 | |||||||||
Foreclosed real estate | 536 | 493 | 1,113 | |||||||||
Total nonperforming assets | $ | 9,981 | $ | 11,425 | $ | 9,472 | ||||||
Real estate held by parent company | 325 | 325 | 350 | |||||||||
Total nonperforming loans and other real estate owned | $ | 10,306 | $ | 11,750 | $ | 9,822 | ||||||
Allowance for loan and lease losses allocated to impaired loans | $ | 645 | $ | 1,231 | $ | 504 | ||||||
Allowance for loan and lease losses allocated to loans held for sale** | - | - | - | |||||||||
Allowance for loan and lease losses allocated to all other loans | 3,752 | 3,011 | 3,596 | |||||||||
Total allowance for loan and lease losses | $ | 4,397 | $ | 4,242 | $ | 4,100 | ||||||
Asset quality ratios: | ||||||||||||
Non-performing assets to total assets | 2.26 | % | 2.63 | % | 2.14 | % | ||||||
Excluding loans held for sale** | 2.15 | % | 2.37 | % | 1.79 | % | ||||||
Non-performing loans to total loans | 3.40 | % | 4.46 | % | 3.53 | % | ||||||
Excluding loans held for sale** | 3.24 | % | 4.02 | % | 2.90 | % | ||||||
Allowance for loan and lease losses to total loans | 1.58 | % | 1.73 | % | 1.73 | % | ||||||
Excluding loans held for sale** | 1.61 | % | 1.74 | % | 1.76 | % | ||||||
Allowance for loan and lease losses to total non-performing loans | 47 | % | 39 | % | 49 | % | ||||||
Excluding non-performing loans held for sale** | 50 | % | 43 | % | 60 | % | ||||||
* Table combines bank and non-bank subsidiaries. | ||||||||||||
** Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank. Loans held for sale are carried at fair value. |
The level of non-performing loans continues to be high by historical standards, due to the significant downturn in the economy and subsequent reduction in real estate collateral values that occurred over the past few years. Of the $8.7 million in non-accrual loan balances at September 30, 2013, 60% of these loans were current with their payments. The $9.4 million of non-performing loans as of September 30, 2013, includes $919 thousand of SBA-guaranteed loans, which are supported by $632 thousand of SBA loan guarantees. The remaining $8.5 million of non-performing loans are loans which management has determined to be impaired. A determination of impairment is one of expected payment nonperformance, 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 $645 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, 2013 were $10.0 million, down $1.4 million from December 31, 2012, and up $509 thousand from September 30, 2012.
Potential Problem Loans
At September 30, 2013, the Company had approximately $3.4 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 borrower to comply with the repayment terms of the loan.
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 of September 30, 2013, as measured by loan delinquencies and by the Company’s internal asset quality rating system, is stable and well managed, there can be no assurances that continuing economic weakness will not lead to new problem loans in future periods. A further decline in economic conditions in the Company’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general. The Company 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, 2013 totaled $4.397 million, an increase of $155 thousand from December 31, 2012 and $297 thousand higher than third quarter 2012. The ratio of ALLL to total loans at September 30, 2013 was 1.61%, as compared with 1.73% at December 31, 2012 and 1.76% at September 30, 2012. At September 30, 2013 and 2012, the ratio of ALLL to total non-performing loans was 50% and 60%, respectively. Both the ALLL to total loan ratio and the ALLL to total non-performing loans ratio are affected by the purchase discount taken on loans acquired during the acquisition of Santa Lucia Bank in October, 2011. If the credit-related portion of the purchase discount on such loans were included in the ALLL, the ALLL to total loans ratio would be 2.71% and the ALLL to total non-performing loans would be 76% at September 30, 2013.
The following table provides an analysis of the changes in the ALLL for the three-month and nine-month periods ended September 30, 2013 and 2012:
Allowance for Loan and Lease Losses | ||||||||||||||||
(dollars in thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Balance at beginning of period | $ | 4,232 | $ | 3,781 | $ | 4,242 | $ | 3,326 | ||||||||
Provision for loan losses | 210 | 225 | 310 | 675 | ||||||||||||
Loans charged off | (67 | ) | (22 | ) | (261 | ) | (144 | ) | ||||||||
Recoveries of previous charge-offs | 22 | 116 | 106 | 243 | ||||||||||||
Net (charge-offs) recoveries | (45 | ) | 94 | (155 | ) | 99 | ||||||||||
Balance at end of period | $ | 4,397 | $ | 4,100 | $ | 4,397 | $ | 4,100 | ||||||||
Allowance for loan losses as a percentage of: | ||||||||||||||||
Period end loans, including loan held for sale | 1.58 | % | 1.73 | % | 1.58 | % | 1.73 | % | ||||||||
Period end loans, excluding loans held for sale* | 1.61 | % | 1.76 | % | 1.61 | % | 1.76 | % | ||||||||
Total non-performing loans, including loans held for sale | 47 | % | 49 | % | 47 | % | 49 | % | ||||||||
Non-performing loans, excluding loans held for sale* | 50 | % | 60 | % | 50 | % | 60 | % | ||||||||
As a percentage of average loans (annualized): | ||||||||||||||||
Net charge-offs (recoveries) | 0.07 | % | -0.17 | % | 0.08 | % | -0.06 | % | ||||||||
Provision for loan losses | 0.32 | % | 0.40 | % | 0.17 | % | 0.39 | % | ||||||||
Total loans, including loans held for sale | $ | 277,545 | $ | 237,027 | $ | 277,545 | $ | 237,027 | ||||||||
Loans excluding loans held for sale | 272,432 | 233,537 | 272,432 | 233,537 | ||||||||||||
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and Government-guaranteed loans held for sale at Mission Community Bank. Loans held for sale are carried at fair value. | ||||||||||||||||
The Company provides for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate by management to be adequate for probable losses incurred as of the balance sheet date. 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, 2013, 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, 2013, this reserve totaled $456 thousand as compared to $406 thousand as of December 31, 2012 and $406 thousand on September 30, 2012. The reserve for undisbursed loan commitments is included in other liabilities in the consolidated balance sheet and changes to this reserve are recorded as adjustments to non-interest expenses.
Investments
All but one of the securities in the Bank’s investment portfolio are considered to be investment grade. The one security below investment grade has been fully reserved for. The portfolio consists of a mixture of fixed-rate US agency securities (17%), fixed-rate mortgage-backed securities (21%), floating-rate mortgage-backed securities (27%), fixed-rate tax-exempt municipal securities (14%), and other fixed-rate securities (16%) and floating-rate securities (5%). The weighted average life of the portfolio, based on projected prepayment speeds, is 5.0 years with an approximate effective duration of 3.9 years.
During the second quarter of 2013 the aggregate fair value of the Bank’s investment portfolio shifted from a net unrealized gain to a net unrealized loss, due to a sharp increase in intermediate- to long-term market interest rates, rather than any change in credit quality. That unrealized loss position remained, although at a reduced level, as of September 30, 2013. As stated in Note 3 to the consolidated financial statements, the Bank does not believe the securities that are in an unrealized loss position as of September 30, 2013, are other than temporarily impaired.
Deposits
Deposits are the primary source of funding for lending and investing needs. Total deposits were $388.8 million as of September 30, 2013 as compared with $387.3 million at December 31, 2012 and $389.4 million at September 30, 2012. As noted earlier, the mix of deposits improved over third quarter, 2012 as non-interest bearing demand deposits increased 9.0% while the higher cost time deposits and money market account balances declined by 4.5% over the past one year.
The Bank generally prices interest-bearing deposits competitively based on periodic interest rate surveys in the local market and based on the Bank’s own balance sheet needs. Deposit rates are adjusted as needed using a deposit pricing model that considers the type of product, competition, interest rate yield curve, depth of customer relationship, the Bank’s cost of funds, liquidity profile and other asset and liability considerations. TheNet Interest Analysisand Rate/Volume Analysis provided earlier in this Discussion contain information regarding the average rates paid on deposits for the first nine months of 2012 and 2013.
The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) as well as the Insured Cash Sweep (“ICS”) programs. These programs provide customers the ability to deposit their money into CDARS certificates of deposit and/or ICS money market accounts in excess of $250,000, which is the FDIC insurable deposit limit, yet retains FDIC insurance over the total deposit. In order to obtain this level of insurance, the CDARS and ICS programs act as clearinghouses among banks, splitting the deposit and then matching them with other banks in the CDARS and ICS network of approximately 3,000 banks in increments of less than $250,000 per depositor, thereby qualifying for full FDIC insurance and keeping the total deposit with our bank. The CDARS and ICS programs are attractive to large depositors who are more interested in their deposits being fully insured by the FDIC than they are in seeking higher interest rates. As of September 30, 2013, the Bank had issued $18.3 million of certificates of deposit to local customers through the CDARS program and $2.0 million through the ICS program.
Borrowings
In addition to the Company’s junior subordinated debt securities, the Bank has a secured borrowing facility through the FHLB. The Bank had $6.0 million outstanding borrowings from the FHLB as of September 30, 2013, none as of December 31, 2012, and $3.8 million as of September 30, 2012.
Capital
Total shareholders’ equity has increased by $1.074 million from December 31, 2012, and increased by $2.485 million from September 30, 2012. The increase from year-end 2012 was due to the addition of net income attributable to common stock of $1.646 million, as well as $3.0 million of additional common stock issued in the second quarter of 2013 that provided additional capital to the company. Partly offsetting the above was the sharp increase in long-term interest rates in the second quarter of 2013 that drove the unrealized gain of $1.8 million on the securities portfolio at December 31, 2012 into an unrealized loss position of $1.9 million at September 30, 2013. As mentioned above, the Bank does not believe the securities that are in an unrealized loss position as of September 30, 2013, are other than temporarily impaired.
The following table sets forth 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, 2013, December 31, 2012, and September 30, 2012:
Mission Community Bank | ||||||||||||||||
Capital Ratios | ||||||||||||||||
(dollars in thousands) | Amount of Capital Required To Be | |||||||||||||||
Actual | Well-Capitalized | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
As of September 30, 2013: | ||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 42,303 | 12.90 | % | $ | 32,787 | 10.0 | % | ||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 38,195 | 11.65 | % | $ | 19,672 | 6.0 | % | ||||||||
Tier 1 Capital (to Average Assets) | $ | 38,195 | 8.66 | % | $ | 22,056 | 5.0 | % | ||||||||
As of December 31, 2012: | ||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 40,544 | 13.65 | % | $ | 29,703 | 10.0 | % | ||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 36,820 | 12.40 | % | $ | 17,822 | 6.0 | % | ||||||||
Tier 1 Capital (to Average Assets) | $ | 36,820 | 8.61 | % | $ | 21,391 | 5.0 | % | ||||||||
As of September 30, 2012: | ||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 39,809 | 13.74 | % | $ | 28,963 | 10.0 | % | ||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 36,178 | 12.49 | % | $ | 17,378 | 6.0 | % | ||||||||
Tier 1 Capital (to Average Assets) | $ | 36,178 | 8.23 | % | $ | 21,976 | 5.0 | % |
The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $500 million, the minimum asset size criteria for bank holding companies subject to those requirements. However, regulatory capital amounts and ratios for the Company (consolidated) are as follows:
Mission Community Bancorp | ||||||||||||||||||||||||
Regulatory Capital Ratios | September 30, 2013 | December 31, 2012 | September 30, 2012 | |||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 47,334 | 14.35 | % | $ | 43,802 | 14.62 | % | $ | 44,506 | 15.10 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 43,210 | 13.10 | % | $ | 40,057 | 13.37 | % | $ | 40,822 | 13.85 | % | ||||||||||||
Tier 1 Capital (to Average Assets) | $ | 43,210 | 9.92 | % | $ | 40,057 | 9.30 | % | $ | 40,822 | 9.16 | % |
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 (such as federal funds sold) are the primary means for providing immediate liquidity. Borrowings from established lines of credit with the FHLB and other banks are additional sources of readily available liquidity. The Company had $22.4 million in cash and cash equivalents as of September 30, 2013, as compared with $25.6 million as of December 31, 2012.
In order to manage the Bank’s liquidity requirements, the Bank strives to maintain an appropriate ratio of loans to deposits and to maintain sufficient off-balance-sheet sources of liquidity which may be drawn upon when or if needed. As of September 30, 2013 the Company’s loan-to-deposit ratio was 71%, an increase from the 63% ratio as of December 31, 2012. A low loan-to-deposit ratio indicates that the Bank has sufficient liquidity in place to meet potential needs for loan funding and/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 47.3% as of September 30, 2013, as compared with 46.2% as of December 31, 2012.
One of the 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, 2013, the Bank had borrowed $3.0 million from the FHLB for a 5-year term at a fixed interest rate of 1.03%, and another $3.0 million for a 3-year term at a fixed rate of 0.85%. 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, 2013, up to $102.8 million could be borrowed from the FHLB if needed. 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 and securities 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” to the extent that collateral is delivered to them and can also draw on correspondent bank lines of credit.
Off-Balance-Sheet Arrangements
In the normal course of business, the Company 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 sheets.
As of the dates indicated, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:
Loan Commitments | ||||||||||||
(in thousands) | September 30, | December 31, | September 30, | |||||||||
2013 | 2012 | 2012 | ||||||||||
Commitments to Extend Credit | $ | 55,987 | $ | 41,155 | $ | 41,334 | ||||||
Standby Letters of Credit | 2,005 | 2,365 | 3,179 | |||||||||
$ | 57,992 | $ | 43,520 | $ | 44,513 | |||||||
The Company’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 that at September 30, 2013 totaled $456 thousand ($406 thousand as of December 31, 2012 and September 30, 2012), which is included in other liabilities in the consolidated balance sheet.
The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements. The effect on the Company’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 low levels of investment in fixed assets or inventories. Inflation and its impact on interest rates have a very direct effect on the Company’s balance sheet and earnings. Management believes that the impact of inflation on financial results has much to do with the Company’s ability to anticipate and respond to such changes. Management endeavors to structure its balance sheet and mix of financial instruments to benefit from all interest rate trends and at the same time to do that within a well defined set of parameters to avoid excessive risk to capital, liquidity and earnings.
The Company’s growth and earnings performance is influenced by the local economies it serves. As we enter fourth quarter, 2013 overall economic activity and employment in California have shown considerable improvement over the past year, as strong growth in the technology sector has been joined by gains in tourism and entertainment and a rebound in home sales and residential construction.
California’s non-farm employment has risen 1.8% over the past year, and private sector payrolls have increased 2%. The State’s unemployment rate fell to 8.5% in June and has considerably closed its gap relative to the nation. Home prices have rebounded solidly and new home construction is increasing. The recent pull back in longer term interest rates at the start of fourth quarter, decline in fuel costs and what appears to be the continuation of quantitative easing likely into 2014 are supportive of continued economic progress into the new year.
Locally, the labor market in San Luis Obispo County soared to new highs during 2013. Non-farm payrolls grew 4.1% from July 2012 to July 2013 with the addition of approximately 4,500 jobs and outpacing every other major metropolitan area in the state. Currently, total non-farm payrolls in San Luis Obispo County stand at 106,700 jobs, representing about 1,600 more jobs than the prerecession peak in April 2007.
The local industries that have continued to drive employment include logistics, construction and tourism, while public sector employment has remained weak on what otherwise is robust private-sector growth. Growth in leisure and hospitality payrolls is expected to continue as new hotels are built in the area and established hotels expand and upgrade. Hotel occupancy and room rates are up at the region’s existing hotels, which areis helping to support the county’s restaurants, wine industry, and beach front economies.
Given several positive economic developments in the communities we serve, we continue to be optimistic with regard to how this will translate into increased business for the Company.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision of our management, including our principal executive officer and principal financial officer, the Company conducted, as of September 30, 2013, an assessment of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2013.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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. | Mine Safety Disclosures |
Not applicable.
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) |
2.2 | Agreement and Plan of Merger, dated as of October 21, 2013, by and between Heritage Oaks Bancorp and the Registrant (GG) |
3.1 | Restated Articles of Incorporation (B) |
3.2 | Certificate of Amendment to Articles of Incorporation (C) |
3.3 | Certificate of Amendment to Articles of Incorporation (D) |
3.4 | Amended and Restated Bylaws (E) |
4.1 | Certificate of Determination for Series A Non-Voting Preferred Stock (F) |
4.2 | Certificate of Determination for Series B Non-Voting Preferred Stock (F) |
4.3 | Certificate of Determination for Series C Non-Voting Preferred Stock (G) |
4.4 | Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (H) |
4.5 | Declaration of Trust of Mission Community Capital Trust I dated October 10, 2003 (H) |
4.6 | 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 (H) |
4.7 | Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (H) |
4.8 | Certificate of Determination for Series D Preferred Stock (H) |
4.9 | Form of Common Stock Purchase Warrant (I) |
4.10 | Form of Warrant Agreement for warrants issued pursuant to subscription rights (J) |
4.11 | Amendment No. 1 to public warrants issued pursuant to subscription rights offering (K) |
4.12 | Form of Warrant Issued to Replace Warrants Issued in 2010 Private Placement (L) |
4.13 | Form of Warrant Issued to Replace Warrants Issued in 2011 Private Placement (L) |
4.14 | Additional Form of Warrant Issued to Replace Warrants Issued in 2011 Private Placement (M) |
4.15 | Amended and Restated Declaration of Trust, dated as of April 28, 2006, of Santa Lucia Bancorp (CA) Capital Trust (N) |
4.16 | Indenture dated as of April 28, 2006, between Wells Fargo Bank, National Association, as Trustee, and Santa Lucia Bancorp (N) |
4.17 | First Supplemental Indenture dated as of October 21, 2011 between Wells Fargo Bank, National Association, as trustee, and Mission Community Bancorp (N) |
10.1 | Purchase and Sale Agreement and Lease dated January, 1997, as amended (F) |
10.2 | Lease Agreement – Paso Robles (F) |
10.3 | Lease Agreement – Arroyo Grande (F) |
10.4 | 1998 Stock Option Plan, as amended (F) |
10.5 | Lease Agreement – 569 Higuera, San Luis Obispo (G) |
10.6 | Lease Agreement – 3480 S. Higuera, San Luis Obispo (O) |
10.7 | Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (P) |
10.8 | Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (Q) |
10.9 | 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 (R) |
10.10 | Lease Agreement – 1670 South Broadway, Santa Maria (S) |
10.11 | Mission Community Bancorp 2008 Stock Incentive Plan (T) |
10.12 | Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (U) |
10.13 | Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (U) |
10.14 | Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which include the Securities Purchase Agreement—Standard Term attached thereto, with respect to the issuance and sale of the Series D. Preferred Stock (V) |
10.15 | Side Letter Agreement dated January 9, 2009 amendment the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (V) |
10.16 | 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 (V) |
10.17 | Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (V) |
10.18 | Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (W) |
10.19 | Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (X) |
10.20 | Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (Y) |
10.21 | Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (Z) |
10.22 | Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (AA) |
10.23 | Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Robert J. Stevens (BB) |
10.24 | Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Thomas J. Tolda (BB) |
10.25 | Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Tom L. Dobyns (BB) |
10.28 | Agreement and Plan of Merger dated as of June 24, 2011 by and among Carpenter Fund Manager GP, LLC; Mission Community Bancorp; Mission Community Bank; Santa Lucia Bancorp and Santa Lucia Bank (CC) |
10.29 | 2011 Equity Incentive Plan (DD) |
10.30 | Form of Indemnification Agreement dated June 25, 2013 between Mission Community Bancorp and each of its Directors (FF) |
10.31 | Letter Agreement between Mission Community Bancorp and James W. Lokey dated October 21, 2013, re continued employment (GG) |
14 | Code of Ethics (EE) |
31.1 | Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act |
31.2 | Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act |
32.1 | Certification of CEO pursuant to Section 906 of Sarbanes Oxley Act |
32.2 | Certification of CFO pursuant to Section 906 of Sarbanes Oxley Act |
101 | Interactive Data Files |
(A) | Included in the Company’s Form 8-K filed on December 18, 2000, and incorporated by reference herein. | |
(B) | Included in the Company’s Form 10-QSB filed on August 14, 2006, and incorporated by reference herein. | |
(C) | Included in the Company’s Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement filed on July 24, 2007, and incorporated by reference herein. | |
(D) | Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein. | |
(E) | Included in the Company's Form 8-K filed on March 29, 2012, and incorporated herein by reference. | |
(F) | Included in the Company’s Form 10-KSB filed on April 2, 2001, and incorporated by reference herein. | |
(G) | Included in the Company’s Form 10-QSB filed November 12, 2002, and incorporated by reference herein. | |
(H) | Included in the Company’s Form 8-K filed on October 21, 2003, incorporated by reference herein. | |
(I) | Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010, and incorporated by reference herein. | |
(J) | Included in Amendment No. 1 to the Company's Form S-1 Registration Statement filed on October 1, 2010, and incorporated by reference herein. | |
(K) | Included in the Company's Form 8-K filed on September 7, 2012 and incorporated herein by reference. | |
(L) | Included in the Company’s Form 8-K filed on March 26, 2012, and incorporated by reference herein. | |
(M) | Included in the Company’s Form 8-K filed on October 3, 2012, and incorporated herein by reference . | |
(N) | Included in the Company's Form 8-K filed on October 27, 2012, and incorporated by reference herein. | |
(O) | Included in the Company’s Form 10-QSB filed on August 10, 2004, and incorporated by reference herein. | |
(P) | Included in the Company’s Form 8-K filed on June 13, 2007, and incorporated by reference herein. | |
(Q) | Included in the Company’s Form SB-2 Registration Statement filed on June 13, 2007, and incorporated by reference herein. | |
(R) | Included in the Company’s Form 8-K filed on October 23, 2007, and incorporated by reference herein. | |
(S) | Included in the Company’s Form 10-KSB filed on March 28, 2008, and incorporated by reference herein. | |
(T) | Included in the Company’s Form 10-Q filed on May 15, 2008, and incorporated by reference herein. | |
(U) | Included in the Company’s Form 8-K filed on December 30, 2008, and incorporated by reference herein. | |
(V) | Included in the Company’s Form 8-K filed January 14, 2009, and incorporated by reference herein. | |
(W) | Included in the Company’s Form 8-K filed on December 24, 2009, and incorporated by reference herein. | |
(X) | Included in the Company’s From 8-K filed on March 22, 2010, and incorporated by reference herein. | |
(Y) | Included in the Company’s Form 8-K filed on March 26, 2010, and incorporated by reference herein. | |
(Z) | Included in the Company’s Form 8-K filed on June 1, 2010, and incorporated by reference herein. | |
(AA) | Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein. | |
(BB) | Included in the Company's Form 8-K filed on December 21, 2012, and incorporated herein by reference. | |
(CC) | Included in Form 8-K filed on June 27, 2011, and incorporated by reference herein. | |
(DD) | Included in the Company’s Form 8-K filed on September 30, 2011 and incorporated by reference herein. | |
(EE) | Included in the Company's Form 10-K filed on March 31, 2011, and incorporated herein by reference. | |
(FF) | Included in the Company’s Form 8-K filed on June 27, 2013, and incorporated herein by reference. | |
(GG) | Included in the Company’s Form 8-K filed on October 22, 2013, and incorporated herein by reference. |
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/JAMES W. LOKEY |
|
JAMES W. LOKEY
Chairman and Chief Executive Officer
Dated: November 4, 2013
By: | /s/THOMAS J. TOLDA |
|
THOMAS J. TOLDA
Executive Vice President and Chief Financial Officer
Dated: November 4, 2013
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