Attached files
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
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OR
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o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 333-12892
MISSION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
California
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77-0559736
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(State or other jurisdiction
of incorporation)
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(I.R.S. Employer
Identification No.)
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3380 S. Higuera St., San Luis Obispo, California 93401
(Address of principal executive offices)
(805) 782-5000
Issuer’s telephone number
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No (not yet applicable to registrant)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 7,094,274 shares of common stock outstanding as of May 6, 2010.
Mission Community Bancorp
March 31, 2011
Index
PART I – FINANCIAL INFORMATION
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4T. Controls and Procedures
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PART II – OTHER INFORMATION
PART I
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
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||||||||||||
Unaudited
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||||||||||||
(dollars in thousands)
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||||||||||||
March 31, 2011
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December 31, 2010
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March 31, 2010
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||||||||||
Assets
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||||||||||||
Cash and due from banks
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$ | 8,370 | $ | 10,817 | $ | 13,900 | ||||||
Federal funds sold
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- | - | - | |||||||||
Total cash and cash equivalents
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8,370 | 10,817 | 13,900 | |||||||||
Interest-bearing deposits in other banks
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302 | 550 | 400 | |||||||||
Investment securities available for sale
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79,399 | 75,435 | 40,662 | |||||||||
Loans held for sale
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12,457 | 15,115 | 771 | |||||||||
Loans, net of unearned income
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105,294 | 105,110 | 131,714 | |||||||||
Less allowance for loan and lease losses
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(3,245 | ) | (3,198 | ) | (5,080 | ) | ||||||
Net loans
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102,049 | 101,912 | 126,634 | |||||||||
Federal Home Loan Bank stock and other stock, at cost
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2,606 | 2,682 | 3,003 | |||||||||
Premises and equipment
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3,165 | 3,199 | 3,335 | |||||||||
Other real estate owned
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4,053 | 3,137 | 1,500 | |||||||||
Company owned life insurance
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3,002 | 2,980 | 2,909 | |||||||||
Accrued interest and other assets
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2,216 | 1,974 | 1,847 | |||||||||
Total Assets
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$ | 217,619 | $ | 217,801 | $ | 194,961 | ||||||
Liabilities and Shareholders' Equity
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||||||||||||
Deposits:
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||||||||||||
Noninterest-bearing demand
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$ | 24,706 | $ | 22,910 | $ | 22,194 | ||||||
Money market, NOW and savings
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63,346 | 70,010 | 57,979 | |||||||||
Time certificates of deposit
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86,606 | 80,320 | 85,178 | |||||||||
Total deposits
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174,658 | 173,240 | 165,351 | |||||||||
Other borrowings
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- | 349 | 6,000 | |||||||||
Junior subordinated debt securities
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3,093 | 3,093 | 3,093 | |||||||||
Accrued interest and other liabilities
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1,445 | 1,975 | 2,234 | |||||||||
Total liabilities
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179,196 | 178,657 | 176,678 | |||||||||
Shareholders' equity:
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||||||||||||
Preferred stock - Series A (100,000 shares issued and outstanding)
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392 | 392 | 392 | |||||||||
Preferred stock - Series B (20,500 shares issued and outstanding)
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192 | 192 | 192 | |||||||||
Preferred stock - Series C (50,000 shares issued and outstanding)
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500 | 500 | 500 | |||||||||
Preferred stock - Series D (5,116 shares issued and outstanding)
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5,068 | 5,068 | 5,068 | |||||||||
Common stock - 50,000,000 shares authorized;
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||||||||||||
Issued and outstanding: 7,094,274 at March 31, 2011
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and December 31, 2010, and 1,345,602 at March 31, 2010
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46,387 | 46,427 | 18,042 | |||||||||
Additional paid-in capital
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361 | 327 | 251 | |||||||||
Retained deficit
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(13,751 | ) | (13,220 | ) | (6,730 | ) | ||||||
Accumulated other comprehensive (loss) income
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(726 | ) | (542 | ) | 568 | |||||||
Total shareholders' equity
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38,423 | 39,144 | 18,283 | |||||||||
Total Liabilities and Shareholders' Equity
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$ | 217,619 | $ | 217,801 | $ | 194,961 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiaries
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Condensed Consolidated Statements of Operations
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Unaudited
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(in thousands, except per share data)
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For the Three Months Ended
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March 31, 2011
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March 31, 2010
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Interest Income
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Interest and fees on loans
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$ | 1,789 | $ | 2,058 | ||||
Interest on investment securities
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419 | 309 | ||||||
Other interest income
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10 | 7 | ||||||
Total interest income
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2,218 | 2,374 | ||||||
Interest Expense
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Interest on money market, NOW and savings deposits
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115 | 119 | ||||||
Interest on time certificates of deposit
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247 | 338 | ||||||
Other interest expense
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30 | 99 | ||||||
Total interest expense
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392 | 556 | ||||||
Net interest income
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1,826 | 1,818 | ||||||
Provision for loan and lease losses
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- | 200 | ||||||
Net interest income after provision for loan and lease losses
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1,826 | 1,618 | ||||||
Non-interest income
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Service charges on deposit accounts
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77 | 82 | ||||||
Gain on sale of loans
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106 | - | ||||||
Loan servicing fees, net of amortization
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24 | 34 | ||||||
Gain on sale of available-for-sale securities
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- | 58 | ||||||
Other real estate income
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20 | - | ||||||
Net losses and writedowns of fixed assets or other real estate
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(47 | ) | (106 | ) | ||||
Gain on disposition of loans held for sale
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50 | - | ||||||
Other income and fees
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42 | 39 | ||||||
Total non-interest income
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272 | 107 | ||||||
Non-interest expense
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Salaries and employee benefits
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1,315 | 923 | ||||||
Occupancy expenses
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321 | 300 | ||||||
Furniture and equipment
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114 | 124 | ||||||
Data processing
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201 | 188 | ||||||
Professional fees
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130 | 134 | ||||||
Marketing and business development
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37 | 29 | ||||||
Office supplies and expenses
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59 | 57 | ||||||
Insurance and regulatory assessments
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145 | 204 | ||||||
Loan and lease expenses
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37 | 28 | ||||||
Other real estate expenses
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56 | 10 | ||||||
Other expenses
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150 | 114 | ||||||
Total non-interest expense
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2,565 | 2,111 | ||||||
Loss before income taxes
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(467 | ) | (386 | ) | ||||
Income tax expense (benefit)
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- | - | ||||||
Net loss
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$ | (467 | ) | $ | (386 | ) | ||
Net loss applicable to common stock
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$ | (522 | ) | $ | (413 | ) | ||
Per Common Share Data:
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Net loss - basic
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$ | (0.07 | ) | $ | (0.31 | ) | ||
Average common shares outstanding - basic
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7,094,274 | 1,345,602 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiaries
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Condensed Consolidated Statements of Changes in Shareholders' Equity
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(Unaudited - dollars in thousands)
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Accumulated
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Additional
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Other
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Preferred
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Common Stock
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Paid-In
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Comprehensive
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Retained
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Comprehensive
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Stock
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Shares
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Amount
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Capital
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Loss
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Deficit
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Loss
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Total
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Balance at January 1, 2010
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$ | 6,152 | 1,345,602 | $ | 18,042 | $ | 242 | $ | (6,280 | ) | $ | 482 | $ | 18,638 | ||||||||||||||||||
Dividends declared and paid
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on Series D preferred stock
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(64 | ) | (64 | ) | ||||||||||||||||||||||||||||
Stock-based compensation
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9 | 9 | ||||||||||||||||||||||||||||||
Comprehensive loss:
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Net (loss)
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$ | (386 | ) | (386 | ) | (386 | ) | |||||||||||||||||||||||||
Less beginning of year unrealized
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gain on securities sold during
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||||||||||||||||||||||||||||||||
the period, net of taxes of $0
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(22 | ) | (22 | ) | (22 | ) | ||||||||||||||||||||||||||
Net unrealized gain on remaining
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available-for-sale securities,
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net of taxes of $-0-
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- | - | - | - | 108 | - | 108 | 108 | ||||||||||||||||||||||||
Total comprehensive loss
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$ | (300 | ) | |||||||||||||||||||||||||||||
Balance at March 31, 2010
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$ | 6,152 | 1,345,602 | $ | 18,042 | $ | 251 | $ | (6,730 | ) | $ | 568 | $ | 18,283 | ||||||||||||||||||
Balance at January 1, 2011
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$ | 6,152 | 7,094,274 | $ | 46,427 | $ | 327 | $ | (13,220 | ) | $ | (542 | ) | $ | 39,144 | |||||||||||||||||
Dividends declared and paid
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on Series D preferred stock
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(64 | ) | (64 | ) | ||||||||||||||||||||||||||||
Stock-based compensation
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34 | 34 | ||||||||||||||||||||||||||||||
Additional expenses of 2010
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shareholder rights offering
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(40 | ) | (40 | ) | ||||||||||||||||||||||||||||
Comprehensive loss:
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Net (loss)
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$ | (467 | ) | (467 | ) | (467 | ) | |||||||||||||||||||||||||
Net unrealized gain on
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available-for-sale securities,
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net of taxes of $-0-
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- | - | - | - | (184 | ) | - | (184 | ) | (184 | ) | |||||||||||||||||||||
Total comprehensive loss
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$ | (651 | ) | |||||||||||||||||||||||||||||
Balance at March 31, 2011
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$ | 6,152 | 7,094,274 | $ | 46,387 | $ | 361 | $ | (13,751 | ) | $ | (726 | ) | $ | 38,423 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Mission Community Bancorp and Subsidiaries
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Condensed Consolidated Statements of Cash Flows
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(Unaudited - dollars in thousands)
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For the Three Months Ended
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March 31, 2011
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March 31, 2010
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Operating Activities
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Net loss
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$ | (467 | ) | $ | (386 | ) | ||
Adjustments to reconcile net loss to net
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||||||||
cash provided by (used in) operating activities:
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Depreciation
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125 | 133 | ||||||
Accretion of discount on securities and loans, net
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119 | (23 | ) | |||||
Provision for credit losses
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- | 200 | ||||||
Stock-based compensation
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34 | 9 | ||||||
Gain on sale of available-for-sale securities
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- | (58 | ) | |||||
Gain on sale or disposition of loans held for sale
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(106 | ) | - | |||||
Net losses and writedowns of fixed assets or other real estate
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47 | 106 | ||||||
Increase in company-owned life insurance
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(22 | ) | (23 | ) | ||||
Other, net
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(773 | ) | 503 | |||||
Proceeds from loan sales
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965 | 2,920 | ||||||
Loans originated for sale
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(933 | ) | (2,041 | ) | ||||
Net cash (used in) provided by operating activities
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(1,011 | ) | 1,340 | |||||
Investing Activities
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Net change in Federal Home Loan Bank and other stock
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76 | - | ||||||
Net decrease in deposits in other banks
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248 | 25 | ||||||
Purchase of available-for-sale securities
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(7,995 | ) | (3,967 | ) | ||||
Proceeds from maturities, calls and paydowns of available-for-sale securities
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3,703 | 3,536 | ||||||
Proceeds from sales of available-for-sale securities
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- | 58 | ||||||
Net decrease in loans
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1,550 | 2,409 | ||||||
Purchases of premises and equipment
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(91 | ) | (213 | ) | ||||
Additional investments in other real estate owned
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(32 | ) | - | |||||
Proceeds from sale of other real estate owned
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139 | 600 | ||||||
Net cash (used in) provided by investing activities
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(2,402 | ) | 2,448 | |||||
Financing Activities
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Net (decrease) increase in demand deposits and savings accounts
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(4,868 | ) | 1,413 | |||||
Net increase in time deposits
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6,287 | 168 | ||||||
Net (decrease) in other borrowings
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(349 | ) | - | |||||
Additional stock offering costs
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(40 | ) | - | |||||
Payment of TARP-CPP dividends
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(64 | ) | (64 | ) | ||||
Net cash provided by financing activities
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966 | 1,517 | ||||||
Net (decrease) increase in cash and cash equivalents
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(2,447 | ) | 5,305 | |||||
Cash and cash equivalents at beginning of year
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10,817 | 8,595 | ||||||
Cash and cash equivalents at end of period
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$ | 8,370 | $ | 13,900 | ||||
Non-cash changes:
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Change in unrealized gains (losses) on available-for-sale securities
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$ | (184 | ) | 86 | ||||
Real estate acquired by foreclosure
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1,070 | - | ||||||
Supplemental disclosures of cash flow information:
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Interest paid
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382 | 545 | ||||||
Taxes paid
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- | - |
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
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, 2010, which was filed on March 31, 2011.
Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial statements for the three-month periods ended March 31, 2011 and 2010 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.
Management has determined that since all of the banking products and services offered by the Bank are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits. The Bank participated in the FDIC’s Transaction Account Guarantee Program (“TAGP”). Under the program, through December 31, 2010, all noninterest-bearing transaction accounts were fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the current standard maximum deposit insurance amount to $250,000 and extended full deposit insurance coverage for non-interest bearing transaction accounts to December 31, 2012.
Note 2 – Stock Based Compensation
The Company has a stock option plan, adopted in 1998, which is more fully described in Note J to the consolidated financial statements in the Company’s Annual Report on Form 10-K. The 1998 Stock Option Plan has been terminated with respect to the granting of future options under
the Plan. In 2008 the Company adopted the Mission Community Bancorp 2008 Stock Incentive Plan, which provides for the grant of various equity awards, including stock options.
The Company accounts for equity-based compensation arrangements, including employee stock options, using the “modified prospective method,” where stock-based compensation expense is recognized using the fair value based method for all new awards granted.
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.
The fair value of each option granted in the three months ended March 31, 2011, was estimated on the date of grant using the following assumptions:
Exercise price - $5.00
Market price of common stock - $3.65
Expected stock price volatility - 37.4%
Expected option life - 6 years
Risk-free interest rate - 2.32%
Weighted average fair value of options granted during the period - $1.09
No options were granted during the three months ended March 31, 2010.
During the three-month periods ended March 31, 2011 and 2010, the Bank recognized pre-tax stock-based compensation expense of $34,000 and $9,000, respectively. As of March 31, 2011, the Company has unvested options outstanding with unrecognized compensation expense totaling $323,000, which is scheduled to be recognized as follows (in thousands):
April 1 through December 31, 2011
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$ | 104 | ||
2012
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138 | |||
2013
|
69 | |||
2014
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6 | |||
2015
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5 | |||
2016
|
1 | |||
Total unrecognized compensation cost
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$ | 323 |
No options outstanding were “in the money” as of March 31, 2011.
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)
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Gross
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Gross
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Estimated
|
|||||||||||||
Amortized
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Unrealized
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Unrealized
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Market
|
|||||||||||||
Cost
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Gains
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Losses
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Value
|
|||||||||||||
March 31, 2011:
|
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U.S. Government agencies
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$ | 27,907 | $ | 41 | $ | (298 | ) | $ | 27,650 | |||||||
Mortgage-backed securities
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48,164 | 197 | (722 | ) | 47,639 | |||||||||||
Municipal securities
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2,917 | 46 | - | 2,963 | ||||||||||||
Corporate debt securities
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996 | 4 | - | 1,000 | ||||||||||||
Asset-backed securities
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141 | 6 | - | 147 | ||||||||||||
$ | 80,125 | $ | 294 | $ | (1,020 | ) | $ | 79,399 | ||||||||
December 31, 2010:
|
||||||||||||||||
U.S. Government agencies
|
$ | 21,083 | $ | 47 | $ | (270 | ) | $ | 20,860 | |||||||
Mortgage-backed securities
|
49,831 | 215 | (566 | ) | 49,480 | |||||||||||
Municipal securities
|
2,917 | 20 | (15 | ) | 2,922 | |||||||||||
Corporate debt securities
|
1,981 | 20 | - | 2,001 | ||||||||||||
Asset-backed securities
|
165 | 7 | - | 172 | ||||||||||||
$ | 75,977 | $ | 309 | $ | (851 | ) | $ | 75,435 |
The scheduled maturities of investment securities at March 31, 2011, were as follows. Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.
(in thousands)
|
Available-for-Sale Securities
|
|||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Within one year
|
$ | 997 | $ | 1,001 | ||||
Due in one year to five years
|
26,986 | 26,735 | ||||||
Due in five years to ten years
|
16,866 | 16,767 | ||||||
Due in greater than ten years
|
35,276 | 34,896 | ||||||
$ | 80,125 | $ | 79,399 |
Investment securities in a temporary unrealized loss position as of each balance sheet date are shown in the following table, based on the length of time they have been continuously in an unrealized loss position:
(in thousands)
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
March 31, 2011:
|
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U.S. Government agencies
|
$ | 18,724 | $ | 298 | $ | - | $ | - | $ | 18,724 | $ | 298 | ||||||||||||
Mortgage-backed securities
|
36,242 | 722 | - | - | 36,242 | 722 | ||||||||||||||||||
Municipal securities
|
303 | - | - | - | 303 | - | ||||||||||||||||||
Corporate debt securities
|
- | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities
|
- | - | - | - | - | - | ||||||||||||||||||
$ | 55,269 | $ | 1,020 | $ | - | $ | - | $ | 55,269 | $ | 1,020 | |||||||||||||
December 31, 2010:
|
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U.S. Government agencies
|
$ | 15,985 | $ | 270 | $ | - | $ | - | $ | 15,985 | $ | 270 | ||||||||||||
Mortgage-backed securities
|
37,274 | 566 | - | - | 37,274 | 566 | ||||||||||||||||||
Municipal securities
|
1,169 | 15 | - | - | 1,169 | 15 | ||||||||||||||||||
Corporate debt securities
|
- | - | - | - | - | - | ||||||||||||||||||
Asset-backed securities
|
- | - | - | - | - | - | ||||||||||||||||||
$ | 54,428 | $ | 851 | $ | - | $ | - | $ | 54,428 | $ | 851 |
As of March 31, 2011, the Company held 25 securities that had been in an unrealized loss position for less than 12 months. No securities have been in an unrealized loss position for 12 months or longer as of March 31, 2011. 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 March 31, 2011, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of March 31, 2011 are other than temporarily impaired.
During the first quarter of 2010, the Bank sold $5,532,000 of investment securities for gross gains of $58,000. Settlement of these transactions occurred during the second quarter of 2010. No securities were sold at a loss in the first quarter of 2010, and no securities were sold in the first quarter of 2011.
As of March 31, 2011, investment securities carried at $5,792,000 and $17,742,000 were pledged to secure public deposits, as required by law, and to secure potential borrowings from the Federal Home Loan Bank of San Francisco, respectively.
Note 4 — Loans
The Company’s loan portfolio consists primarily of loans to borrowers within the Central Coast area of California. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company’s market area and, as a result, the loan and collateral portfolios are concentrated in those industries and in that geographic area.
The following table shows the composition of the Company’s loans by type:
Loan Composition
|
||||||||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
March 31, 2011
|
December 31, 2010
|
March 31, 2010
|
||||||||||||||||||||||
Type of Loan
|
Amount
|
Percentage
|
Amount
|
Percentage
|
Amount
|
Percentage
|
||||||||||||||||||
Commercial
|
$ | 16,872 | 14.3 | % | $ | 17,701 | 14.7 | % | $ | 19,051 | 14.4 | % | ||||||||||||
Agricultural
|
2,484 | 2.1 | % | 1,022 | 0.9 | % | 671 | 0.5 | % | |||||||||||||||
Leases, net of unearned income
|
933 | 0.8 | % | 1,047 | 0.9 | % | 1,208 | 0.9 | % | |||||||||||||||
Municipal loans
|
3,603 | 3.1 | % | 2,987 | 2.5 | % | 3,822 | 2.9 | % | |||||||||||||||
Real estate
|
84,139 | 71.4 | % | 87,005 | 72.4 | % | 93,658 | 70.7 | % | |||||||||||||||
Construction and land development
|
8,188 | 7.0 | % | 8,972 | 7.4 | % | 12,496 | 9.4 | % | |||||||||||||||
Consumer
|
1,532 | 1.3 | % | 1,491 | 1.2 | % | 1,579 | 1.2 | % | |||||||||||||||
Total loans
|
$ | 117,751 | 100.0 | % | $ | 120,225 | 100.0 | % | $ | 132,485 | 100.0 | % |
The table above includes loans held for sale as follows:
Loans Held for Sale
|
||||||||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
March 31, 2011
|
December 31, 2010
|
March 31, 2010
|
||||||||||||||||||||||
Type of Loan
|
Amount
|
% of Total Loans
|
Amount
|
% of Total Loans
|
Amount
|
% of Total Loans
|
||||||||||||||||||
Commercial
|
$ | 243 | 0.2 | % | $ | 32 | 0.0 | % | $ | 771 | 0.6 | % | ||||||||||||
Real estate
|
8,774 | 7.5 | % | 10,545 | 8.8 | % | - | 0.0 | % | |||||||||||||||
Construction and land development
|
3,440 | 2.9 | % | 4,538 | 3.8 | % | - | 0.0 | % | |||||||||||||||
Total loans
|
$ | 12,457 | 10.6 | % | $ | 15,115 | 12.6 | % | $ | 771 | 0.6 | % |
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 are carried at the lower of cost or fair value, with no allowance for loan losses.
As of March 31, 2011, and December 31, 2010, loans totaling $75,145,000 and $60,681,000, respectively, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco.
Included in commercial loans at December 31, 2010, were $349,458 in guaranteed portions of SBA loans sold and subject to a 90-day premium refund obligation. In accordance with accounting standards for the sale of a portion of a loan, the Bank recorded the proceeds from the sale of the guaranteed portion of those SBA loans, which totaled $385,546, as a secured borrowing and included $349,458 of that amount in other borrowings on the consolidated balance sheet, with $36,088 recorded as a deferred premium and included in other liabilities. The 90-day premium refund obligation elapsed during the first quarter of 2011 and the transaction was recorded as a sale during that quarter, with the guaranteed portions of loans and the secured borrowings removed from the balance sheet and the resulting gain on sale recorded. In February 2011, the SBA eliminated the refund obligation period, so the Bank is no longer required to defer gain recognition for SBA loan sales after February 15, 2011. As of March 31, 2011, no SBA loan sales have been deferred.
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 periods ended March 31:
March 31, 2011
|
March 31, 2010
|
|||||||
Balance at beginning of year
|
$ | 3,197,636 | $ | 5,536,929 | ||||
Provision for loan and lease losses charged to expense
|
- | 200,000 | ||||||
Loans charged off
|
(8,049 | ) | (687,354 | ) | ||||
Recoveries on loans previously charged off
|
55,043 | 30,817 | ||||||
Balance at end of period
|
$ | 3,244,630 | $ | 5,080,392 |
Changes in the allowance for loan and lease losses for the three months ended March 31, 2011, and year ended December 31, 2010, are shown below disaggregated by portfolio segment:
Three Months Ended March 31, 2011
|
||||||||||||||||||||
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
|
$ | 530,473 | $ | 94,082 | $ | - | $ | - | $ | 624,555 | ||||||||||
Commercial real estate - owner-occupied
|
165,181 | 136,031 | - | 10,475 | 311,687 | |||||||||||||||
Commercial real estate - non-owner-occupied
|
696,239 | (222,118 | ) | - | - | 474,121 | ||||||||||||||
Residential real estate
|
501,008 | (83,147 | ) | - | 13,509 | 431,370 | ||||||||||||||
All other real estate loans
|
3,289 | (28 | ) | - | - | 3,261 | ||||||||||||||
Commercial and industrial loans
|
1,021,240 | (131,944 | ) | - | 30,979 | 920,275 | ||||||||||||||
Consumer and all other loans and lease financing
|
123,727 | (5,503 | ) | (8,049 | ) | 80 | 110,255 | |||||||||||||
Unallocated
|
156,479 | 212,627 | - | - | 369,106 | |||||||||||||||
Totals
|
$ | 3,197,636 | $ | - | $ | (8,049 | ) | $ | 55,043 | $ | 3,244,630 | |||||||||
Year Ended December 31, 2010
|
||||||||||||||||||||
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 Year
|
|||||||||||||||
Construction and land development
|
$ | 1,529,114 | $ | 1,737,805 | $ | (2,755,179 | ) | $ | 18,733 | $ | 530,473 | |||||||||
Commercial real estate - owner-occupied
|
669,727 | 822,197 | (1,326,743 | ) | - | 165,181 | ||||||||||||||
Commercial real estate - non-owner-occupied
|
1,272,180 | 234,669 | (810,610 | ) | - | 696,239 | ||||||||||||||
Residential real estate
|
162,505 | 1,679,365 | (1,340,862 | ) | - | 501,008 | ||||||||||||||
All other real estate loans
|
248,029 | (9,279 | ) | (235,461 | ) | - | 3,289 | |||||||||||||
Commercial and industrial loans
|
866,580 | 1,710,065 | (1,582,702 | ) | 27,297 | 1,021,240 | ||||||||||||||
Consumer and all other loans and lease financing
|
275,646 | (18,153 | ) | (134,401 | ) | 635 | 123,727 | |||||||||||||
Unallocated
|
513,148 | (356,669 | ) | - | - | 156,479 | ||||||||||||||
Totals
|
$ | 5,536,929 | $ | 5,800,000 | $ | (8,185,958 | ) | $ | 46,665 | $ | 3,197,636 |
The following table shows the Bank’s loan portfolio (excluding loans held for sale) allocated by management’s internal risk ratings as of the dates indicated:
Loans by Risk Rating
|
Risk Ratings
|
|||||||||||||||||||
(in thousands)
|
Special
|
Total
|
||||||||||||||||||
Pass
|
Mention
|
Substandard
|
Doubtful
|
Loans
|
||||||||||||||||
As of March 31, 2011:
|
||||||||||||||||||||
Construction and land development
|
$ | 3,251 | $ | 173 | $ | 1,324 | $ | - | $ | 4,748 | ||||||||||
Commercial real estate - owner-occupied
|
25,614 | 3,534 | 1,279 | - | 30,427 | |||||||||||||||
Commercial real estate - non-owner-occupied
|
25,427 | 2,750 | 779 | - | 28,956 | |||||||||||||||
Residential real estate
|
14,502 | - | 175 | - | 14,677 | |||||||||||||||
All other real estate
|
1,304 | - | - | - | 1,304 | |||||||||||||||
Commercial and industrial
|
15,474 | 248 | 1,016 | - | 16,738 | |||||||||||||||
Consumer and all other loans and lease financing
|
8,330 | - | 114 | - | 8,444 | |||||||||||||||
Total loans, net of unearned income
|
$ | 93,902 | $ | 6,705 | $ | 4,687 | $ | - | $ | 105,294 | ||||||||||
As of December 31, 2010:
|
||||||||||||||||||||
Construction and land development
|
$ | 2,932 | $ | 179 | $ | 1,324 | $ | - | $ | 4,435 | ||||||||||
Commercial real estate - owner-occupied
|
29,590 | - | 1,023 | - | 30,613 | |||||||||||||||
Commercial real estate - non-owner-occupied
|
22,477 | 6,077 | 781 | - | 29,335 | |||||||||||||||
Residential real estate
|
15,322 | - | - | - | 15,322 | |||||||||||||||
All other real estate
|
1,315 | - | - | - | 1,315 | |||||||||||||||
Commercial and industrial
|
14,872 | 150 | 877 | 13 | 15,912 | |||||||||||||||
Consumer and all other loans and lease financing
|
8,046 | - | 132 | - | 8,178 | |||||||||||||||
Total loans, net of unearned income
|
$ | 94,554 | $ | 6,406 | $ | 4,137 | $ | 13 | $ | 105,110 | ||||||||||
As of March 31, 2010:
|
||||||||||||||||||||
Construction and land development
|
$ | 2,320 | $ | 1,321 | $ | 8,855 | $ | - | $ | 12,496 | ||||||||||
Commercial real estate - owner-occupied
|
25,344 | - | 9,801 | - | 35,145 | |||||||||||||||
Commercial real estate - non-owner-occupied
|
29,161 | 665 | 6,923 | - | 36,749 | |||||||||||||||
Residential real estate
|
16,444 | 322 | 1,752 | - | 18,518 | |||||||||||||||
All other real estate
|
1,326 | - | 1,942 | - | 3,268 | |||||||||||||||
Commercial and industrial
|
12,470 | 354 | 2,588 | 13 | 15,425 | |||||||||||||||
Consumer and all other loans and lease financing
|
9,191 | - | 922 | - | 10,113 | |||||||||||||||
Total loans, net of unearned income
|
$ | 96,256 | $ | 2,662 | $ | 32,783 | $ | 13 | $ | 131,714 |
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:
Loans by Delinquency Status
|
Accruing
|
Past Due
|
||||||||||||||||||||||||||||||||||
(in thousands)
|
Recorded Balance of Loans Past Due
|
Troubled
|
90+ Days
|
Loans in
|
||||||||||||||||||||||||||||||||
30-59 | 60-89 | 90 | + |
Total
|
Debt
|
and
|
Non-Accrual
|
|||||||||||||||||||||||||||||
Days
|
Days
|
Days
|
Past Due
|
Current
|
Total Loans
|
Restructurings
|
Accruing
|
Status
|
||||||||||||||||||||||||||||
As of March 31, 2011:
|
||||||||||||||||||||||||||||||||||||
Construction and land development
|
$ | - | $ | - | $ | - | $ | - | $ | 4,748 | $ | 4,748 | $ | - | $ | - | $ | - | ||||||||||||||||||
Commercial real estate - owner-occupied
|
- | - | 682 | 682 | 29,745 | 30,427 | - | - | 710 | |||||||||||||||||||||||||||
Commercial real estate - non-owner-occupied
|
196 | - | - | 196 | 28,760 | 28,956 | - | - | - | |||||||||||||||||||||||||||
Residential real estate
|
- | 175 | - | 175 | 14,502 | 14,677 | - | - | - | |||||||||||||||||||||||||||
All other real estate
|
- | - | - | - | 1,304 | 1,304 | - | - | - | |||||||||||||||||||||||||||
Commercial and industrial
|
249 | - | 235 | 484 | 16,254 | 16,738 | - | - | 652 | |||||||||||||||||||||||||||
Consumer and all other loans and lease financing
|
- | - | - | - | 8,444 | 8,444 | 8 | - | - | |||||||||||||||||||||||||||
Total loans, net of unearned income
|
$ | 445 | $ | 175 | $ | 917 | $ | 1,537 | $ | 103,757 | $ | 105,294 | $ | 8 | $ | - | $ | 1,362 | ||||||||||||||||||
As of December 31, 2010:
|
||||||||||||||||||||||||||||||||||||
Construction and land development
|
$ | - | $ | - | $ | - | $ | - | $ | 4,435 | $ | 4,435 | $ | - | $ | - | $ | - | ||||||||||||||||||
Commercial real estate - owner-occupied
|
- | 681 | - | 681 | 29,932 | 30,613 | - | - | 641 | |||||||||||||||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | - | 29,335 | 29,335 | - | - | - | |||||||||||||||||||||||||||
Residential real estate
|
- | - | - | - | 15,322 | 15,322 | - | - | - | |||||||||||||||||||||||||||
All other real estate
|
- | - | - | - | 1,315 | 1,315 | - | - | - | |||||||||||||||||||||||||||
Commercial and industrial
|
237 | 165 | 821 | 1,223 | 14,689 | 15,912 | - | - | 1,352 | |||||||||||||||||||||||||||
Consumer and all other loans and lease financing
|
38 | - | - | 38 | 8,140 | 8,178 | - | - | - | |||||||||||||||||||||||||||
Total loans, net of unearned income
|
$ | 275 | $ | 846 | $ | 821 | $ | 1,942 | $ | 103,168 | $ | 105,110 | $ | - | $ | - | $ | 1,993 | ||||||||||||||||||
As of March 31, 2010:
|
||||||||||||||||||||||||||||||||||||
Construction and land development
|
$ | - | $ | - | $ | - | $ | - | $ | 12,496 | $ | 12,496 | $ | - | $ | - | $ | 1,428 | ||||||||||||||||||
Commercial real estate - owner-occupied
|
1,570 | - | - | 1,570 | 33,575 | 35,145 | - | - | 464 | |||||||||||||||||||||||||||
Commercial real estate - non-owner-occupied
|
- | 847 | - | 847 | 35,902 | 36,749 | - | - | 1,896 | |||||||||||||||||||||||||||
Residential real estate
|
- | - | - | - | 18,518 | 18,518 | - | - | - | |||||||||||||||||||||||||||
All other real estate
|
- | - | - | - | 3,268 | 3,268 | - | - | - | |||||||||||||||||||||||||||
Commercial and industrial
|
171 | - | 171 | 15,254 | 15,425 | 719 | - | 500 | ||||||||||||||||||||||||||||
Consumer and all other loans and lease financing
|
3 | - | - | 3 | 10,110 | 10,113 | 109 | - | - | |||||||||||||||||||||||||||
Total loans, net of unearned income
|
$ | 1,744 | $ | 847 | $ | - | $ | 2,591 | $ | 129,123 | $ | 131,714 | $ | 828 | $ | - | $ | 4,288 |
Following are summaries of the investment in impaired loans (excluding loans held for sale) as of the dates indicated, including the related allowance for loan losses and cash-basis income recognized:
Impaired Loans
|
For the Three Months Ended
|
|||||||||||||||||||
(in thousands)
|
As of March 31, 2011
|
March 31, 2011
|
||||||||||||||||||
Unpaid
|
Average
|
Interest Income
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Recognized
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
While Impaired
|
||||||||||||||||
Impaired Loans With a Related Allowance for Loan and Lease Losses:
|
||||||||||||||||||||
Construction and land development
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Commercial real estate - owner-occupied
|
326 | 397 | 32 | 325 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | - | - | |||||||||||||||
Residential real estate
|
- | - | - | - | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
374 | 468 | 3 | 382 | - | |||||||||||||||
Consumer and all other loans and lease financing
|
8 | 8 | - | - | - | |||||||||||||||
Total Impaired Loans With An Allowance Recorded
|
708 | 873 | 35 | 707 | - | |||||||||||||||
Impaired Loans With No Related Allowance for Loan and Lease Losses:
|
||||||||||||||||||||
Construction and land development
|
- | - | - | 356 | - | |||||||||||||||
Commercial real estate - owner-occupied
|
384 | 404 | - | 15 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | - | - | |||||||||||||||
Residential real estate
|
- | - | - | - | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
278 | 303 | - | 600 | - | |||||||||||||||
Consumer and all other loans and lease financing
|
- | - | - | - | - | |||||||||||||||
Total Impaired Loans With No Allowance Recorded
|
662 | 707 | - | 971 | - | |||||||||||||||
Total Loans Individually Evaluated for Impairment:
|
||||||||||||||||||||
Construction and land development
|
- | - | - | 356 | - | |||||||||||||||
Commercial real estate - owner-occupied
|
710 | 801 | 32 | 340 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | - | - | |||||||||||||||
Residential real estate
|
- | - | - | - | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
652 | 771 | 3 | 982 | - | |||||||||||||||
Consumer and all other loans and lease financing
|
8 | 8 | - | 4 | - | |||||||||||||||
Total Loans Individually Evaluated For Impairment
|
$ | 1,370 | $ | 1,580 | $ | 35 | $ | 1,682 | $ | - | ||||||||||
Loans Collectively Evaluated for Impairment:
|
||||||||||||||||||||
Construction and land development
|
$ | 4,748 | $ | 4,748 | $ | 625 | ||||||||||||||
Commercial real estate - owner-occupied
|
29,717 | 29,717 | 280 | |||||||||||||||||
Commercial real estate - non-owner-occupied
|
28,956 | 28,956 | 474 | |||||||||||||||||
Residential real estate
|
14,677 | 14,677 | 432 | |||||||||||||||||
All other real estate
|
1,304 | 1,304 | 3 | |||||||||||||||||
Commercial and industrial
|
16,086 | 16,086 | 917 | |||||||||||||||||
Consumer and all other loans and lease financing
|
8,436 | 8,436 | 110 | |||||||||||||||||
Unallocated
|
- | - | 369 | |||||||||||||||||
Total Loans Collectively Evaluated For Impairment
|
$ | 103,924 | $ | 103,924 | $ | 3,210 | ||||||||||||||
Total Loans:
|
||||||||||||||||||||
Construction and land development
|
$ | 4,748 | $ | 4,748 | $ | 625 | ||||||||||||||
Commercial real estate - owner-occupied
|
30,427 | 30,518 | 312 | |||||||||||||||||
Commercial real estate - non-owner-occupied
|
28,956 | 28,956 | 474 | |||||||||||||||||
Residential real estate
|
14,677 | 14,677 | 432 | |||||||||||||||||
All other real estate
|
1,304 | 1,304 | 3 | |||||||||||||||||
Commercial and industrial
|
16,738 | 16,857 | 920 | |||||||||||||||||
Consumer and all other loans and lease financing
|
8,444 | 8,444 | 110 | |||||||||||||||||
Unallocated
|
- | - | 369 | |||||||||||||||||
Total Loans
|
$ | 105,294 | $ | 105,504 | $ | 3,245 |
Impaired Loans
|
For the Year Ended
|
|||||||||||||||||||
(in thousands)
|
As of December 31, 2010
|
December 31, 2010
|
||||||||||||||||||
Unpaid
|
Average
|
Interest Income
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Recognized
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
While Impaired
|
||||||||||||||||
Impaired Loans With a Related Allowance for Loan and Lease Losses:
|
||||||||||||||||||||
Construction and land development
|
$ | - | $ | - | $ | - | $ | 1,817 | $ | - | ||||||||||
Commercial real estate - owner-occupied
|
- | - | - | 2,053 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | 1,393 | - | |||||||||||||||
Residential real estate
|
- | - | - | 94 | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
1,010 | 1,424 | 9 | 1,193 | - | |||||||||||||||
Consumer and all other loans and lease financing
|
- | - | - | 226 | - | |||||||||||||||
Total Impaired Loans With An Allowance Recorded
|
1,010 | 1,424 | 9 | 6,776 | - | |||||||||||||||
Impaired Loans With No Related Allowance for Loan and Lease Losses:
|
||||||||||||||||||||
Construction and land development
|
356 | 375 | - | 307 | - | |||||||||||||||
Commercial real estate - owner-occupied
|
326 | 396 | - | 46 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | 958 | - | |||||||||||||||
Residential real estate
|
- | - | - | - | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
301 | 322 | - | 299 | 27 | |||||||||||||||
Consumer and all other loans and lease financing
|
- | - | - | - | - | |||||||||||||||
Total Impaired Loans With No Allowance Recorded
|
983 | 1,093 | - | 1,610 | 27 | |||||||||||||||
Total Loans Individually Evaluated for Impairment:
|
||||||||||||||||||||
Construction and land development
|
356 | 375 | - | 2,124 | - | |||||||||||||||
Commercial real estate - owner-occupied
|
326 | 396 | - | 2,099 | - | |||||||||||||||
Commercial real estate - non-owner-occupied
|
- | - | - | 2,351 | - | |||||||||||||||
Residential real estate
|
- | - | - | 94 | - | |||||||||||||||
All other real estate
|
- | - | - | - | - | |||||||||||||||
Commercial and industrial
|
1,311 | 1,746 | 9 | 1,492 | 27 | |||||||||||||||
Consumer and all other loans and lease financing
|
- | - | - | 226 | - | |||||||||||||||
Total Loans Individually Evaluated For Impairment
|
$ | 1,993 | $ | 2,517 | $ | 9 | $ | 8,386 | $ | 27 | ||||||||||
Loans Collectively Evaluated for Impairment:
|
||||||||||||||||||||
Construction and land development
|
$ | 4,079 | $ | 4,079 | $ | 531 | ||||||||||||||
Commercial real estate - owner-occupied
|
30,287 | 30,287 | 165 | |||||||||||||||||
Commercial real estate - non-owner-occupied
|
29,335 | 29,335 | 696 | |||||||||||||||||
Residential real estate
|
15,322 | 15,322 | 501 | |||||||||||||||||
All other real estate
|
1,315 | 1,315 | 3 | |||||||||||||||||
Commercial and industrial
|
14,601 | 14,601 | 1,012 | |||||||||||||||||
Consumer and all other loans and lease financing
|
8,178 | 8,178 | 124 | |||||||||||||||||
Unallocated
|
- | - | 157 | |||||||||||||||||
Total Loans Collectively Evaluated For Impairment
|
$ | 103,117 | $ | 103,117 | $ | 3,189 | ||||||||||||||
Total Loans:
|
||||||||||||||||||||
Construction and land development
|
$ | 4,435 | $ | 4,454 | $ | 531 | ||||||||||||||
Commercial real estate - owner-occupied
|
30,613 | 30,683 | 165 | |||||||||||||||||
Commercial real estate - non-owner-occupied
|
29,335 | 29,335 | 696 | |||||||||||||||||
Residential real estate
|
15,322 | 15,322 | 501 | |||||||||||||||||
All other real estate
|
1,315 | 1,315 | 3 | |||||||||||||||||
Commercial and industrial
|
15,912 | 16,347 | 1,021 | |||||||||||||||||
Consumer and all other loans and lease financing
|
8,178 | 8,178 | 124 | |||||||||||||||||
Unallocated
|
- | - | 157 | |||||||||||||||||
Total Loans
|
$ | 105,110 | $ | 105,634 | $ | 3,198 |
Note 5 — Shareholders’ Equity and Loss Per Share
Common Stock
On April 27, 2010, there was an initial closing (the “Initial Closing”) under the Securities Purchase Agreement dated December 22, 2009, as amended (the “Securities Purchase Agreement”), by and between the Company and Carpenter Fund Manager GP, LLC (the “Manager”) on behalf of and as General Partner of Carpenter Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community BancFund—CA, L.P. (the “Investors”). At the Initial Closing the Investors purchased an aggregate of 2,000,000 shares of the common stock of the Company paired with warrants to purchase 2,000,000 shares of the common stock of the Company for an aggregate purchase price of $10 million. The warrants are exercisable for a term of five years from issuance at an exercise price of $5.00 per share and contain customary anti-dilution provisions.
On June 15, 2010, the Investors purchased an aggregate of 3,000,000 additional shares of common stock and warrants to purchase 3,000,000 shares of common stock at a purchase price of $5.00 per unit of one share of common stock and one warrant in the second closing under the Securities Purchase Agreement (the “Second Closing”), for an aggregate purchase price of $15 million.
The Company used a substantial majority of the proceeds from the Second Closing to enable a newly-formed wholly owned subsidiary of the Company, Mission Asset Management, Inc., to purchase from the Bank, certain non-performing loans and other real estate owned assets.
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, 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.
Prior to the Initial Closing, the Manager was the largest shareholder of the Company, beneficially owning 333,334 shares of the common stock of the Company or 24.7% of the issued and outstanding shares. Following the Second Closing and the rights offering, the Manager was the beneficial owner of 5,333,334 shares of the common stock of the Company (not including warrants) or 75.2% of the issued and outstanding shares.
Loss per Share
The following table shows the calculation of earnings (loss) per common share and the allocation of the Company’s net loss among common stock and the various classes of preferred stock:
Three Months Ended
|
||||||||
March 31, 2011
|
March 31, 2010
|
|||||||
Net income (loss)
|
$ | (467,291 | ) | $ | (385,840 | ) | ||
Less net income (loss) allocated to preferred stock:
|
||||||||
Convertible preferred (Series A & C)
|
(7,363 | ) | (30,679 | ) | ||||
Non-convertible preferred (Series B)
|
(1,509 | ) | (6,289 | ) | ||||
TARP preferred (Series D)
|
63,950 | 63,950 | ||||||
Net income (loss) allocated to all classes of preferred stock
|
55,078 | 26,982 | ||||||
Income (loss) allocated to common stock
|
$ | (522,369 | ) | $ | (412,822 | ) | ||
Average common shares outstanding
|
7,094,274 | 1,345,602 | ||||||
Basic earnings (loss) per common share
|
$ | (0.07 | ) | $ | (0.31 | ) |
No presentation of diluted earnings (loss) per common share has been presented because the result would be anti-dilutive.
Note 6 —Income taxes
The Company recognized no income tax expense or benefit for the three months ended March 31, 2011, or 2010, due to a limitation on the Company’s ability to recognize deferred tax assets.
Note 7 — Fair Value Measurement
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
|
·
|
Level 1—Quoted prices in active markets for identical assets or liabilities
|
|
·
|
Level 2—Estimates based on significant other observable inputs that market participants would use in pricing the asset or liability
|
|
·
|
Level 3—Estimates based on significant unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include management’s judgment, which may be a significant factor.
|
|
For some assets or liabilities, the inputs used to measure fair value may fall into more than one level of the fair value hierarchy. In such cases, the asset or liability is identified based on the lowest level input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.
|
Assets and liabilities measured at fair value on a recurring basis are summarized below:
(in thousands)
|
Fair Value Measurements Using
|
|||||||||||||||
March 31, 2011
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agencies
|
$ | - | $ | 27,650 | $ | - | $ | 27,650 | ||||||||
Mortgage-backed securities
|
- | 47,639 | - | 47,639 | ||||||||||||
Municipal securities
|
- | 2,963 | - | 2,963 | ||||||||||||
Corporate debt securities
|
- | 1,000 | - | 1,000 | ||||||||||||
Asset-backed securities
|
- | 147 | - | 147 | ||||||||||||
Total available-for-sale securities
|
- | 79,399 | - | 79,399 | ||||||||||||
Loans held for sale
|
- | - | 12,457 | 12,457 | ||||||||||||
Total assets measured at fair value on a recurring basis
|
$ | - | $ | 79,399 | $ | 12,457 | $ | 91,856 | ||||||||
December 31, 2010
|
||||||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agencies
|
$ | - | $ | 20,860 | $ | - | $ | 20,860 | ||||||||
Mortgage-backed securities
|
- | 49,480 | - | 49,480 | ||||||||||||
Municipal securities
|
- | 2,922 | - | 2,922 | ||||||||||||
Corporate debt securities
|
- | 2,001 | - | 2,001 | ||||||||||||
Asset-backed securities
|
- | 172 | - | 172 | ||||||||||||
Total available-for-sale securities
|
- | 75,435 | - | 75,435 | ||||||||||||
Loans held for sale
|
- | - | 15,115 | 15,115 | ||||||||||||
Total assets measured at fair value on a recurring basis
|
$ | - | $ | 75,435 | $ | 15,115 | $ | 90,550 |
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 2011 or 2010 and there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the three months ended March 31, 2011.
Loans held for sale that are carried at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary. Those loans are valued by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows to MAM, including collateral liquidation if repayment weaknesses exist.
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)
|
Current
|
|||||||||||||||||||
Period
|
||||||||||||||||||||
Fair Value Measurements Using
|
Gains
|
|||||||||||||||||||
March 31, 2011
|
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
|
$ | - | $ | - | $ | 652 | $ | 652 | $ | 6 | ||||||||||
Commercial real estate - owner-occupied
|
- | - | 710 | 710 | (32 | ) | ||||||||||||||
Construction and land development
|
- | - | - | - | - | |||||||||||||||
Consumer and all other loans and lease financing
|
- | - | 8 | 8 | - | |||||||||||||||
Total impaired loans, net of specific reserves
|
$ | - | $ | - | $ | 1,370 | $ | 1,370 | $ | (26 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis:
|
||||||||||||||||||||
Other real estate owned
|
$ | - | $ | - | $ | 4,053 | $ | 4,053 | $ | (47 | ) | |||||||||
Full Year
|
||||||||||||||||||||
Fair Value Measurements Using
|
Gains
|
|||||||||||||||||||
December 31, 2010
|
Level 1
|
Level 2
|
Level 3
|
Total
|
(Losses)
|
|||||||||||||||
Financial assets measured at fair value on a non-recurring basis:
|
||||||||||||||||||||
Impaired loans, net of specific reserves--
|
||||||||||||||||||||
Commercial and industrial
|
$ | - | $ | - | $ | 1,010 | $ | 1,010 | $ | (648 | ) | |||||||||
Commercial real estate - owner-occupied
|
- | - | 326 | 326 | (97 | ) | ||||||||||||||
Construction and land development
|
- | - | 356 | 356 | (10 | ) | ||||||||||||||
Total impaired loans, net of specific reserves
|
$ | - | $ | - | $ | 1,692 | $ | 1,692 | $ | (755 | ) | |||||||||
Non-financial assets measured at fair value on a non-recurring basis:
|
||||||||||||||||||||
Other real estate owned
|
$ | - | $ | - | $ | 3,137 | $ | 3,137 | $ | (486 | ) |
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 assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first three months of 2011 and 2010:
(in thousands)
|
Level 3 Available-for-Sale Securities and Loans Held for Sale
|
|||||||
Three Months Ended March 31
|
||||||||
2011
|
2010
|
|||||||
Balance at beginning of year
|
$ | 15,115 | $ | 913 | ||||
Securities transfered into Level 3
|
- | - | ||||||
Net increase (decrease) in SBA loans held for sale
|
223 | (132 | ) | |||||
Loans held for sale transfered into Level 3
|
- | - | ||||||
Unrealized gains (losses)
|
||||||||
included in other comprehensive income (loss)
|
- | - | ||||||
Purchases
|
- | - | ||||||
Settlements - principal reductions in loans held for sale
|
(1,810 | ) | - | |||||
Loans held for sale transferred to other real estate owned
|
(1,070 | ) | ||||||
Securities valuation reserve
|
- | (6 | ) | |||||
Loans held for sale valuation reserve
|
(1 | ) | - | |||||
Balance at end of period
|
$ | 12,457 | $ | 775 |
The following methods and assumptions were used to estimate the fair value of significant financial instruments that are not carried at fair value in the consolidated balance sheet:
Financial Assets. The carrying amounts of cash and short-term investments are considered to approximate fair value. Short-term investments include federal funds sold and interest bearing deposits with other banks. For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of values provided by brokers. The fair value of loans (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. The carrying value of accrued interest receivable approximates fair value and the fair value of Company owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers. The carrying amount of FHLB and FRB stock 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 deposits, fair value is estimated by discounting estimated future cash flows using
currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material.
The estimated fair value of financial instruments is summarized as follows:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying Value
|
Fair Value
|
Carrying Value
|
Fair Value
|
|||||||||||||
Financial Assets:
|
||||||||||||||||
Cash and due from banks
|
$ | 8,370 | $ | 8,370 | $ | 10,817 | $ | 10,817 | ||||||||
Interest-bearing deposits in other banks
|
302 | 302 | 550 | 550 | ||||||||||||
Investment securities
|
79,399 | 79,399 | 75,435 | 75,435 | ||||||||||||
Loans held for sale
|
12,457 | 12,457 | 15,115 | 15,115 | ||||||||||||
Loans, net of allowance for loan and lease losses
|
102,049 | 104,033 | 101,912 | 102,926 | ||||||||||||
Federal Home Loan Bank and other stocks
|
2,606 | 2,606 | 2,682 | 2,682 | ||||||||||||
Company owned life insurance
|
3,002 | 3,002 | 2,980 | 2,980 | ||||||||||||
Accrued interest receivable
|
714 | 714 | 697 | 697 | ||||||||||||
Financial Liabilities:
|
||||||||||||||||
Deposits
|
174,658 | 174,933 | 173,240 | 173,590 | ||||||||||||
Other borrowings
|
- | - | 349 | 349 | ||||||||||||
Junior subordinated debt securities
|
3,093 | 1,331 | 3,093 | 1,333 | ||||||||||||
Accrued interest payable
|
190 | 190 | 180 | 180 |
Note 8 — Recent Accounting Pronouncements
Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements. ASU 2010-06 revised two disclosure requirements concerning fair value measurements and clarified two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarified that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. ASU 2010-06 became effective for the Company’s financial statements as of December 31, 2010, except for the disclosure requirements related to the presentation of purchases, sales, issuances and settlements within Level 3, which were adopted by the Company on January 1, 2011. The adoption of the remaining provisions of ASU 2010-06 did not have a material impact on the Company’s financial position, results of operations or cash flows.
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires more robust and disaggregated disclosures about the credit quality of financing receivables (loans) and allowances for loan losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on and after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this guidance has significantly expanded disclosure requirements related to accounting policies and disclosures related to the allowance for loan losses but did not have an impact on the Company's financial position, results of operation or cash flows.
Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 approved the deferral of certain disclosure requirements surrounding TDRs included in ASU 2010-20, which were scheduled to be effective on January 1, 2011. The disclosure requirements were delayed until the FASB finalized the standards update related to their exposure draft, Clarifications to Accounting for Troubled Debt Restructurings by Creditors. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR. The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011. The disclosures which were deferred by ASU 2011-01 are required for interim and annual periods beginning on or after June 15, 2011. Management is currently determining the potential impact that the adoption of this standard may have on the Company’s financial position, results of operations and disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements. These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.” Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Bank operates); competition from other providers of financial services offered by the Bank; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Bank’s credit customers; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company or the Bank. The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.
Overview of Results of Operations and Financial Condition
|
·
|
The Company incurred a net loss of $(467) thousand for the first quarter of 2011, as compared with a net loss of $(386) thousand for the first quarter of 2010. The factors resulting in these losses will be discussed below.
|
|
·
|
No provision for loan losses was recorded in the first quarter of 2011, a decrease of $200 thousand from the first quarter of 2010.
|
|
·
|
Net interest income for the three-month period ended March 31, 2011, was $1.826 million, an increase of $8 thousand from the same period in 2010, primarily due to continued decreases in deposit rates as well as a $5.6 million decrease in the average balance of borrowed funds.
|
|
·
|
The net interest margin (net interest income as a percentage of average interest earning assets) decreased by 43 basis points, to 3.52%, for the three-month period ended March 31, 2011, as compared to the same period in 2010.
|
|
·
|
For the three months ended March 31, 2011, non-interest income increased by $165 thousand from the same period in 2010. The improvement was in increased gains on sales of SBA-guaranteed loans and disposition of other loans held for sale, as well as reduced losses on other real estate.
|
|
·
|
Non-interest expense increased by $454 thousand for the first quarter of 2011, as compared to the same quarter in 2010. Principal factors relating to the increase were
|
|
salaries and benefits for newly hired officers and increased operating expenses of foreclosed real estate.
|
|
·
|
Total assets were essentially flat from December 31, 2010 to March 31, 2011.
|
|
·
|
Non-performing assets decreased from $15.1 million as of December 31, 2010 to $12.0 million on March 31, 2011.
|
Income Summary
For the three months ended March 31, 2011, the Company incurred a net loss of $(467) thousand. This compares with a net loss of $(386) thousand for the comparable period of 2010.
Return (loss) on average assets (annualized) was (0.86)% for the first quarter of 2011, as compared with (0.81)% for the first quarter of 2010. Annualized return (loss) on average equity was (4.96)% for the first quarter of 2011 as compared with (8.34)% for the comparable 2010 period.
Net Interest Income
Net interest income is the largest source of the Bank’s operating income. For the three-month period ended March 31, 2011, net interest income was $1.826 million, an increase of $8 thousand from the same period in 2010, primarily due to continued decreases in deposit rates as well as a $5.6 million decrease in the average balance of borrowed funds. The beneficial impact of the reduction in interest expense was largely offset, however, as the average balance of interest-earning assets—primarily loans—declined by $23.4 million between those two periods.
The net interest margin (net interest income as a percentage of average interest earning assets) was 3.52% for the three-month period ended March 31, 2011, a decrease of 43 basis points as compared to the same period in 2010. Short-term interest rates dropped steeply in 2008, stabilized in 2009 and have remained at the current very low level. The initial drop placed severe pressure on our interest margin throughout 2008 and into 2009 but as rates stabilized, higher-rate liabilities have rolled off or repriced downward, significantly reducing our interest cost. Partially offsetting the beneficial impact of lower interest expense has been a reduction in interest income on loans, as demand for quality credits has diminished and the balance of non-accrual loans has increased since the first quarter of 2010.
The following table shows the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three-month periods ended March 31, 2011 and 2010:
(Dollars in thousands)
|
||||||||||||||||||||||||
For the Three Months Ended
|
||||||||||||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Interest-earning assets:
|
||||||||||||||||||||||||
Loans, net of unearned income*
|
$ | 119,612 | $ | 1,789 | 6.06 | % * | $ | 136,010 | $ | 2,058 | 6.14 | % * | ||||||||||||
Investment securities*
|
75,267 | 419 | 2.26 | % * | 39,674 | 309 | 3.15 | % * | ||||||||||||||||
Federal funds sold
|
- | - | - | - | - | - | ||||||||||||||||||
Other interest income
|
15,339 | 10 | 0.26 | % | 11,108 | 7 | 0.25 | % | ||||||||||||||||
Total interest-earning assets / interest income
|
210,218 | 2,218 | 4.28 | % | 186,792 | 2,374 | 5.15 | % | ||||||||||||||||
Non-interest-earning assets:
|
||||||||||||||||||||||||
Allowance for loan losses
|
(3,227 | ) | (5,551 | ) | ||||||||||||||||||||
Cash and due from banks
|
1,426 | 2,701 | ||||||||||||||||||||||
Premises and equipment
|
3,208 | 3,382 | ||||||||||||||||||||||
Other assets
|
7,599 | 6,379 | ||||||||||||||||||||||
Total assets
|
$ | 219,224 | $ | 193,703 | ||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
Interest-bearing liabilities:
|
||||||||||||||||||||||||
Interest-bearing deposits:
|
||||||||||||||||||||||||
Interest-bearing demand accounts
|
$ | 11,211 | $ | 20 | 0.73 | % | $ | 20,756 | $ | 41 | 0.79 | % | ||||||||||||
Savings and Money Market deposit accounts
|
51,976 | 95 | 0.74 | % | 35,063 | 78 | 0.90 | % | ||||||||||||||||
Certificates of deposit
|
86,389 | 247 | 1.16 | % | 85,719 | 338 | 1.60 | % | ||||||||||||||||
Total interest-bearing deposits
|
149,576 | 362 | 0.98 | % | 141,538 | 457 | 1.31 | % | ||||||||||||||||
Other short-tems borrowings
|
385 | 5 | 4.75 | % | - | - | - | |||||||||||||||||
Federal Home Loan Bank advances
|
- | - | - | 6,000 | 74 | 5.01 | % | |||||||||||||||||
Trust preferred securities
|
3,093 | 25 | 3.30 | % | 3,093 | 25 | 3.25 | % | ||||||||||||||||
Total borrowed funds
|
3,478 | 30 | 3.46 | % | 9,093 | 99 | 4.41 | % | ||||||||||||||||
Total interest-bearing liabilities / interest expense
|
153,054 | 392 | 1.04 | % | 150,631 | 556 | 1.50 | % | ||||||||||||||||
Non-interest-bearing liabilities:
|
||||||||||||||||||||||||
Non-interest-bearing deposits
|
26,604 | 22,696 | ||||||||||||||||||||||
Other liabilities
|
1,355 | 1,596 | ||||||||||||||||||||||
Total liabilities
|
181,013 | 174,923 | ||||||||||||||||||||||
Shareholders' equity
|
38,211 | 18,780 | ||||||||||||||||||||||
Total liabilities and shareholders' equity
|
$ | 219,224 | $ | 193,703 | ||||||||||||||||||||
Net interest-rate spread
|
3.24 | % | 3.65 | % | ||||||||||||||||||||
Impact of non-interest-bearing
|
||||||||||||||||||||||||
sources and other changes in
|
||||||||||||||||||||||||
balance sheet composition
|
0.28 | % | 0.30 | % | ||||||||||||||||||||
Net interest income / margin on earning assets
|
$ | 1,826 | 3.52 | % ** | $ | 1,818 | 3.95 | % ** | ||||||||||||||||
*No taxable-equivalent adjustment has been made on municipal securities and loans
|
||||||||||||||||||||||||
because no tax benefits are currently being recognized by the Company.
|
||||||||||||||||||||||||
** Net interest income as a % of earning assets
|
Shown in the following table are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by the Bank and the Company on those assets and liabilities for the three-month periods ended March 31, 2011 and 2010. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.
Rate / Volume Variance Analysis
|
||||||||||||
(In thousands)
|
Three Months Ended March 31, 2011
|
|||||||||||
Compared to 2010
|
||||||||||||
Increase (Decrease)
|
||||||||||||
in interest income and expense
|
||||||||||||
due to changes in:
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest-earning assets:
|
||||||||||||
Loans, net of unearned income
|
$ | (245 | ) | $ | (24 | ) | $ | (269 | ) | |||
Investment securities
|
217 | (107 | ) | 110 | ||||||||
Federal funds sold
|
- | - | - | |||||||||
Other interest income
|
3 | - | 3 | |||||||||
Total increase (decrease) in interest income
|
(25 | ) | (131 | ) | (156 | ) | ||||||
Interest-bearing liabilities:
|
||||||||||||
Transaction accounts
|
(18 | ) | (3 | ) | (21 | ) | ||||||
Savings deposits
|
33 | (16 | ) | 17 | ||||||||
Certificates of deposit
|
3 | (94 | ) | (91 | ) | |||||||
Total interest-bearing deposits
|
18 | (113 | ) | (95 | ) | |||||||
Other short-term borrowings
|
5 | - | 5 | |||||||||
FHLB advances
|
(74 | ) | - | (74 | ) | |||||||
Trust preferred securities
|
- | - | - | |||||||||
Total borrowed funds
|
(69 | ) | - | (69 | ) | |||||||
Total increase (decrease) in interest expense
|
(51 | ) | (113 | ) | (164 | ) | ||||||
Increase (decrease) in net interest income
|
$ | 26 | $ | (18 | ) | $ | 8 |
The tables above reflect the impact of lower rates paid on deposit accounts, the payoff of all remaining FHLB borrowings and the $8 million increase in average interest-bearing deposits over the past year, substantially offset by the reduced volume of loans outstanding in 2011. The overall rate decline on CD’s resulted from maturing CD’s being repriced downward in the current low rate environment.
Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain at a very low level through the remainder of 2011. If so, we expect to see certificate of deposit rates continue to decline (as the portfolio continues to reprice), with loan rates remaining relatively stable, which should result in improvement in our net interest margin. In the early stage of the next cycle of rising interest rates we would expect to see deposits repricing slightly faster than loans, as “floors” (minimum rates) have been implemented on much of the variable rate loan portfolio. Many of those floor rates are currently higher than the rate would be without the imposition of the floor. A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months. Additional non-accrual loans would put downward pressure on the net interest margin.
Provision for Loan Losses
The Bank recorded no provision for loan losses for the three months ended March 31, 2011, as compared with a $200 thousand provision for the first quarter of 2010.
Loan charge-offs totaled $8 thousand (with $55 thousand in recoveries) for the first quarter of 2011, as compared with $687 thousand of charge-offs and $31 thousand of recoveries for the same period in 2010. The ratio of allowance for loan losses to total loans was 2.76% at March 31, 2011, as compared to 3.83% a year ago and 2.66% as of December 31, 2010.
The Bank makes provisions for loan losses when required to bring the total allowance for loan losses to a level deemed appropriate for the risk in the loan portfolio. The determination of the appropriate level for the allowance is based on such factors as historical loss experience, the volume and type of lending conducted, the amount of nonperforming loans, regulatory standards, general economic conditions, and other factors related to the collectability of loans in the portfolio.
The provision for loan losses and allowance for loan losses reflect management’s consideration of the various risks in the loan portfolio. Additional discussion of loan quality and the allowance for loan losses is provided in the Asset Quality, Potential Problem Loans and Allowance for Loan and Lease Losses sections of this report.
Non-Interest Income
Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from the sale of loans and gains or losses on sales of securities and other real estate. For the three-month period ended March 31, 2011, non-interest income was $272 thousand, an increase of $165 thousand, or 154%, from the same period in 2011.
The following table shows the major components of non-interest income:
Non-Interest Income
|
||||||||||||||||
(In thousands)
|
For the Three Months Ended March 31,
|
|||||||||||||||
$ Amount
|
Change
|
|||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Service charges on deposit accounts
|
$ | 77 | $ | 82 | $ | (5 | ) | -6 | % | |||||||
Gain on sale of loans
|
106 | - | 106 |
nm
|
||||||||||||
Loan servicing fees, net of amortization
|
24 | 34 | (10 | ) | -29 | % | ||||||||||
Gain on sale of available-for-sale securities
|
- | 58 | (58 | ) | -100 | % | ||||||||||
Other real estate income
|
20 | - | 20 |
nm
|
||||||||||||
Loss or writedown of fixed assets or other real estate
|
(47 | ) | (106 | ) | 59 |
nm
|
||||||||||
Gain on disposition of loans held for sale
|
50 | - | 50 |
nm
|
||||||||||||
Other income and fees
|
42 | 39 | 3 | 8 | % | |||||||||||
Total non-interest income
|
$ | 272 | $ | 107 | $ | 165 | 154 | % | ||||||||
nm - not meaningful
|
The improvement in non-interest income was due to gains on sales of SBA loans and disposition of other loans held for sale, as well as reduced losses on other real estate. No gains on sales of SBA loans were recognized in the first quarter of 2010 due to the 90-day limited recourse period, as noted in Note 4 to the condensed consolidated financial statements.
More than half of the service charge income shown in the non-interest income table relates to NSF fee income, which declined by $12 thousand compared to the first quarter of 2010. Other fees not directly assessed on deposit accounts, such as non-customer ATM fees and wire transfer fees, increased by $7 thousand over the same period.
Non-Interest Expense
Non-interest expense represents salaries and benefits, occupancy expenses, professional fees, outside services, and other miscellaneous expenses necessary to conduct business. Non-interest expenses increased by $454 thousand, or 22%, for the three months ended March 31, 2011, as compared to the first quarter of 2010.
The following table shows the major components of non-interest expenses:
Non-Interest Expense
|
||||||||||||||||
(In thousands)
|
For the Three Months Ended March 31,
|
|||||||||||||||
$ Amount
|
Change
|
|||||||||||||||
2011
|
2010
|
$ | % | |||||||||||||
Salaries and employee benefits
|
$ | 1,315 | $ | 923 | $ | 392 | 42 | % | ||||||||
Occupancy expenses
|
321 | 300 | 21 | 7 | % | |||||||||||
Furniture and equipment
|
114 | 124 | (10 | ) | -8 | % | ||||||||||
Data processing
|
201 | 188 | 13 | 7 | % | |||||||||||
Professional fees
|
130 | 134 | (4 | ) | -3 | % | ||||||||||
Marketing and business development
|
37 | 29 | 8 | 28 | % | |||||||||||
Office supplies and expenses
|
59 | 57 | 2 | 4 | % | |||||||||||
Insurance and regulatory assessments
|
145 | 204 | (59 | ) | -29 | % | ||||||||||
Loan and lease expenses
|
37 | 28 | 9 | 32 | % | |||||||||||
Other real estate expenses
|
56 | 10 | 46 | 460 | % | |||||||||||
Other
|
150 | 114 | 36 | 32 | % | |||||||||||
Total non-interest expense
|
$ | 2,565 | $ | 2,111 | $ | 454 | 22 | % |
The increase in non-interest expense was principally from:
|
·
|
An increase in salaries and benefits due to additional officers hired in the second half of 2010, including the Company’s new chief executive officer, in preparation for planned future growth,
|
|
·
|
Expenses of operating a higher volume of other real estate, and
|
|
·
|
Stock option compensation for recently-hired officers (an increase of $25 thousand).
|
These increased expenses were partially offset by a significant decrease in our FDIC insurance assessment (a $59 thousand decrease for the first three months of 2011 vs. 2010).
Income Taxes
The Company recognized no income tax expense or benefit for the three months ended March 31, 2011 or 2010, due to a limitation on the Company’s ability to recognize deferred tax assets.
Balance Sheet Analysis
At March 31, 2011, consolidated assets totaled $217.6 million, as compared with $217.8 million at December 31, 2010, and $195.0 million at the end of 2010’s first quarter. This represents an increase of $22.6 million (11.6%) over the past twelve months. Total loans decreased $14.7 million (11%) over that period, while securities and cash equivalents increased $33.1 million (60%), deposits increased $9.3 million (6%), borrowed funds decreased $6.0 million (100%) and shareholders’ equity increased $20.1 million (110%). The increases in securities, cash equivalents and shareholders’ equity were due to the growth in deposits, as well as the issuance of 5,748,672 shares of common stock in the last nine months of 2010, for net proceeds of $28.4 million. The Company’s net losses over the past year partially offset the increase in capital from the stock issuance. See also the Capital section of this report.
The following table shows balance sheet growth trends over the past five quarters:
Balance Sheet Growth
|
||||||||||||||||||||||||||||||||||||||||
(dollars in thousands)
|
Increase(Decrease) From Previous Quarter End*
|
|||||||||||||||||||||||||||||||||||||||
March 31, 2011
|
December 31, 2010
|
September 30, 2010
|
June 30, 2010
|
March 31, 2010
|
||||||||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||
Total Assets
|
$ | (182 | ) | -0.3 | % | $ | 5,596 | 10.5 | % | $ | 3,423 | 6.5 | % | $ | 13,821 | 28.4 | % | $ | 1,855 | 3.9 | % | |||||||||||||||||||
Earning Assets
|
(1,384 | ) | -2.7 | % | 5,348 | 10.6 | % | 2,889 | 5.8 | % | 12,337 | 26.7 | % | 1,894 | 4.2 | % | ||||||||||||||||||||||||
Loans
|
(2,474 | ) | -8.3 | % | (2,638 | ) | -8.5 | % | (3,033 | ) | -9.6 | % | (6,589 | ) | -19.9 | % | (3,925 | ) | -11.7 | % | ||||||||||||||||||||
Deposits
|
1,418 | 3.3 | % | 7,619 | 18.3 | % | 4,495 | 11.1 | % | (4,225 | ) | -10.2 | % | 1,581 | 3.9 | % | ||||||||||||||||||||||||
Borrowings
|
(349 | ) | -405.6 | % | (4,121 | ) | -365.8 | % | 328 | 31.4 | % | (1,858 | ) | -124.2 | % | - | 0.0 | % | ||||||||||||||||||||||
Shareholders' Equity
|
(720 | ) | -7.5 | % | 1,891 | 20.1 | % | (562 | ) | -5.9 | % | 19,531 | 428.5 | % | (355 | ) | -7.7 | % | ||||||||||||||||||||||
*Percentages shown as annualized rates
|
Loans
The following table shows the composition of our loans by type of loan (including loans held for sale):
Loan Composition
|
||||||||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
March 31, 2011
|
December 31, 2010
|
March 31, 2010
|
||||||||||||||||||||||
Type of Loan
|
Amount
|
Percentage
|
Amount
|
Percentage
|
Amount
|
Percentage
|
||||||||||||||||||
Commercial
|
$ | 16,872 | 14.3 | % | $ | 17,701 | 14.7 | % | $ | 19,051 | 14.4 | % | ||||||||||||
Agricultural
|
2,484 | 2.1 | % | 1,022 | 0.9 | % | 671 | 0.5 | % | |||||||||||||||
Leases, net of unearned income
|
933 | 0.8 | % | 1,047 | 0.9 | % | 1,208 | 0.9 | % | |||||||||||||||
Municipal loans
|
3,603 | 3.1 | % | 2,987 | 2.5 | % | 3,822 | 2.9 | % | |||||||||||||||
Real estate
|
84,139 | 71.4 | % | 87,005 | 72.4 | % | 93,658 | 70.7 | % | |||||||||||||||
Construction and land development
|
8,188 | 7.0 | % | 8,972 | 7.4 | % | 12,496 | 9.4 | % | |||||||||||||||
Consumer
|
1,532 | 1.3 | % | 1,491 | 1.2 | % | 1,579 | 1.2 | % | |||||||||||||||
Total loans
|
$ | 117,751 | 100.0 | % | $ | 120,225 | 100.0 | % | $ | 132,485 | 100.0 | % |
The table shows a net decrease in loans outstanding over the past twelve months—primarily in commercial, real estate and construction loans. Of the total real estate and construction loans as of March 31, 2011, 75% are commercial real estate loans, and 48% of those are owner-occupied properties. Approximately 2% of the owner-occupied commercial real estate loans are SBA-guaranteed.
Asset Quality
Non-accrual loans (including loans held for sale) totaled $8.5 million at March 31, 2011, as compared to $12.0 million at December 31, 2010 and $4.3 million at March 31, 2010.
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 presents information about the Company’s non-performing loans, including quality ratios as of March 31, 2011, December 31, 2010 and March 31, 2010:
Non-Performing Assets
|
||||||||||||
(in thousands)
|
March 31
|
December 31
|
March 31
|
|||||||||
2011
|
2010
|
2010
|
||||||||||
Loans in nonaccrual status:
|
||||||||||||
Nonaccrual loans held for investment
|
$ | 1,362 | $ | 1,993 | $ | 4,288 | ||||||
Nonaccrual loans held for sale*
|
7,151 | 10,011 | - | |||||||||
Loans past due 90 days or more and accruing
|
- | - | - | |||||||||
Restructured loans in accruing status
|
8 | - | 740 | |||||||||
Total nonperforming loans
|
8,521 | 12,004 | 5,028 | |||||||||
Foreclosed real estate
|
3,487 | 2,572 | 935 | |||||||||
Total nonperforming assets
|
$ | 12,008 | $ | 14,576 | $ | 5,963 | ||||||
Real estate held for possible future branch office
|
565 | 565 | 565 | |||||||||
Total nonperforming loans and other real estate owned
|
$ | 12,573 | $ | 15,141 | $ | 6,528 | ||||||
Allowance for loan and lease losses allocated to impaired loans
|
$ | 35 | $ | 9 | $ | 57 | ||||||
Allowance for loan and lease losses allocated to loans held for sale*
|
- | - | - | |||||||||
Allowance for loan and lease losses allocated to all other loans
|
3,210 | 3,189 | 5,023 | |||||||||
Total allowance for loan and lease losses
|
$ | 3,245 | $ | 3,198 | $ | 5,080 | ||||||
Asset quality ratios:
|
||||||||||||
Non-performing assets to total assets
|
5.52 | % | 6.69 | % | 3.06 | % | ||||||
Excluding loans held for sale*
|
2.37 | % | 2.25 | % | 3.07 | % | ||||||
Non-performing loans to total loans
|
7.24 | % | 9.98 | % | 3.80 | % | ||||||
Excluding loans held for sale*
|
1.30 | % | 1.90 | % | 3.82 | % | ||||||
Allowance for loan and lease losses to total loans
|
2.76 | % | 2.66 | % | 3.83 | % | ||||||
Excluding loans held for sale*
|
3.08 | % | 3.04 | % | 3.86 | % | ||||||
Allowance for loan and lease losses to total non-performing loans
|
38 | % | 27 | % | 101 | % | ||||||
Excluding non-performing loans held for sale*
|
237 | % | 160 | % | 101 | % | ||||||
* Loans held for sale are carried at fair value
|
For comparison, ratios in the table above are presented both with and without loans held for sale. The high level of non-performing loans has been due to the significant downturn in the economy and reduction in real estate collateral values over the past three years. The $8.5 million of non-performing loans as of March 31, 2011, includes $1.3 million of SBA-guaranteed loans, which are supported by $1.1 million of SBA loan guarantees. The remaining $7.2 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 $35 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 March 31, 2011 were $12.0 million, a decrease of $3.1 million from the $15.1 million balance at December 31, 2010. Foreclosed real estate represents real property taken by the Bank from the borrower either through foreclosure or through a deed in lieu of foreclosure, and is carried at the lesser of cost or fair market value, less estimated selling costs.
The following table provides a summary of the change in the balance of other real estate owned for the three months ended March 31, 2011:
Other Real Estate Owned
|
||||
(dollars in thousands)
|
Three Months Ended
|
|||
March 31, 2011
|
||||
Balance of foreclosed real estate at beginning of year
|
$ | 2,572 | ||
Real estate held for possible future branch office
|
565 | |||
Total other real estate owned at beginning of year
|
$ | 3,137 | ||
Foreclosures during the period
|
1,070 | |||
Additional investments in other real estate
|
32 | |||
Sales of other real estate
|
(139 | ) | ||
Writedowns and losses on sales of other real estate
|
(47 | ) | ||
Balance of other real estate owned at end of period
|
$ | 4,053 |
Potential Problem Loans
At March 31, 2011, the Bank had approximately $9.5 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. The $9.5 million of potential problem loans includes $551 thousand of SBA-guaranteed loans, which are supported by $425 thousand of SBA loan guarantees, and $8.5 million of the potential problem loans are secured by real estate.
Potential problem loans were identified through the ongoing loan review process and are subject to continuing management attention. Management has provided in the allowance for loan and lease losses for potential losses related to these loans, based on an evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation.
While credit quality, as measured by loan delinquencies and by the Bank’s internal risk grading system, appears to be manageable as of March 31, 2011, there can be no assurances that new problem loans will not develop in future periods. A continuing decline in economic conditions in the Bank’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general. The Bank has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) at March 31, 2011 totaled $3.2 million, an increase of $47 thousand from December 31, 2010. The ratio of ALLL to total loans at March 31, 2011, was 2.76%, as compared with 2.66% at December 31, 2010, and 3.83% at March 31, 2010. The decrease in the ALLL from a year ago is attributable to the June 2010 reclassification of $22.2 million of lower-quality loans to held for sale, which resulted in a reduction of specific reserves now that these loans are valued on a recurring basis at the lower of cost or fair value. At March 31, 2011 and 2010, the ratio of ALLL to total non-performing loans was 38% and 101%, respectively.
The following table provides an analysis of the changes in the ALLL for the three-month periods ended March 31, 2011 and 2010:
Allowance for Loan and Lease Losses
|
||||||||
(dollars in thousands)
|
Three Months Ended
|
|||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Balance at beginning of period
|
$ | 3,198 | $ | 5,537 | ||||
Provision for loan losses
|
- | 200 | ||||||
Loans charged off
|
(8 | ) | (689 | ) | ||||
Recoveries of previous charge-offs
|
55 | 32 | ||||||
Net recoveries (charge-offs)
|
47 | (657 | ) | |||||
Balance at end of period
|
$ | 3,245 | $ | 5,080 | ||||
Allowance for loan losses as a percentage of:
|
||||||||
Period end loans
|
2.76 | % | 3.83 | % | ||||
Period end loans excluding loans held for sale*
|
3.08 | % | 3.86 | % | ||||
Total non-performing loans
|
38 | % | 101 | % | ||||
Non-performing loans excluding loans held for sale*
|
237 | % | 101 | % | ||||
As a percentage of average loans (annualized):
|
||||||||
Net charge-offs (recoveries)
|
-0.16 | % | 1.96 | % | ||||
Provision for loan losses
|
0.00 | % | 0.60 | % | ||||
* Loans held for sale are carried at fair value
|
The Bank makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio. At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the volume and type of lending conducted, the amount of identified potential loss associated with specific nonperforming loans, collateral values, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.
Based on its quarterly review, management believes that the allowance for loan losses at March 31, 2011, is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involve uncertainty and matters of judgment. Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.
In addition, management has established a reserve for undisbursed loan commitments. As of March 31, 2011, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheet.
Investments
All securities in the Bank’s investment portfolio are considered to be investment grade. The portfolio consists of a mixture of fixed-rate US agency securities (34%), fixed-rate mortgage-backed securities (35%), floating-rate mortgage-backed securities (25%), fixed-rate tax-exempt municipal securities (4%), floating-rate corporate debt securities (1%) and fixed-rate CMO’s (1%). The Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages. The average life of the portfolio is projected to be 3.8 years, with a duration of 3.4 years.
Deposits
Deposits are the primary source of funding for lending and investing needs. Total deposits were $174.7 million as of March 31, 2011, as compared with $173.2 million at December 31, 2010, and $165.4 million at March 31, 2010.
The Bank generally prices interest-bearing deposits at or above the median rate by classification based on periodic interest rate surveys in the local market. Deposit rates are then adjusted, using a deposit pricing model, to balance the cost of funds, funding needs and other asset and liability considerations. The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for the first three months of 2011 and 2010.
The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC, up to $50 million. The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of more than 3,000 banks with other network banks (in increments of less than the per-depositor FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet. The CDARS program has become very attractive since mid-year 2008, as local depositors sought out safety with yield often a secondary concern. As of March 31, 2011, the Bank had issued $41.9 million of certificates of deposit to local customers through the CDARS program, as compared with $45.9 million as of March 31, 2010.
Borrowings
In addition to the Company’s junior subordinated debt securities, the Bank has a secured borrowing facility through the Federal Home Loan Bank of San Francisco (“FHLB”). As of March 31, 2011 and December 31, 2010, the Bank had no outstanding borrowings from the FHLB.
Other borrowings as of December 31, 2010 consisted of $349 thousand in proceeds from the sale of SBA-guaranteed loans that have been sold but are subject to a 90-day premium refund obligation. The 90-day premium refund obligation period elapsed during the first quarter of 2011 and the transaction was then recorded as a sale, with the loans and the secured borrowings removed from the balance sheet and the resulting gain on sale recorded in the consolidated statement of operations. In February 2011, the SBA eliminated the refund obligation period, so the Bank is not required to defer gain recognition for SBA loan sales after February 15, 2011.
Capital
Total shareholders’ equity has increased $20.1 million, or 110%, over the past twelve months. The increase was due to the issuance of 5,748,672 shares of common stock in the last nine months of 2010, for net proceeds of $28.4 million. The Company’s net losses over the past year partially offset the increase in capital from the stock issuance.
The following table shows the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at March 31, 2011, December 31, 2010, and March 31, 2010:
Mission Community Bank
|
||||||||||||||||||||||||
Capital Ratios
|
Amount of Capital Required
|
|||||||||||||||||||||||
(dollars in thousands)
|
To Be
|
To Be Adequately
|
||||||||||||||||||||||
Actual
|
Well-Capitalized
|
Capitalized
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As of March 31, 2011:
|
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets)
|
$ | 21,461 | 16.99 | % | $ | 12,633 | 10.0 | % | $ | 10,106 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets)
|
$ | 19,858 | 15.72 | % | $ | 7,580 | 6.0 | % | $ | 5,053 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets)
|
$ | 19,858 | 9.85 | % | $ | 10,085 | 5.0 | % | $ | 8,068 | 4.0 | % | ||||||||||||
As of December 31, 2010:
|
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets)
|
$ | 21,649 | 17.20 | % | $ | 12,587 | 10.0 | % | $ | 10,069 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets)
|
$ | 20,054 | 15.93 | % | $ | 7,552 | 6.0 | % | $ | 5,035 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets)
|
$ | 20,054 | 10.18 | % | $ | 9,852 | 5.0 | % | $ | 7,881 | 4.0 | % | ||||||||||||
As of March 31, 2010:
|
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets)
|
$ | 21,701 | 14.45 | % | $ | 15,023 | 10.0 | % | $ | 12,018 | 8.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets)
|
$ | 19,782 | 13.17 | % | $ | 9,014 | 6.0 | % | $ | 6,009 | 4.0 | % | ||||||||||||
Tier 1 Capital (to Average Assets)
|
$ | 19,782 | 10.24 | % | $ | 9,663 | 5.0 | % | $ | 7,730 | 4.0 | % |
See also Effects of Inflation and Economic Issues below, for a discussion of EESA and its impact on the Company.
Liquidity
The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded. The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit. Cash and cash equivalents (primarily federal funds sold) are the primary means for providing immediate liquidity. The Bank had $8.4 million in cash and cash equivalents on March 31, 2011, as compared with $10.8 million as of December 31, 2010, and $13.9 million on March 31, 2010.
In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain an appropriate ratio of loans to deposits, and to maintain sufficient off-balance-sheet sources of funds which may be drawn upon when needed. As of March 31, 2011, the Company’s loans-to-deposits ratio was 67%, as compared with 69% as of December 31, 2010, and 80% on March 31, 2010. This ratio has been declining over the past several quarters, as demand for quality credits has been weak through the economic downturn, while deposits have grown during this period. A low loans-to-deposits ratio indicates that the Bank has liquidity in place to meet potential needs for loan funding or deposit withdrawals. The Bank’s sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 52% as of March 31, 2011, as compared with 47% as of December 31, 2010, and 26% as of March 31, 2010.
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 March 31, 2011, the Bank had no outstanding borrowings from the FHLB. Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased. The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets. Based on this limitation and loans and securities pledged as of March 31, 2011, up to $45.7 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” for additional secured borrowing should the need arise.
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers, including commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheets.
As of the dates indicated, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:
Loan Commitments
|
||||||||||||
(in thousands)
|
March 31
|
December 31
|
March 31
|
|||||||||
2011
|
2010
|
2010
|
||||||||||
Commitments to Extend Credit
|
$ | 18,761 | $ | 19,832 | $ | 18,610 | ||||||
Standby Letters of Credit
|
861 | 901 | 301 | |||||||||
$ | 19,622 | $ | 20,733 | $ | 18,911 |
The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management has established a reserve for undisbursed loan commitments. As of March 31, 2011, and December 31, 2010, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheets.
The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements. The effect on the Bank’s revenues, expenses, cash flows and liquidity
from the unused portion of commitments to provide credit cannot be reasonably predicted, as there is no guarantee the lines of credit will ever be used.
Effects of Inflation and Economic Issues
A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively little investments in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal levels in order to maintain an appropriate equity to assets ratio. Management believes that the impact of inflation on financial results depends on the Company’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.
San Luis Obispo and Santa Barbara Counties continue to have unemployment rates (9.9% and 9.6%, respectively, as of March 2011), significantly below the California statewide seasonally-adjusted rate of 12.0%, but both remain above the nationwide seasonally-adjusted rate of 8.8%. SLO County’s rate is down from a high of 10.6% early in 2010, while Santa Barbara County’s rate peaked at 10.1%. As unemployment increased during the Great Recession, real estate values declined significantly and, after several years of strong appreciation, residential and commercial sale activity—and especially construction activity—slowed dramatically. There can be no assurance that the local economy will rebound quickly or that real estate values will return to pre-2006 levels in the near term. As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls over financial reporting in the Company’s fiscal quarter ended March 31, 2011.
PART II - OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
There are no material legal proceedings to which the Company is a party or to which any of its property is subject.
Item 1A.
|
Risk Factors
|
Not applicable.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None.
Item 3.
|
Defaults Upon Senior Securities
|
None.
Item 4.
|
(Reserved)
|
Item 5.
|
Other Information
|
None.
Item 6. Exhibits
Exhibit Index:
Exhibit #
|
||
2.1
|
Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)
|
|
3.1
|
Restated Articles of Incorporation (I)
|
|
3.2
|
Certificate of Amendment to Articles of Incorporation (L)
|
|
3.3
|
Certificate of Amendment to Articles of Incorporation (Y)
|
|
3.4
|
Bylaws, as amended (B),(S)
|
|
4.1
|
Certificate of Determination for Series A Non-Voting Preferred Stock (B)
|
|
4.2
|
Certificate of Determination for Series B Non-Voting Preferred Stock (B)
|
|
4.3
|
Certificate of Determination for Series C Non-Voting Preferred Stock (D)
|
|
4.4
|
Purchase Agreement dated October 10, 2003, by and among Registrant, Mission Community Capital Trust I, and Bear Stearns & Co., Inc. (E)
|
|
4.5
|
Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (E)
|
|
4.6
|
Declaration of Trust of Mission Community Capital Trust I dated October 10, 2003 (E)
|
|
4.7
|
Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (E)
|
|
4.8
|
Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (E)
|
|
4.9
|
Fee Agreement dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Co., Bear Stearns & Co., Inc. and Mission Community Capital Trust I (E)
|
|
4.10
|
Certificate of Determination for Series D Preferred Stock (R)
|
|
4.11
|
Form of Common Stock Purchase Warrant (Z)
|
|
4.12
|
Form of Warrant Agreement for warrants issued pursuant to subscription rights (AA)
|
|
10.1
|
Purchase and Sale Agreement and Lease dated January, 1997, as amended (B)
|
|
10.2
|
Intentionally omitted
|
|
10.3
|
Lease Agreement – Paso Robles (B)
|
|
10.4
|
Lease Agreement – San Luis Obispo (B)
|
|
10.5
|
Lease Agreement – Arroyo Grande (B)
|
|
10.6
|
1998 Stock Option Plan, as amended (B)
|
|
10.7
|
Lease Agreement – 569 Higuera, San Luis Obispo (D)
|
|
10.8
|
Lease Agreement – 671 Tefft Street, Nipomo CA (C)
|
|
10.9
|
Intentionally omitted
|
|
10.10
|
Lease Agreement – 3480 S. Higuera, San Luis Obispo (F)
|
|
10.11
|
Salary Protection Agreement — Mr. Pigeon (G)
|
|
10.12
|
Intentionally omitted
|
|
10.13
|
Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J)
|
|
Exhibit #
|
||
10.14
|
Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J)
|
|
10.15
|
Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K)
|
|
10.16
|
Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M)
|
|
10.17
|
Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N)
|
|
10.18
|
Lease Agreement – 1670 South Broadway, Santa Maria (O)
|
|
10.19
|
Mission Community Bancorp 2008 Stock Incentive Plan (P)
|
|
10.20
|
Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q)
|
|
10.21
|
Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q)
|
|
10.22
|
Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q)
|
|
10.23
|
Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which includes the Securities Purchase Agreement—Standard Terms attached thereto, with respect to the issuance and sale of the Series D Preferred Stock (R)
|
|
10.24
|
Side Letter Agreement dated January 9, 2009 amending the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R)
|
|
10.25
|
Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R)
|
|
10.26
|
Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R)
|
|
10.27
|
Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (U)
|
|
10.28
|
Form of Warrant to be issued in connection with the Securities Purchase Agreement (U)
|
|
10.29
|
Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (V)
|
|
10.30
|
Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (W)
|
|
10.31
|
Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (X)
|
|
10.32
|
Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (Y)
|
|
(A) Included in the Company’s Form 8-K filed on December 18, 2000
(B) Included in the Company’s Form 10-KSB filed on April 2, 2001
(C) Included in the Company’s Form 10-QSB filed August 12, 2002
(D) Included in the Company’s Form 10-QSB filed on November 12, 2002
(E) Included in the Company’s Form 8-K filed on October 21, 2003
(F) Included in the Company’s Form 10-QSB filed on August 10, 2004
(G) Included in the Company’s Form 8-K filed on January 19, 2005
(H) Intentionally omitted
(I) Included in the Company’s Form 10-QSB filed on August 14, 2006
(J) Included in the Company’s Form 8-K filed on June 13, 2007
(K) Included in the Form SB-2 Registration Statement of the Company filed on June 13, 2007
(L) Included in Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement of the Company filed on July 24, 2007
(M) Included in the Company’s Form 8-K filed on August 14, 2007
(N) Included in the Company’s Form 8-K filed on October 23, 2007
(O) Included in the Company’s Form 10-KSB filed on March 28, 2008
(P) Included in the Company’s Form 10-Q filed on May 15, 2008
(Q)Included in the Company’s Form 8-K filed on December 30, 2008
(R)Included in the Company’s Form 8-K filed on January 14, 2009
(S)Included in the Company’s Form 10-Q filed on August 14, 2009
(T)Included in the Company’s Form 10-K filed on March 16, 2009
(U)Included in the Company’s From 8-K filed on December 24, 2009
(V)Included in the Company’s Form 8-K filed on March 22, 2010
(W)Included in the Company’s Form 8-K filed on March 26, 2010
(X)Included in the Company’s Form 8-K filed on June 1, 2010
(Y)Included in the Company’s Form 8-K filed on August 2, 2010
(Z)Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010
(AA)Included in Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on October 1, 2010
|
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MISSION COMMUNITY BANCORP
By: /s/ Anita M. Robinson
ANITA M ROBINSON
President
Dated: May 16, 2011
By: /s/ Ronald B. Pigeon
RONALD B. PIGEON
Executive Vice President and Chief Financial Officer
Dated: May 16, 2011