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EX-32.2 - CFO SEC. 906 CERTIFICATION - MISSION COMMUNITY BANCORPexh32-2.htm
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EX-32.1 - CEO SEC. 906 CERTIFICATION - MISSION COMMUNITY BANCORPexh32-1.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1

 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended June 30, 2009

 
OR
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-12892

MISSION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
California
 
77-0559736
(State or other jurisdiction
of incorporation)
 
(I.R.S. Employer
Identification No.)

581 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 or to registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No (not yet applicable to registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer  o
Non-accelerated filer o
   (Do not check if a smaller reporting company)
Smaller reporting company þ
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  1,345,602 shares of common stock outstanding as of August 10, 2009.


 



Mission Community Bancorp
Form 10-Q/A
EXPLANATORY NOTE

We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the six months ended June 30, 2009 (the “Original Filing”) to amend and restate our unaudited condensed consolidated financial statements and related disclosures for the six months ended June 30, 2009, as discussed in Note 8 to the accompanying restated unaudited condensed consolidated financial statements.  The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on August 14, 2009. This Amendment corrects and restates the original Quarterly Report on Form 10-Q, but continues to be reported as of the date of the original filing of the Form 10-Q on August 14, 2009.  The Company has not updated the disclosures in this Amendment to report as of a later date.  All information contained in this Amendment is subject to updating and supplementing as provided in the periodic reports filed with the SEC subsequent to the original filing date.

Background of the Restatement
On June 11, 2010, the Company announced that its Audit Committee, with the assistance of its independent auditors, had determined that an error had been made with respect to the recognition of  $511 thousand in tax benefits in the first six months of 2009.  As a result of this error, the Company announced that the previously issued unaudited condensed consolidated financial statements for the fiscal quarters ended March 31, 2009, June 30, 2009, and September 30, 2009 in the Company’s Forms 10-Q for those periods should no longer be relied upon (collectively, the “Affected Periods”).  The error had been corrected on a year-to-date basis as of September 30, 2009.  This restatement reflects the appropriate portions of the correction in the first and second quarters of 2009, rather than in the third quarter.  The financial statements for the full year 2009 are not included in the Affected Periods.

Description of the Error
The recognition of a $479 thousand tax benefit in the first fiscal quarter of 2009 and an additional $32 thousand in the second quarter was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable.  However, at that time, management was unaware of a previous interpretation under the tax law that would disqualify the Company from electing the extended carryback period under ARRA.  The error was corrected on a year-to-date basis as of September 30, 2009.  This restatement reflects the appropriate portions of that correction in the first and second quarters of 2009, rather than in the third quarter.

Restatement of Other Financial Statements
This amendment to our Quarterly Report on Form 10-Q is being filed to restate our unaudited condensed consolidated financial statements and related financial information for the six-month period ended June 30, 2009.  With the filing of this Form 10-Q/A, we are concurrently filing amendments to our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009 and September 30, 2009.  We are also concurrently filing an amendment to our Form 10-Q for the quarterly period ending March 31, 2010.  The amendment to this most recent Form 10-Q is being filed only because the originally filed report for March 31, 2010 includes financial statements which present comparisons to the uncorrected March 31, 2009, financial statements.  The consolidated financial statements and related financial information contained in any of the Company’s filings with the SEC during the Affected Periods should no longer be relied upon.

 



Mission Community Bancorp
June 30, 2009

Index




















 



PART I

Item 1.   Financial Statements (Restated)


                 
 Condensed Consolidated Balance Sheets
                 
 Unaudited
 
(dollars in thousands)
 
   
(Restated)
     
 
June 30, 2009
   
December 31, 2008
   
June 30, 2008
 
 Assets
                 
 Cash and due from banks
  $ 11,837     $ 7,804     $ 2,799  
 Federal funds sold
    1,145       9,920       160  
 Total cash and cash equivalents
    12,982       17,724       2,959  
 Interest-bearing deposits in other banks
    575       11,710       550  
 Investment securities available for sale
    43,764       24,846       25,669  
                         
 Loans held for sale
    1,227       1,264       1,088  
                         
 Loans, net of unearned income
    150,216       152,047       147,354  
 Less allowance for loan losses
    (3,474 )     (3,942 )     (2,986 )
 Net loans
    146,742       148,105       144,368  
                         
 Federal Home Loan Bank stock and other stock, at cost
    2,849       2,757       2,195  
 Premises and equipment
    2,807       2,599       3,466  
 Other real estate owned
    2,300       983       -  
 Company owned life insurance
    2,837       2,789       2,739  
 Accrued interest and other assets
    3,240       2,713       3,017  
 Total Assets
  $ 219,323     $ 215,490     $ 186,051  
                         
 Liabilities and Shareholders' Equity
                       
 Deposits:
                       
 Noninterest-bearing demand
  $ 22,129     $ 22,802     $ 23,157  
 Money market, NOW and savings
    40,796       32,668       38,710  
 Time certificates of deposit
    97,760       89,334       64,313  
 Total deposits
    160,685       144,804       126,180  
 Other borrowings
    30,044       45,700       37,200  
 Junior subordinated debt securities
    3,093       3,093       3,093  
 Accrued interest and other liabilities
    1,317       1,376       1,059  
 Total liabilities
    195,139       194,973       167,532  
 Shareholders' Equity:
                       
 Preferred stock - Series A (100,000 shares issued and outstanding)
    392       392       392  
 Preferred stock - Series B (20,500 shares issued and outstanding)
    192       192       192  
 Preferred stock - Series C (50,000 shares issued and outstanding)
    500       500       500  
 Preferred stock - Series D (5,116 shares issued and outstanding)
    5,068       -       -  
 Common stock - 10,000,000 shares authorized;
                       
  Issued and outstanding: 1,345,602 at June 30, 2009;
                       
  1,345,602 at December 31, 2008;
                       
  and 1,120,576 at June 30, 2008
    18,042       18,042       14,193  
 Additional paid-in capital
    206       172       132  
 Retained earnings (deficit)
    (213 )     864       3,260  
 Accumulated other comprehensive income -
                       
 unrealized appreciation on available-for-sale
                       
 securities
    (3 )     355       (150 )
 Total shareholders' equity
    24,184       20,517       18,519  
 Total Liabilities and Shareholders' Equity
  $ 219,323     $ 215,490     $ 186,051  

 
 

The accompanying notes are an integral part of these consolidated financial statements.

 


 
 
Mission Community Bancorp and Subsidiary
                       
Condensed Consolidated Statements of Income
                   
 Unaudited
 
(in thousands, except per share data)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
(Restated)
         
(Restated)
       
   
June 30, 2009
   
June 30, 2008
   
June 30, 2009
   
June 30, 2008
 
 Interest Income
                       
 Interest and fees on loans
  $ 2,288     $ 2,291     $ 4,619     $ 4,720  
 Interest on investment securities
    329       316       588       528  
 Other interest income
    18       44       111       138  
 Total interest income
    2,635       2,651       5,318       5,386  
 Interest Expense
                               
 Interest on money market, NOW and savings deposits
    128       155       281       357  
 Interest on time certificates of deposit
    623       515       1,273       1,120  
 Other interest expense
    346       380       745       746  
 Total interest expense
    1,097       1,050       2,299       2,223  
 Net interest income
    1,538       1,601       3,019       3,163  
 Provision for loan losses
    381       2,325       681       2,545  
 Net interest income after provision for loan losses
    1,157       (724 )     2,338       618  
 Non-interest income
                               
 Service charges on deposit accounts
    79       83       161       153  
 Gain on sale of loans
    112       9       174       39  
 Loan servicing fees, net of amortization
    23       20       48       45  
 Grants and awards
    7       -       7       -  
 Gain on sale of available-for-sale securities
    -       -       239       -  
 Other income and fees
    42       26       70       57  
 Total non-interest income
    263       138       699       294  
 Non-interest expense
                               
 Salaries and employee benefits
    914       922       1,893       1,884  
 Occupancy expenses
    160       158       332       279  
 Furniture and equipment
    126       102       237       215  
 Data processing
    193       131       379       263  
 Professional fees
    170       82       265       173  
 Marketing and business development
    36       57       70       90  
 Office supplies and expenses
    66       57       136       114  
 Insurance and regulatory assessments
    241       52       298       101  
 Loan and lease expenses
    34       25       66       46  
 Provision for unfunded commitments
    -       15       35       15  
 Other expenses
    192       147       313       288  
 Total non-interest expense
    2,132       1,748       4,024       3,468  
 (Loss) before income taxes
    (712 )     (2,334 )     (987 )     (2,556 )
 Income tax expense (benefit)
    -       (988 )     -       (1,104 )
 Net (loss)
  $ (712 )   $ (1,346 )   $ (987 )   $ (1,452 )
 Net (loss) applicable to common stock
  $ (712 )   $ (1,205 )   $ (988 )   $ (1,298 )
                                 
 Per Common Share Data:
                               
 Net Income (Loss) - Basic
  $ (0.53 )   $ (1.08 )   $ (0.73 )   $ (1.28 )
 Net Income (Loss) - Diluted
  $ (0.53 )   $ (1.08 )   $ (0.73 )   $ (1.28 )
                                 
 Average common shares outstanding - basic
    1,345,602       1,120,576       1,345,602       1,017,147  
 Average common shares outstanding - diluted
    N/A       N/A       N/A       N/A  


The accompanying notes are an integral part of these consolidated financial statements.

 


 
 
                                           
Condensed Consolidated Statements of Changes in Shareholders' Equity (Restated)
             
 (Unaudited - dollars in thousands)
                                               
                                 
Accumulated
       
               
Additional
         
Retained
   
Other
       
   
Preferred
   
Common Stock
   
Paid-In
   
Comprehensive
   
Earnings
   
Comprehensive
       
   
Stock
   
Shares
   
Amount
   
Capital
   
Income
   
(Deficit)
   
Income(Loss)
   
Total
 
                                                 
 Balance at January 1, 2008
  $ 1,084       689,232     $ 7,126     $ 108           $ 4,712     $ 108     $ 13,138  
                                                               
 Exercise of stock options
                                                             
 and related tax benefit of $25
            20,700       232                                     232  
                                                               
 Issuance of common stock
                                                             
 in public offering, net
                                                             
 of offering expenses
            410,644       6,835                                     6,835  
                                                               
 Stock-based compensation
                            24                             24  
                                                               
 Comprehensive income:
                                                             
 Net (loss)
                                  $ (1,452 )     (1,452 )             (1,452 )
 Net unrealized gain on
                                                               
available-for-sale securities,
                                                               
net of taxes of $180
    -       -       -       -       (258 )     -       (258 )     (258 )
Total comprehensive income (loss)
                            $ (1,710 )                        
                                                                 
 Balance at June 30, 2008
  $ 1,084       1,120,576     $ 14,193     $ 132             $ 3,260     $ (150 )   $ 18,519  
                                                                 
                                                                 
 Balance at January 1, 2009
  $ 1,084       1,345,602     $ 18,042     $ 172             $ 864     $ 355     $ 20,517  
                                                                 
 Issuance of 5,116 shares of
                                                               
 Series D preferred stock
                                                               
 to U.S. Treasury Department,
                                                               
 net of issuance costs of $48
    5,068                                                       5,068  
                                                                 
 Dividends declared and paid
                                                               
 on Series D preferred stock
                                            (90 )             (90 )
                                                                 
 Stock-based compensation
                            34                               34  
                                                                 
 Comprehensive income (loss):
                                                               
 Net (loss)
                                  $ (987 )     (987 )             (987 )
 Less beginning of year
                                                               
    unrealized gain on                                                                
securities sold during
                                                               
    the period, net                                                                
of taxes of $-0-
                                    (285 )             (285 )     (285 )
 Net unrealized gain on
                                                               
     remaining available-                                                                
for-sale securities,
                                                               
net of taxes of $2
    -       -       -       -       (73 )     -       (73 )     (73 )
Total comprehensive income (loss)
                            $ (1,345 )                        
                                                                 
 Balance at June 30, 2009
  $ 6,152       1,345,602     $ 18,042     $ 206             $ (213 )   $ (3 )   $ 24,184  


The accompanying notes are an integral part of these consolidated financial statements.

 


 
 
           
 Condensed Consolidated Statements of Cash Flows
           
   
(Unaudited - dollars in thousands)
 
   
For the Six Months Ended
 
   
(Restated)
       
   
June 30, 2009
   
June 30, 2008
 
 Operating Activities
           
 Net (loss)
  $ (987 )   $ (1,452 )
 Adjustments to reconcile net (loss) to net
               
 cash provided by (used in) operating activities:
               
 Depreciation
    211       176  
 Accretion of discount on securities and loans, net
    (67 )     (88 )
 Provision for credit losses
    681       2,545  
 Provision for losses on unfunded loan commitments
    35       15  
 Stock-based compensation
    33       24  
 Gain on sale of securities
    (239 )     -  
 Gain on loan sales
    (174 )     (39 )
 Increase in company-owned life insurance
    (48 )     (45 )
 Other, net
    (619 )     (1,295 )
 Proceeds from loan sales
    3,920       2,712  
 Loans originated for sale
    (3,690 )     (718 )
 Net cash provided by (used in) operating activities
    (944 )     1,835  
 Investing Activities
               
 Net change in Federal Home Loan Bank and other stock
    (92 )     (135 )
 Net decrease (increase) in deposits in other banks
    11,135       -  
 Purchase of available-for-sale securities
    (30,007 )     (12,880 )
 Proceeds from maturities, calls and paydowns of available-for-sale securities
    3,258       3,922  
 Proceeds from sales of available-for-sale securities
    7,726       -  
 Net decrease (increase) in loans
    (602 )     (24,615 )
 Purchase of bank-owned life insurance
    -       (405 )
 Purchases of premises and equipment
    (419 )     (109 )
 Proceeds from sale of fixed assets
    -       5  
 Net cash provided by (used in) investing activities
    (9,001 )     (34,217 )
 Financing Activities
               
 Net increase in demand deposits and savings accounts
    7,455       6,072  
 Net increase in time deposits
    8,426       7,675  
 Net increase (decrease) in other borrowings
    (15,656 )     9,000  
 Proceeds from issuance of common stock in public offering, net
    -       6,835  
 Proceeds from issuance of preferred stock under TARP-CPP, net
    5,068       -  
 Payment of TARP-CPP dividends
    (90 )     -  
 Net cash provided by financing activities
    5,203       29,814  
 Net increase (decrease) in cash and cash equivalents
    (4,742 )     (2,568 )
 Cash and cash equivalents at beginning of year
    17,724       5,527  
 Cash and cash equivalents at end of period
  $ 12,982     $ 2,959  
                 
 Non-cash changes:
               
 Real estate acquired by foreclosure
  $ 1,317       -  
 Supplemental disclosures of cash flow information:
               
 Interest paid
    2,363       2,266  
 Taxes paid
    -       35  


The accompanying notes are an integral part of these consolidated financial statements.

 


Mission Community Bancorp and Subsidiary
Notes to Condensed Consolidated Financial Statements (Restated)

Note 1 – Basis of Presentation and Management Representations
 
The unaudited consolidated financial statements include accounts of Mission Community Bancorp (“the Company”) and its subsidiary, Mission Community Bank (“the Bank”) and the Bank’s subsidiary, Mission Community Development Corporation.  All material inter-company balances and transactions have been eliminated.
 
 
These financial statements have been prepared in accordance with the Securities and Exchange Commission’s rules and regulations for quarterly reporting and, therefore, do not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles.  These financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2008, which was filed on March 16, 2009.
 
 
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- and six-month periods ended June 30, 2009 and 2008 reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation of the Company’s financial position and results of operations.
 

Note 2 – Stock Based Compensation
 
The Company has a stock option plan, adopted in 1998, which is more fully described in Note I to the consolidated financial statements in the Company’s Annual Report on Form 10-K.  The 1998 Stock Option Plan has been terminated with respect to the granting of future options under the Plan.  In 2008 the Company adopted the Mission Community Bancorp 2008 Stock Incentive Plan, which has been approved by the Company’s shareholders.  The 2008 Plan provides for the grant of various equity awards, including stock options.
 
 
On January 1, 2006, the Company implemented Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”), which addresses accounting for equity-based compensation arrangements, including employee stock options.  SFAS 123R replaced SFAS 123 and superseded Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related guidance.  The Company adopted the “modified prospective method,” where stock-based compensation expense is recorded beginning on the adoption date and prior periods are not restated.  Under this method, compensation expense is recognized using the fair value based method for all new awards granted after January 1, 2006.  Additionally, compensation expense for unvested options that were outstanding at December 31, 2005, is being recognized over the requisite service period based on the fair value of those options as previously calculated under the pro forma disclosures of SFAS 123.
 
 
On May 27, 2008, the Company granted to the Bank’s two most senior officers options to purchase a total of 41,064 shares of common stock at an exercise price of $18.00 per share.  These non-qualified stock options were granted under the 2008 Stock Incentive Plan, vest over five years, and expire ten years after the date of grant.  The fair value ascribed to those options, using the Black-Scholes option pricing model, was $4.58 per share, or a total of $188,073.
 

 


 
During the six-month periods ended June 30, 2009 and 2008, the Bank recognized pre-tax stock-based compensation expense of $33 thousand and $24 thousand, respectively, as a result of adopting SFAS 123R.  As of June 30, 2009, the Company has unvested options outstanding with unrecognized compensation expense totaling $165 thousand, which is scheduled to be recognized as follows (in thousands):
 
July 1 through December 31, 2009                $  37
2010                                                                       38
2011                                                                       38
2012                                                                       37
2013                                                                       15
Total unrecognized compensation cost      $165
 

 
Note 3 — Operating Segments
 
The Company has only one reportable operating segment—commercial banking.  The commercial banking segment provides traditional banking services such as checking and savings accounts, time certificates of deposit and loans.
 
 

 
Note 4 — Preferred Stock
 
On January 9, 2009, in exchange for aggregate consideration of $5,116,000, Mission Community Bancorp issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of a new Series D Fixed Rate Cumulative Perpetual Preferred Stock (the “Series D Preferred”) having a liquidation preference of $1,000 per share.  This transaction is a part of the Capital Purchase Program of the Treasury’s Troubled Asset Relief Program (“TARP”).  The Series D Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year.  The Company may not redeem the Series D Preferred Stock during the first three years except with the proceeds from a “qualified equity offering.” After three years, the Company may, at its option, redeem the Series D Preferred Stock at par value plus accrued and unpaid dividends.  The Series D Preferred Stock is generally non-voting.  Prior to January 9, 2012, unless the Company has redeemed the Series D Preferred Stock or the Treasury Department has transferred the Series D Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to issue a common stock dividend or repurchase its common stock, or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances.  The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital.
 
 

 
Note 5 —Income taxes
 
The Company recognized no income tax expense or benefit for the six months ended June 30, 2009, as compared with a $1,104 thousand tax benefit for the same period in 2008.  No tax benefit was recorded for the most recent quarter due to a limitation on the Company’s ability to recognize deferred tax assets.
 

 


 

 
Note 6 — Fair Value Measurement
 
The Company has adopted Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements.  SFAS No. 157, which was effective for financial assets and liabilities on January 1, 2008, and for non-financial assets and liabilities on January 1, 2009, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  This Statement establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Statement describes three levels of inputs that may be used in fair value measurement:
 
 
·
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.
 
When feasible, Level 1 pricing is preferable to Level 2, and Level 3 pricing would only be used if neither Level 1 nor Level 2 pricing methods were considered appropriate.
 
 
The Bank has one security in its available-for-sale portfolio that has been assessed as “impaired” since 2004.  Prior to January 1, 2008, the Bank has used a pricing method for this security that would be considered Level 2 pricing.  Upon adoption of SFAS No. 157 in 2008, the Bank concluded that Level 3 pricing was more appropriate for this security, given the lack of observable inputs to the estimation process.  Due to the illiquidity in the secondary market for this security, this fair value estimate cannot be corroborated by observable market data.  This change in estimate resulted in a reduction in the fair value of this security by $168 thousand as of January 1, 2008.  Because this security remains in the available-for-sale portfolio, this change in estimate was included in other comprehensive income but had no effect on reported net income (loss).
 
 
The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value as of June 30, 2009:
 
(in thousands)
 
Fair Value Measurements Using
       
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets measured at fair value on a recurring basis:
                       
 Available-for-sale securities
  $ -     $ 43,744     $ 20     $ 43,764  
                                 
Financial sssets measured at fair value on a non-recurring basis:
                               
Collateral-Dependent Impaired
                               
Loans, Net of Specific Reserves
  $ -     $ -     $ 4,262     $ 4,262  
                                 
Non-financial sssets measured at fair value on a non-recurring basis:
                               
Foreclosed real estate
  $ -     $ -     $ 1,400     $ 1,400  
Other real estate
    -       -       900       900  
 

 
 
Collateral-dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying value of $5,138,000, with a specific reserve of $876,000, as of June 30, 2009.
 
 
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 six months of 2008 and 2009:
 
 

 
(in thousands)
 
Level 3 Securities Available for Sale
 
   
Six Months Ended June 30
 
   
2009
   
2008
 
 Balance at beginning of year
  $ 32     $ -  
 Transfers into Level 3
    92       227  
 Unrealized gains (losses)
               
 included in other comprehensive income (loss)
    -       (168 )
 Purchases
    -       -  
 Settlements
    -       -  
 Paydowns and maturities
    (104 )     (7 )
 Balance at end of period
  $ 20     $ 52  
                 
 Total unrealized gains (losses)
               
 for the period relating to assets still held at the reporting date
  $ -     $ (168 )
 

 
 
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.  The fair value of loans are estimated
 

 


 
using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available.
 
 
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:
 
 
 
   
June 30, 2009
 
   
Carrying Value
   
Fair Value
 
Financial Assets:
           
   Cash and due from banks
  $ 11,837     $ 11,837  
   Federal funds sold
    1,145       1,145  
   Interest-bearing deposits in other banks
    575       575  
   Investment securities
    43,764       43,764  
   Loans, net
    147,969       148,450  
   Federal Home Loan Bank and other stocks
    2,849       2,849  
   Company owned life insurance
    2,837       2,837  
   Accrued interest receivable
    876       876  
                 
Financial Liabilities:
               
   Deposits
    160,685       161,129  
   Other borrowings
    30,044       34,812  
   Junior subordinated debt securities
    3,093       3,262  
   Accrued interest and other liabilities
    1,317       1,317  

 

 
Note 7 — Recent Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed.”  FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157.  FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.
 
 
Also in April 2009, the FASB issued FSP FAS 115-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  The FSP amends FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairment guidance more operational and to improve the
 

 


 
presentation of other-than-temporary impairments in the financial statements.  This statement applies to other-than-temporary impairments of debt and equity securities and requires a company to assert that (a) it does not have the intent to sell the security in question and (b) it is more likely than not that it will not have to sell the security in question before recovery of its cost basis to avoid an impairment being considered other-than-temporary.  This FSP also changes the amount of impairment losses recognized in earnings.  Under this FSP impairments are separated into two components: (i) the amount of impairments related to credit losses and (ii) and the amount related to other factors.  The amount of impairment related to credit losses is reflected as a charge to earnings, while the amount deemed to be related to other factors is reflected as an adjustment to shareholders’ equity through other comprehensive income.
 
 
And also in April 2009 the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  This FSP amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.
 
 
The standards summarized in the preceding paragraphs were effective for the financial reporting period ended June 30, 2009, and did not have a material effect on the Company’s financial condition or results of operations.  The new interim disclosures required by FSP FAS No. 107-1 and APB 28-1 are included in Note 6 – Fair Value Measurement.
 
 
The Company implemented Statement of Financial Accounting Standards No. 165, Subsequent Events (SFAS 165), effective for the financial reporting period ended June 30, 2009. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after June 30, 2009 up through August 13, 2009, the date these financial statements were available to be issued. During this period the Company did not have any material recognizable subsequent events.
 
 

 
Note 8 — Restated Financial Statements
 
When initially issued, the Company’s financial statements reflected a $511 thousand tax benefit for the first six months of 2009, including a $32 thousand tax benefit for the second quarter.  The recognition of the tax benefits was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable.  ARRA, which was enacted in February, 2009, provided (for tax year 2008 only) an extended NOL carryback period of up to five years for an electing “eligible small business.”  Eligible small business was defined to be a small business with average “gross receipts” for 2006-2008 of $15 million or less.  Based on total income per the Company’s consolidated tax returns for 2006 and 2007 and estimated total income expected to be reported for its 2008 tax return, management believed that the Company’s average gross receipts were less than $15 million.  However, management was unaware at that time that—for banks—the term “gross receipts” has been interpreted under the tax law to include gross sales of securities and loans.  When gross sales of SBA loans, not merely the gains on sale, are included in gross receipts, the Company’s three-year average gross receipts exceeds $15
 

 


 
million.  Therefore, the Company did not qualify for the extended carryback period under ARRA.  The error had been corrected on a year-to-date basis as of September 30, 2009.  These restated financial statements reflect the appropriate portion of that correction in the first and second quarters of 2009, rather than in the third quarter.
 
 
The accompanying financial statements reflect the following changes from those originally issued as of and for the three and six months ended June 30, 2009:
 
·
In the condensed consolidated balance sheet, accrued interest and other assets has been reduced from $3,751,000 to $3,240,000.  Retained earnings has been reduced from $298,000 to a deficit of $(213,000) and total shareholders’ equity has been reduced from $24,695,000 to $24,184,000.  Total assets has been reduced from $219,834,000 to $219,323,000, and total liabilities and shareholders’ equity has had the same adjustment.
 
 
 
·
In the condensed consolidated statement of income, income tax expense (benefit) has been changed from a benefit of $32 thousand for the three months and $511 thousand for the six months to zero for both periods.  The net loss of $(680) thousand for the three months and $(476) thousand for the six months have been changed to a net loss of $(712) thousand for the three months and $(987) thousand for the six months.  Net loss applicable to common stock has been changed from $(682) thousand for the three months and $(519) thousand for the six months to a loss of $(712) thousand for the three months and $(988) thousand for the six months.  Basic and diluted earnings (loss) per share have both been changed from $(0.51) for the three months and $(0.39) for the six months to $(0.53) for the three months and $(0.73) for the six months.  No changes were made to loss before income taxes.
 
 
 
·
In addition to the balance sheet changes noted above for retained earnings and total shareholders’ equity, the condensed consolidated statement of shareholders’ equity reflects an increase in the comprehensive loss from $(834) thousand to $(1.345) million.
 
 
 
·
In the condensed consolidated statement of cash flows, changes have been made to the components of net cash provided by (used in) operating activities, but no changes have been made to total net cash provided by (used in) operating activities, investing activities or financing activities.
 

 


 
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)
 

Forward-Looking Statements
 
Some matters discussed in this Form 10-Q may be “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 and therefore may involve risks, uncertainties and other factors which may cause our actual results to be materially different from the results expressed or implied by our forward-looking statements.  These statements generally appear with words such as “anticipate,” “believe,” “estimate,” “may,” “intend,” and “expect.”  Although management believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct.  Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where the Bank operates); competition from other providers of financial services offered by the Bank; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of the Bank’s credit customers; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of the Company or the Bank.  The Company undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.
 

Restatements of Results of Operations and Financial Condition
 
 
In this amendment to its Quarterly Report on Form 10-Q, the Company has voluntarily corrected and restated its earnings (loss) for the first six months of 2009 to correct for an error in the recognition of income tax benefits in the first and second  quarters.  The Company’s originally-issued financial statements for the six months reflected a $511 thousand tax benefit, including a $32 tax benefit in the second quarter.  The recognition of the tax benefits was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable.  However, at that time management was unaware of a previous interpretation under the tax law that would disqualify the Company from electing the extended carryback period under ARRA.  The error was corrected on a year-to-date basis as of September 30, 2009.  This restatement reflects the appropriate portions of that correction in the first and second quarters of 2009, rather than in the third quarter.
 
 
Further information on this restatement and the specific accounts affected are detailed in Note 8 to the Notes to Condensed Consolidated Financial Statements (Restated).

 
Overview of Results of Operations and Financial Condition
 
 
 
·
The Company incurred a net loss of $(712) thousand for the second quarter of 2009, as compared with a net loss of $(1.346) million for the second three months of 2008.  For the first six months of 2009, the Company’s net loss was $(987) thousand, as compared
 

 

Index

 
 
with a net loss of $(1.452) million for the first half of 2008.  The factors resulting in the 2009 results will be discussed below.
 
 
 
·
Net interest income for the three-month period ended June 30, 2009 decreased by $63 thousand, or 4%, from the comparable period in 2008, due primarily to a decrease in the net interest margin of 0.80 percentage points.  For the first half of 2009, net interest income declined by $144 thousand, or 5%, from the first six months of 2008.
 
 
 
·
The provision for loan losses decreased by $1.944 million, or 84%, from the second quarter of 2008 to the same quarter in 2009.  For the six months, the loan loss provision declined by $1.864 million, or 73%.  Increased risk in a few large relationships, along with a general downturn in the economy in 2008, caused management and the board of directors to enhance the allowance for loan and lease losses (“ALLL”) by $2.3 million in the second quarter of last year.
 
 
 
·
For the three months ended June 30, 2009, non-interest income increased by $125 thousand, or 91%, from the same period in 2008, primarily due to increased gains on sales of SBA-guaranteed loans in 2009.  For the first six months of 2009, non-interest income was up $405 thousand, or 138%, over the same period in 2008.  In addition to increased sales of SBA-guaranteed loans, non-interest income for the first six months of 2009 included $239 thousand of gains on the sale of appreciated securities.
 
 
 
·
Non-interest expense increased by $384 thousand, or 22%, for the second three months of 2009, as compared to the second quarter of 2008.  For the first half of 2009, non-interest expense was up $556 thousand, or 16%.  These increases were principally due to material increases in FDIC insurance assessments, the cost of outsourcing Information Technology management, costs associated with opening a new branch office in Santa Maria, and professional fees primarily related to problem loan resolution.
 
 
 
·
No tax benefit was recorded for the six months or three months ended June 30, 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.
 
 
 
·
Total assets increased by $4.3 million, or 2.0%, from December 31, 2008 to June 30, 2009.  Total loans decreased by $1.9 million, or 1.2%, over that period, while deposits increased by $15.9 million, or 11.0%.
 
 
 
·
On January 9, 2009, the Company issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of a new Series D Fixed Rate Cumulative Perpetual Preferred Stock (“Series D Preferred”) at $1,000 per share.  This transaction is a part of the Capital Purchase Program of the TARP.  The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital.
 

Income Summary
 
For the three months ended June 30, 2009, the Company incurred a net loss of $(712) thousand.  This compares with a net loss of $(1.346) million for the comparable period of 2008.  For the first six months of 2009, the Company’s net loss was $987 thousand, as compared with a net loss of $(1.452) million for the first half of 2008.
 

 

Index

 
Return on average assets (annualized) was (1.28)% for the second quarter of 2009, as compared with (3.00)% for the second quarter of 2008.  Annualized return on average equity was (11.37)% for the second quarter of 2009 as compared with (26.76)% for the comparable 2008 period.  For the first half of 2009, return on average assets was (0.90)%, as compared with (1.68)% for the same period in 2008.  Return on average equity was (8.07)% for the first six months of 2009, as compared with (16.06)% for the comparable period in 2008.
 
 
Excluding tax benefits, the Company incurred a loss of $(712) thousand for the second quarter of 2009—a reduction of $1,622 thousand from the pre-tax loss of $(2,334) thousand recorded for the same period in 2008.  For the first six months of 2009, the Company’s pre-tax loss was $(987) thousand—a $1,569 reduction from the $(2,556) thousand loss before taxes for the first half of 2008.
 
 
The income statement components of this are as follows:
 
 
 
             
 Pre-Tax Income Variance Summary
           
 (In thousands)
 
Effect on Pre-Tax Income
 
   
Increase (Decrease)
 
   
2nd Quarter
   
Six Months
 
 Change from 2008 to 2009 in:
           
 Net interest income
  $ (63 )   $ (144 )
 Provision for loan losses
    1,944       1,864  
 Non-interest income
    125       405  
 Non-interest expense
    (384 )     (556 )
 Change in income (loss) before income taxes
  $ 1,622     $ 1,569  


These variances will be explained in the discussion below.
 

 
Net Interest Income
 
Net interest income is the largest source of the Bank’s operating income.  For the three-month period ended June 30, 2009, net interest income was $1.538 million, a decrease of $63 thousand, or 4%, from the comparable period in 2008.  For the first six months of 2009, net interest income was $3.019 million, down $144 thousand, or 5%, from the first half of 2008.
 
 
The net interest margin (net interest income as a percentage of average interest earning assets) was 3.05% for the three-month period ended June 30, 2009, a decrease of 80 basis points as compared to the same period in 2008.  As short-term interest rates dropped throughout 2008—2.25% in the first four months of 2008 and 1.75% in the fourth quarter—the Bank experienced increasing pressure on the margin, as competition for deposits in the local market would not permit decreases in deposit rates at the same speed or to the same degree as loan rates were falling.  In addition, the Bank has received an influx of CD deposits since mid-year 2008, as local depositors sought out safety, with yield often a secondary concern (see the Deposits section of this report).  Opportunities to place those new funds in assets earning higher rates than the CD’s have been limited this year, putting additional pressure on the net interest  margin.
 
 
The following tables show the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three- and six-month periods ended June 30, 2009 and 2008:
 

 

Index

 

 
Net Interest Analysis
                                   
 (Dollars in thousands)
                                   
   
For the Three Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
                                   
Interest-earning assets:
                                   
  Loans, net of unearned income*
  $ 153,405     $ 2,288       6.03 % *   $ 140,808     $ 2,291       6.60 % *
  Investment securities*
    37,283       329       3.75 % *     27,147       316       4.96 % *
  Federal funds sold
    11,241       7       0.23 %     594       3       2.23 %
  Other interest income
    5,296       12       0.92 %     2,798       41       5.87 %
Total interest-earning assets / interest income
    207,225     $ 2,636       5.18 %     171,347     $ 2,651       6.31 %
Non-interest-earning assets:
                                               
  Allowance for loan losses
    (3,757 )                     (1,384 )                
  Cash and due from banks
    10,509                       2,174                  
  Premises and equipment
    2,678                       3,503                  
  Other assets
    6,951                       4,761                  
Total assets
  $ 223,606                     $ 180,401                  
                                                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                                               
Interest-bearing liabilities:
                                               
  Interest-bearing deposits:
                                               
    Transaction accounts
  $ 8,435     $ 32       1.51 %   $ 2,356     $ 4       0.75 %
    Savings and Money Market deposit accounts
    29,626       97       1.31 %     38,592       150       1.57 %
    Certificates of deposit
    101,507       623       2.46 %     59,025       514       3.51 %
    Total interest-bearing deposits
    139,568       752       2.16 %     99,973       668       2.70 %
  Federal funds purchased
    29       -       0.83 %     136       1       2.81 %
  Federal Home Loan Bank advances
    33,251       315       3.79 %     34,047       331       3.91 %
  Subordinated debt
    3,093       32       4.14 %     3,093       49       6.32 %
    Total borrowed funds
    36,373       347       3.82 %     37,276       381       4.10 %
Total interest-bearing liabilities / interest expense
    175,941       1,099       2.50 %     137,249       1,049       3.08 %
Non-interest-bearing liabilities:
                                               
  Non-interest-bearing deposits
    21,398                       21,680                  
  Other liabilities
    1,141                       1,240                  
  Total liabilities
    198,480                       160,169                  
Shareholders' equity
    25,126                       20,232                  
Total liabilities  and shareholders' equity
  $ 223,606                     $ 180,401                  
Net interest-rate spread
                    2.68 %                     3.23 %
Impact of non-interest-bearing
                                               
  sources and other changes in
                                               
  balance sheet composition
                    0.37 %                     0.62 %
Net interest income / margin on earning assets
          $ 1,537       3.05 % **           $ 1,602       3.85 % **
                                                 
*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents
                         
** Net interest income as a % of earning assets
                                               

Net Interest Analysis
                                   
 (Dollars in thousands)
                                   
   
For the Six Months Ended
 
   
June 30, 2009
   
June 30, 2008
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
                                   
Interest-earning assets:
                                   
  Loans, net of unearned income*
  $ 153,892     $ 4,619       6.10 % *   $ 134,334     $ 4,720       7.13 % *
  Investment securities*
    30,269       588       4.41 % *     23,081       528       5.21 % *
  Federal funds sold
    14,957       16       0.21 %     3,228       50       3.14 %
  Other interest income
    9,856       95       1.95 %     4,070       88       4.35 %
Total interest-earning assets / interest income
    208,974       5,318       5.21 %     164,713       5,386       6.67 %
Non-interest-earning assets:
                                               
  Allowance for loan losses
    (3,846 )                     (1,274 )                
  Cash and due from banks
    7,003                       2,296                  
  Premises and equipment
    2,648                       3,522                  
  Other assets
    6,619                       4,613                  
Total assets
  $ 221,398                     $ 173,870                  
                                                 
LIABILITIES AND SHAREHOLDERS' EQUITY
                                               
Interest-bearing liabilities:
                                               
  Interest-bearing deposits:
                                               
    Interest-bearing demand accounts
  $ 8,874       74       1.68 %   $ 2,251       8       0.71 %
    Savings and Money Market deposit accounts
    26,998       207       1.55 %     37,046       349       1.89 %
    Certificates of deposit
    98,008       1,273       2.62 %     58,361       1,120       3.86 %
    Total interest-bearing deposits
    133,880       1,554       2.34 %     97,658       1,477       3.04 %
  Federal funds purchased
    15       -       0.83 %     68       1       2.81 %
  Federal Home Loan Bank advances
    36,930       682       3.73 %     31,136       636       4.11 %
  Subordinated debt
    3,093       63       4.12 %     3,093       109       7.10 %
    Total borrowed funds
    40,038       745       3.76 %     34,297       746       4.38 %
Total interest-bearing liabilities / interest expense
    173,918       2,299       2.67 %     131,955       2,223       3.39 %
Non-interest-bearing liabilities:
                                               
  Non-interest-bearing deposits
    21,433                       22,435                  
  Other liabilities
    1,147                       1,304                  
  Total liabilities
    196,498                       155,694                  
Shareholders' equity
    24,900                       18,176                  
Total liabilities and shareholders' equity
  $ 221,398                     $ 173,870                  
Net interest-rate spread
                    2.54 %                     3.28 %
Impact of non-interest-bearing
                                               
  sources and other changes in
                                               
  balance sheet composition
                    0.45 %                     0.67 %
Net interest income / margin on earning assets
          $ 3,019       2.99 % **           $ 3,163       3.95 % **
                                                 
*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents
                         
** Net interest income as a % of earning assets
                                               

Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by the Bank and the Company on those assets and liabilities for the three- and six-month periods ended June 30, 2009 and 2008.  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 June 30, 2009
 
   
Compared to 2008
 
   
Increase (Decrease)
 
   
in interest income and expense
 
   
due to changes in:
 
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
                 
  Loans, net of unearned income
  $ 196     $ (199 )   $ (3 )
  Investment securities
    101       (88 )     13  
  Federal funds sold
    9       (5 )     4  
 Other interest income
    21       (50 )     (29 )
Total increase (decrease) in interest income
    327       (342 )     (15 )
                         
Interest-bearing liabilities:
                       
   Transaction accounts
    20       8       28  
   Savings deposits
    (32 )     (21 )     (53 )
   Certificates of deposit
    294       (185 )     109  
      Total interest-bearing deposits
    282       (198 )     84  
   Federal funds purchased
    (1 )     -       (1 )
   FHLB advances
    (8 )     (8 )     (16 )
   Subordinated debt
    -       (17 )     (17 )
       Total borrowed funds
    (9 )     (25 )     (34 )
Total increase (decrease) in interest expense
    273       (223 )     50  
Increase (decrease) in net interest income
  $ 54     $ (119 )   $ (65 )



Rate / Volume Variance Analysis
                 
 (In thousands)
 
Six Months Ended June 30, 2009
 
   
Compared to 2008
 
   
Increase (Decrease)
 
   
in interest income and expense
 
   
due to changes in:
 
   
Volume
   
Rate
   
Total
 
Interest-earning assets:
                 
  Loans, net of unearned income
  $ 637     $ (738 )   $ (101 )
  Investment securities
    148       (88 )     60  
  Federal funds sold
    47       (81 )     (34 )
 Other interest income
    75       (68 )     7  
Total increase (decrease) in interest income
    907       (975 )     (68 )
                         
Interest-bearing liabilities:
                       
   Transaction accounts
    45       21       66  
   Savings deposits
    (84 )     (58 )     (142 )
   Certificates of deposit
    595       (442 )     153  
      Total interest-bearing deposits
    556       (479 )     77  
   Federal funds purchased
    (1 )     -       (1 )
   FHLB advances
    111       (65 )     46  
   Subordinated debt
    -       (46 )     (46 )
       Total borrowed funds
    110       (111 )     (1 )
Total increase (decrease) in interest expense
    666       (590 )     76  
Increase (decrease) in net interest income
  $ 241     $ (385 )   $ (144 )

 
The tables above reflect the impact of lower yields received on loans due to the reduction in the prime rate over the past year, while growth in the balances of loans and other interest-earning assets have had a positive, albeit lesser, impact.  On the liability side, the rate reductions have also had a beneficial effect, but not enough to offset the reduction in loan yields.  Overall, the
 

 

Index

 
pressure we have experienced on the net interest margin over the past several quarters is just beginning to ease up as we move through 2009.
 
 
Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain low through the remainder of 2009.  We expect this to result in some continued easing of pressure on the net interest margin, since more fixed rate funding sources (certificates of deposit and borrowed funds) than loans are expected to reprice downward as they mature over the balance of 2009 and as additional opportunities to place lower-earning assets into more profitable investment options become available.
 

Provision for Loan Losses
 
The Bank recorded a $381 thousand provision for loan losses for the three months ended June 30, 2009, as compared with $2.325 million for the second quarter of 2008.  For the six months ended June 30, 2009, the loan loss provision totaled $681 thousand, down from $2.545 million in the first half of 2008.
 
 
During the first quarter of last year, in the normal course of business, the Bank underwent both an annual external credit review and a regulatory examination.  While there were no noted issues reflected in those reviews, the downturn in the economy, combined with events in the banking sector last year, caused management to initiate an additional third party review of the Bank’s loan portfolio in the second quarter of 2008.  After the results of that review, management and the board of directors decided to enhance the allowance for loan and lease losses by $2.3 million, resulting in the unusually large loan loss provision in the second quarter of last year.
 
 
Loan charge-offs totaled $963 thousand and recoveries totaled $18 thousand for the second quarter of 2009, as compared with $700 thousand of charge-offs and $5 thousand of recoveries for the same period in 2008.  For the six months, charge-offs were $1.173 million and recoveries were $24 thousand in 2009, as compared with $721 thousand of charge-offs and $12 thousand of recoveries for the first half of 2008. The ratio of allowance for loan losses to total loans was 2.29% at June 30, 2009, as compared to 2.01% a year ago and 2.57% as of December 31, 2008.
 
 
The provision for loan losses and allowance for loan losses reflect management’s consideration of the various risks in the loan portfolio.  Additional discussion of loan quality and the allowance for loan losses is provided in the Asset Quality, Potential Problem Loans and Allowance for Loan and Lease Losses sections of this report.
 

Non-Interest Income
 
Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from the sale of loans and gains on sales of securities.  For the three-month period ended June 30, 2009, non-interest income was $263 thousand, an increase of $125 thousand, or 91%, from the same period in 2008.  This increase was primarily due to increased gains on the sale of SBA loans.  After several months of a nearly frozen secondary market for SBA loans, the market began to thaw toward the end of the first quarter of this year.  For the first half of 2009, non-interest income totaled $699 thousand, up from $294 thousand in the first six months of 2008.  The increase in non-interest income for the first six months of 2009 was also due to the sale of $7.5 million of appreciated securities in the first quarter, on which the Bank recognized $239 thousand in gains.
 

 

Index

 
The following table shows the major components of non-interest income:
 
 

 
                                                 
 Non-Interest Income
                                               
 (In thousands)
 
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
$ Amount
   
Change
   
$ Amount
   
Change
 
   
2009
   
2008
     $         %     2009       2008      $         %
 Service charges on deposit accounts
  $ 79     $ 83     $ (4 )     -5 %   $ 161     $ 153     $ 8       5 %
 Gain on sale of loans
    112       9       103       1144 %     174       39       135       346 %
 Loan servicing fees, net of amortization
    23       20       3       15 %     48       45       3       7 %
 Grants and awards
    7       -       7    
nm
      7       -       7    
nm
 
 Gain on sale of available-for-sale securities
    -       -       -    
nm
      239       -       239    
nm
 
 Other income and fees
    42       26       16       62 %     70       57       13       23 %
    Total non-interest income
  $ 263     $ 138     $ 125       91 %   $ 699     $ 294     $ 405       138 %
                                                                 
 nm - not meaningful
                                                               
 

 
 
The majority of the service charge income shown in the table relates to NSF fee income and other fees not directly assessed on deposit accounts.  Many of the Bank’s deposit products and services have low or no monthly fees, and the Bank does not expect to change this strategy in the near future.
 

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 $384 thousand, or 22%, for the three months ended June 30, 2009, as compared to the second quarter of 2008.  For the first half of 2009, non-interest expenses were up $556 thousand, or 16%, over the same period in 2008.
 
 
The following table shows the major components of non-interest expenses:
 
 

 
                                                 
 Non-Interest Expense
                                               
 (In thousands)
 
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
$ Amount
   
Change
   
$ Amount
   
Change
 
   
2009
   
2008
     $         %     2009       2008      $         %
 Salaries and employee benefits
  $ 914     $ 922     $ (8 )     -1 %   $ 1,893     $ 1,884     $ 9       0 %
 Occupancy expenses
    160       158       2       1 %     332       279       53       19 %
 Furniture and equipment
    126       102       24       24 %     237       215       22       10 %
 Data processing
    193       131       62       47 %     379       263       116       44 %
 Professional fees
    170       82       88       107 %     265       173       92       53 %
 Marketing and business development
    36       57       (21 )     -37 %     70       90       (20 )     -22 %
 Office supplies and expenses
    66       57       9       16 %     136       114       22       19 %
 Insurance and regulatory assessments
    241       52       189       363 %     298       101       197       195 %
 Loan and lease expenses
    34       25       9       36 %     66       46       20       43 %
 Provision for unfunded loan commitments
    -       15       (15 )     -100 %     35       15       20       133 %
 Other
    192       147       45       31 %     313       288       25       9 %
    Total non-interest expense
  $ 2,132     $ 1,748     $ 384       22 %   $ 4,024     $ 3,468     $ 556       16 %
 

 
 
The increase in non-interest expense was principally due to material increases in FDIC insurance assessments (FDIC insurance increased $186 thousand for the second quarter of 2009 vs. 2008, and $191 thousand for the six months), the cost of outsourcing Information Technology management ($52 thousand for the second quarter and $104 thousand for the six months
 

 

Index

 
included in data processing expense), and professional fees ($47 thousand for the second quarter and $54 thousand for the six months) primarily related to problem loan resolution.  Insurance and regulatory assessments for the second quarter and first six months of 2009 include a $97 thousand special FDIC assessment.
 
 
Salaries and benefits have been essentially flat, despite the increased staff for the Santa Maria branch office, which opened in December 2008.  For the second quarter, the Santa Maria branch added $77 thousand in salaries and benefits expense, as compared to the second quarter of 2008.  For the six months, the additional salaries and benefits totaled $140 thousand.  In all, Santa Maria represents increased non-interest expenses of $155 thousand for the second quarter and $298 thousand for the six months.
 

Income Taxes
 
No tax benefit was recorded for the six months ended June 30, 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.  For the first six months of 2008 the Company recorded a $1.104 million tax benefit, which represents an effective tax rate (income tax benefit divided by the loss before income taxes) of 43.2%.
 

Balance Sheet Analysis
 
At June 30, 2009, consolidated assets totaled $219.3 million, as compared with $215.5 million at December 31, 2008, and $186.0 million at the end of 2008’s second quarter.  This represents an increase of $33.3 million (18%) over the past twelve months.  Total loans increased $3.0 million (2%) over that period, while deposits increased $34.5 million (27%) and shareholders’ equity increased $5.7 million (31%).  The growth in shareholders’ equity was the result of a private placement of common stock in December 2008 for a total of $3.8 million, and the issuance in January 2009 of $5.1 million of preferred stock to the United States Department of the Treasury under the Capital Purchase Program of the TARP.  See the Capital Ratios section of this report.
 
 
The following table shows balance sheet growth trends over the past five quarters:
 
 

 
Balance Sheet Growth
                                                           
 (dollars in thousands)
 
Increase(Decrease) From Previous Quarter End*
 
   
June 30, 2009
   
March 31, 2009
   
December 31, 2008
   
September 30, 2008
   
June 30, 2008
 
     $         %    $         %    $         %    $         %    $         %
 Total Assets
  $ (6,330 )     -11.3 %   $ 10,163       19.1 %   $ (3,260 )     -5.9 %   $ 32,699       69.9 %   $ 13,512       31.5 %
 Earning Assets
    (8,757 )     -16.4 %     14,967       30.4 %     (4,825 )     -9.4 %     29,791       67.8 %     12,778       31.7 %
 Loans
    (2,903 )     -7.5 %     1,035       2.7 %     1,956       5.1 %     2,913       7.8 %     17,295       53.0 %
 Deposits
    (407 )     -1.0 %     16,288       45.6 %     (5,389 )     -14.3 %     24,013       75.7 %     6,385       21.4 %
 Borrowings
    (5,256 )     -59.7 %     (10,400 )     -92.3 %     -       0.0 %     8,500       90.9 %     9,000       128.4 %
 Shareholders' Equity
    (908 )     -14.5 %     4,575       90.4 %     1,904       40.7 %     94       2.0 %     (1,671 )     -33.3 %
                                                                                 
*Percentages shown as annualized rates
                                                                 
 

 

 

Index

 

 
Loans
 
The following table shows the composition of our loan portfolio by type of loan:
 
 

 
Loan Portfolio Composition
                                   
 (Dollars in thousands)
                                   
   
June 30, 2009
   
December 31, 2008
   
June 30, 2008
 
 Type of Loan
 
Amount
   
Percentage
   
Amount
   
Percentage
   
Amount
   
Percentage
 
 Commercial
  $ 23,811       16.4 %   $ 24,454       16.0 %   $ 28,696       20.0 %
 Agricultural
    -       0.0 %     -       0.0 %     -       0.1 %
 Leases, net of unearned income
    1,580       0.9 %     1,491       1.0 %     1,153       0.9 %
 Municipal loans
    2,744       1.8 %     2,729       1.8 %     2,782       2.1 %
 Real estate
    104,500       66.6 %     98,049       63.9 %     88,059       59.1 %
 Construction
    15,396       12.0 %     22,857       14.9 %     24,388       15.5 %
 Consumer
    3,412       2.3 %     3,731       2.4 %     3,364       2.3 %
 Total loans
  $ 151,443       100.0 %   $ 153,311       100.0 %   $ 148,442       100.0 %
 

 
 
The table shows flat loan growth in the first half of 2009.  Real estate loans, which are predominately commercial real estate loans, have increased, while construction and commercial loans have declined.  Of the total real estate and construction loans as of June 30, 2009, 69% are commercial mortgage loans, and 46% of those are owner-occupied properties.  Approximately 9% of the owner-occupied commercial mortgage loans contain SBA guarantees.
 
 

 
Asset Quality
 
Non-accrual loans totaled $3.2 million at June, 2009, as compared to $3.6 million at December 31, 2008 and $4.9 million at June 30, 2008.
 
 
Management classifies loans as non-accrual when principal or interest is past due 90 days or more based on the contractual terms of the loan, unless the loan is well-secured and in the process of collection.  Loans that are not past-due 90 days or more will also be classified as non-accrual when, in the opinion of management, there exists a reasonable doubt as to the full and timely collection of either principal or interest.  Once a loan is classified as non-accrual, it may not be reclassified as an accruing loan until all principal and interest payments are brought current and the loan is considered to be collectible as to both principal and interest.
 
 
Restructured loans are those loans with concessions in interest rates or repayment terms due to a decline in the financial condition of the borrower.  Foreclosed real estate represents real estate acquired in satisfaction of loans through foreclosure or other means and is carried on an individual asset basis at the lower of the recorded investment in the related loan or the estimated fair value of the property, less selling expenses.
 
 
The following table presents information about the Company’s non-performing loans, including quality ratios as of June 30, 2009, December 31, 2008 and June 30, 2008:
 
                   
 Non-Performing Assets
                 
 (in thousands)
 
June 30
   
December 31
   
June 30
 
   
2009
   
2008
   
2008
 
 Loans in nonaccrual status
  $ 3,202     $ 3,557     $ 4,944  
 Loans past due 90 days or more and accruing
    1,336       265       -  
 Restructured loans in accruing status
    260       675       -  
 Total nonperforming loans
    4,798       4,497       4,944  
 Foreclosed real estate
    1,400       83       -  
 Total nonperforming assets
  $ 6,198     $ 4,580     $ 4,944  
                         
 Allowance for loan losses
  $ 3,474     $ 3,942     $ 2,986  
                         
 Asset quality ratios:
                       
 Non-performing assets to total assets
    2.83 %     2.13 %     2.66 %
 Non-performing loans to total loans
    3.17 %     2.93 %     3.33 %
 Allowance for loan losses to total loans
    2.29 %     2.57 %     2.01 %
 Allowance for loan losses to total
                       
 non-performing loans
    72 %     88 %     60 %

 
The high level of non-performing loans over the past year has been due to the significant downturn in the economy and reduction in real estate collateral values in 2008 and 2009.  The $4.8 million of non-performing loans as of June 30, 2009, includes $1.1 million of SBA loans, which are supported by $1.0 million of SBA loan guarantees.
 

Potential Problem Loans
 
At June 30, 2009, the Bank had approximately $17.1 million of loans that were not categorized as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans.  This represents a $0.5 million decrease from the $17.6 million of potential problem loans at December 31, 2008.  The $17.1 million of potential problem loans are supported by $590 thousand of SBA loan guarantees.
 
 
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 June 30, 2009, 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.
 

 

Index

Allowance for Loan and Lease Losses
 
The allowance for loan and lease losses (“ALLL”) at June 30, 2009 totaled $3.5 million, a decrease of $468 thousand from December 31, 2008.  The ratio of ALLL to total loans at June 30, 2009, was 2.29%, as compared with 2.57% at December 31, 2008, and 2.01% at June 30, 2008.  At June 30, 2009 and 2008, the ratio of ALLL to total non-performing loans was 72% and 60%, respectively.
 
 
The following table provides an analysis of the changes in the ALLL for the three- and six-month periods ended June 30, 2009 and 2008:
 

                         
 Allowance for Loan and Lease Losses
                       
 (dollars in thousands)
 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
 Balance at beginning of period
  $ 4,038     $ 1,356     $ 3,942     $ 1,150  
 Provision for loan losses
    381       2,325       681       2,545  
 Loans charged off
    (963 )     (700 )     (1,173 )     (721 )
 Recoveries of previous charge-offs
    18       5       24       12  
 Net recoveries (charge-offs)
    (945 )     (695 )     (1,149 )     (709 )
 Balance at end of period
  $ 3,474     $ 2,986     $ 3,474     $ 2,986  
                                 
 Allowance for loan losses as a percentage of:
                               
    Period end loans
    2.29 %     2.01 %     2.29 %     2.01 %
    Non-performing loans
    72 %     60 %     72 %     60 %
 As a percentage of average loans (annualized):
                               
    Net charge-offs (recoveries)
    2.69 %     1.99 %     1.73 %     1.07 %
    Provision for loan losses
    1.09 %     6.64 %     1.03 %     3.82 %

 
Loans charged off in the second quarter of 2009 included one construction loan for a mini-storage facility ($498 thousand), two owner-occupied commercial real estate loans (total of $207 thousand), one non-owner-occupied residential lot loan ($59 thousand), and several small commercial loans secured by non-real estate assets (total of $195 thousand).  Charge-offs in the first quarter of 2009 included one home equity loan ($115 thousand), primarily due to declining property values; the balance remaining upon payoff of one construction loan for a multi-family residential project ($68 thousand); and a few small commercial loans secured by non-real estate assets (total of $23 thousand).  For the second quarter of 2008, loan charge-offs included non-real estate secured commercial loans totaling $696 thousand.
 
 
The Bank makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio.  At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market.  The determination of the appropriate level for the allowance is based on that review, considering such factors as historical experience, the volume and type of lending conducted, the amount of and identified potential loss associated with specific nonperforming loans, regulatory policies, general economic conditions, and other factors related to the collectibility of loans in the portfolio.
 
 
Based on its quarterly review, management believes that the allowance for loan losses at June 30, 2009, 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.
 

 

Index

 
In addition, management has established a reserve for undisbursed loan commitments.  As of June 30, 2009, this reserve totaled $105,000 and is included in other liabilities in the consolidated balance sheet.
 

Investments
 
In 2004, management established a loss reserve for one of the Bank’s asset-backed securities after concluding it was “other than temporarily impaired.”  The security is in non-accrual status, with any interest payments received being credited to the reserve.  As of June 30, 2009, the book value of the security was $20 thousand ($307 thousand amortized cost less the loss reserve, which totals $287 thousand).
 
 
While management has made a best effort to determine the probable loss on this security, no assurances can be given that future changes in the underlying collateral and payments will not materially affect the value of this security with either positive or negative changes.  However, management will continue to closely monitor this investment and, if needed, recognize additional write-downs.
 
 
Excluding the impaired asset-backed security referred to above, all securities in the Bank’s investment portfolio are considered to be investment grade.  The portfolio consists of a mixture of fixed-rate mortgage-backed securities (37%), floating-rate mortgage-backed securities (7%), fixed-rate US agency securities (36%), fixed-rate tax-exempt municipal securities (8%), fixed-rate CMO’s (6%) and floating-rate corporate debt securities (6%).  The Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages.  None of the Bank’s municipal securities may be called before 2011.  The average life of the portfolio is projected to be 3.0 years, with a duration of 2.7 years.
 

Deposits
 
Deposits are the primary source of funding for lending and investing needs.  Total deposits were $160.7 million as of June 30, 2009, as compared with $144.8 million at December 31, 2008, and $126.2 million at June 30, 2008.
 
 
The Bank generally prices deposits at or above the median rate by classification based on periodic interest rate surveys in the local market.  Deposit rates are then adjusted to balance the cost of funds versus funding needs and asset and liability considerations.  The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for the first six months of 2009 and 2008.
 
 
The Bank is one of only two banks in San Luis Obispo county participating in the Certificate of Deposit Account Registry Service (“CDARS”) program.  This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC, up to $50 million.  The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of nearly 3,000 banks with other network banks (in increments of less than the per-depositor FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet.  The CDARS program has become very attractive since mid-year 2008, as local depositors sought out safety, with yield often a secondary concern.  As of June 30, 2009, the
 

 

Index

 
Bank had issued $48.5 million of certificates of deposit to local customers through the CDARS program, up from $6.8 million as of June 30, 2008.
 
 
On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”).  The legislation was in response to the financial crises affecting the banking system and financial markets.  EESA temporarily (until December 31, 2009) raised the basic limit on FDIC deposit insurance coverage from $100,000 to $250,000 per depositor.  Since then, the FDIC has extended the $250,000 limit through the end of 2013.  See also Effects of Inflation and Economic Issues below, for a discussion of the Emergency Economic Stabilization Act of 2008 (“EESA”), and its potential impact on the Company.
 
 
On October 14, 2008, the FDIC announced another temporary program (until December 31, 2009) to provide full FDIC insurance coverage for non-interest bearing transaction accounts, regardless of dollar amount.  Management and the board of directors evaluated the additional cost of this optional insurance program and determined that it would be in the Bank’s best interests to provide this coverage to its depositors.  The cost to the Bank for this additional deposit insurance coverage is 10 basis points on the amount of non-interest-bearing deposits in excess of $250,000.  To date, the FDIC has not extended the unlimited insurance coverage for non-interest bearing accounts beyond 2009.
 

Borrowings
 
In addition to the Company’s junior subordinated debt securities, the Bank has borrowed from, and expects to continue to have borrowings from, the Federal Home Loan Bank of San Francisco (“FHLB”).  Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term certificates of deposit.
 
 
As of June 30, 2009, borrowings from the FHLB totaled $29.8 million, with a weighted average interest rate of 3.82%.  Of the $29.8 million, $3.0 million was borrowed in 2003 for 10 years to offset a specific pool of the Bank’s fixed rate loans maturing in 2013.  During the second quarter of 2007, $3.0 million of short-term brokered deposits were replaced with $3.0 million of FHLB advances maturing in 2010.  The remaining $23.8 million was borrowed to meet shorter-term funding needs and matures on various dates from July through December 2009.
 

Capital
 
Total shareholders’ equity has increased $5.7 million, or 31%, over the past twelve months.  The growth in shareholders’ equity was the result of 1) a private placement on December 2, 2008 of 225,026 shares of common stock sold to the Carpenter Community BancFund-A, L.P. at a price of $17.10 per share, for aggregate gross proceeds to the Company of $3.8 million, and 2) the issuance on January 9, 2009, of 5,116 shares of a Series D Fixed Rate Cumulative Perpetual Preferred Stock to the United States Department of the Treasury at $1,000 per share.  The preferred stock issue is part of the Capital Purchase Program of the TARP.  The Company invested a total of $8.1 million from these two capital transactions in Mission Community Bank as Tier 1 capital.
 
 
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
 

 

Index

 
needed to qualify as a “well-capitalized” institution at June 30, 2009, December 31, 2008, and June 30, 2008:
 

                                     
 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 June 30, 2009:
                                   
    Total Capital (to Risk-Weighted Assets)
  $ 26,928       15.72 %   $ 17,125       10.0 %   $ 13,700       8.0 %
    Tier 1 Capital (to Risk-Weighted Assets)
  $ 24,763       14.46 %   $ 10,275       6.0 %   $ 6,850       4.0 %
    Tier 1 Capital (to Average Assets)
  $ 24,763       11.14 %   $ 11,116       5.0 %   $ 8,893       4.0 %
                                                 
 As of December 31, 2008:
                                               
    Total Capital (to Risk-Weighted Assets)
  $ 22,467       13.27 %   $ 16,937       10.0 %   $ 13,550       8.0 %
    Tier 1 Capital (to Risk-Weighted Assets)
  $ 20,326       12.00 %   $ 10,162       6.0 %   $ 6,775       4.0 %
    Tier 1 Capital (to Average Assets)
  $ 20,326       9.47 %   $ 10,729       5.0 %   $ 8,583       4.0 %
                                                 
 As of June 30, 2008:
                                               
    Total Capital (to Risk-Weighted Assets)
  $ 22,328       13.62 %   $ 16,398       10.0 %   $ 13,119       8.0 %
    Tier 1 Capital (to Risk-Weighted Assets)
  $ 20,256       12.35 %   $ 9,839       6.0 %   $ 6,559       4.0 %
    Tier 1 Capital (to Average Assets)
  $ 20,256       11.29 %   $ 8,973       5.0 %   $ 7,179       4.0 %

 
See also Effects of Inflation and Economic Issues below, for a discussion of EESA and its potential impact on the Company.
 

Liquidity
 
The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded.  The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit.  Cash and cash equivalents (primarily federal funds sold) are the primary means for providing immediate liquidity.  The Bank had $13.0 million in cash and cash equivalents on June 30, 2009, as compared with $17.7 million as of December 31, 2008 and $3.0 million on June 30, 2008.
 
 
In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain an appropriate ratio of loans to deposits, and to maintain sufficient off-balance-sheet sources of funds which may be drawn upon when needed.  For the month of June 2009, the Bank’s loans-to-deposits ratio was 91%.  The sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 41.5% as of June 30, 2009.
 
 
One of the Bank’s off-balance-sheet sources of funds is potential borrowing capacity through the FHLB.  FHLB borrowings are collateralized by loans and/or investments and can be structured over various terms ranging from overnight to ten years.  As of June 30, 2009, the Bank had outstanding borrowings from the FHLB totaling $29.8 million.  Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased.  The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets.  Based on this limitation and loans and securities pledged as of June 30, 2009, an additional $22.2 million could
 

 

Index

 
be borrowed from the FHLB if needed.  The Bank has been reducing its FHLB borrowings as they have matured over the past few months, and it expects to continue to do so in 2009 and 2010.  However, 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 also has access to the Federal Reserve Bank of San Francisco’s (“FRB-SF”) “Discount Window” for additional secured borrowing should the need arise.  As of June 30, 2009, the Bank had pledged $55.4 million of its loan portfolio to the FRB-SF, which provided the Bank with $34.9 million in additional short-term borrowing capacity.
 
 
On October 14, 2008, The FDIC announced a new program, the Temporary Liquidity Guarantee Program (“TLGP”), in which the Bank and the Company chose to participate.  TLGP provides FDIC guarantees for qualifying unsecured debt issued on or before June 30, 2009.  No qualifying debt was issued by the Bank or the Company on or before the June 30 deadline.  Therefore, participation in the TLGP program has resulted in no cost to the Bank or the Company.
 

Off-Balance-Sheet Arrangements
 
In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers, including commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheet.
 
 
As of the dates indicated, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:
 
 
 
 
 
Loan Commitments
                 
 (in thousands)
 
June 30
   
December 31
   
June 30
 
   
2009
   
2008
   
2008
 
 Commitments to Extend Credit
  $ 19,234     $ 28,427     $ 31,133  
 Standby Letters of Credit
    304       304       197  
    $ 19,538     $ 28,731     $ 31,330  
 

 
 
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. 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
 

 

Index

 
rates in order to maintain an appropriate equity to assets ratio.  Management believes that the impact of inflation on financial results depends on the Company’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance.  Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.
 
 
California’s statewide unemployment rate stands at 11.6% as of June 2009, significantly above the national average of 8.5%.  For San Luis Obispo and Santa Barbara Counties, unemployment has trended upward over the past twelve months to stand at 9.0% and 8.2%, respectively.  However, these continue to be some of the lowest unemployment rates in the state.  After several years of strong appreciation, local real estate values declined in 2007 and 2008, as residential and commercial sale activity slowed.  There can be no assurance that the economy will not deteriorate further or that real estate values will return to pre-2007 levels in the short term or at all.  As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.
 
 
The EESA gives the U.S. Treasury the authority to, among other things; invest in preferred stock of financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  There can be no assurance, however, as to the ultimate impact the EESA will have on the financial markets.  Although the extreme level of volatility experienced in the fourth quarter of 2008 has abated to a large extent and credit availability, while still limited, appears to be improving, if the EESA fails to achieve its goal to help stabilize the financial markets or if financial market conditions worsen, the Company’s financial condition or results of operations could be materially and adversely affected.
 
 
On October 14, 2008, the U.S. Treasury Department announced that it would utilize a portion of the EESA funding to directly purchase up to $250 billion of preferred stock in banks.   Management and the board of directors evaluated the initial terms of this capital purchase program and determined that it would be in the Company’s best interests to apply for the maximum amount of capital that might be made available to the Company and submitted its application in November 2008.  The Treasury Dept., in consultation with the Federal Reserve Bank of San Francisco, which serves as the primary federal regulator of the Bank, subsequently determined that the Company was eligible for $5.1 million of capital, which was issued in the form of Series D preferred stock on January 9, 2009.
 

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 


Item 4T.                      Controls and Procedures
 
The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls over financial reporting in the Company’s fiscal quarter ended June 30, 2009.
 
 

 



 


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.
   Submission of Matters to a Vote of Security Holders

The following matters were approved at the Company’s Annual Meeting of Shareholders, which was held on May 27, 2009:

Election of Directors — Election of the following nine persons to the Board of Directors to serve until the 2010 Annual Meeting of Shareholders and until their successors are elected and have qualified:
Bruce M. Breault                                                     Anita M. Robinson
Roxanne Carr                                                           Gary E. Stemper
William B. Coy                                                        Brooks W. Wise
Howard N. Gould                                                     Karl F. Wittstrom
Richard Korsgaard

                                                                      Shares   Percent
Authority given                                     1,106,243               82.2%
Authority withheld                                      4,700                   0.3
Abstain                                                             -0-                    -0-

Amendment of Bylaws — To amend Section 3.2 of the Company’s bylaws to increase the authorized range of directors on the Company’s Board of Directors to between eight (8) and fifteen (15) directors.
                                                                      Shares           Percent
For                                                            1,096,191             81.5%
Against                                                        13,452                1.0
Abstain                                                          1,300                0.1

 


Advisory Vote on Executive Compensation — To approve, on an advisory and non-binding basis, the compensation paid to the Company’s Named Executive Officers.
                                                                      Shares            Percent
For                                                            1,090,926              81.1%
Against                                                        16,148                 1.2
Abstain                                                         3,869                  0.3

A total of 1,110,943 shares (82.6% of those outstanding and entitled to vote) were represented in person or by proxy.


Item 5.
   Other Information

None.

 


Item 6.                         Exhibits

Exhibit Index:

Exhibit #
   
2.1
Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)
 
3.1
Restated Articles of Incorporation (I)
 
3.2
Certificate of Amendment to Articles of Incorporation (L)
 
3.3
Bylaws, as amended (B)
 
4.1
Certificate of Determination for Series A Non-Voting Preferred Stock (B)
 
4.2
Certificate of Determination for Series B Non-Voting Preferred Stock (B)
 
4.3
Certificate of Determination for Series C Non-Voting Preferred Stock (D)
 
4.4
Purchase Agreement dated October 10, 2003, by and among Registrant, Mission Community Capital Trust I, and Bear Stearns & Co., Inc. (E)
 
4.5
Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (E)
 
4.6
Declaration of Trust of Mission Community Capital Trust I dated  October 10, 2003 (E)
 
4.7
Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (E)
 
4.8
Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (E)
 
4.9
Fee Agreement dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Co., Bear Stearns & Co., Inc. and Mission Community Capital Trust I (E)
 
4.10
Certificate of Determination for Series D Preferred Stock (R)
 
10.1
Purchase and Sale Agreement and Lease dated January, 1997, as amended (B)
 
10.2
Intentionally omitted
 
10.3
Lease Agreement – Paso Robles (B)
 
10.4
Lease Agreement – San Luis Obispo (B)
 
10.5
Lease Agreement – Arroyo Grande (B)
 
10.6
1998 Stock Option Plan, as amended (B)
 
10.7
Lease Agreement – 569 Higuera, San Luis Obispo (D)
 
10.8
Lease Agreement – 671 Tefft Street, Nipomo CA (C)
 
10.9
Intentionally omitted
 
10.10
Lease Agreement – 3480  S. Higuera, San Luis Obispo (F)
 
10.11
Salary Protection Agreement — Mr. Pigeon (G)
 
10.12
Salary Protection Agreement — Mr. Judge (H)
 
10.13
Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J)
 
10.14
Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J)
 
10.15
Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K)
 
10.16
Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M)
 
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)
 
 
 
 
 
(A) Included in the Company’s Form 8-K filed on December 18, 2000
(B) Included in the Company’s Form 10-KSB filed on April 2, 2001
(C) Included in the Company’s Form 10-QSB filed August 12, 2002
(D) Included in the Company’s Form 10-QSB filed on November 12, 2002
(E) Included in the Company’s Form 8-K filed on October 21, 2003
(F) Included in the Company’s Form 10-QSB filed on August 10, 2004
(G) Included in the Company’s Form 8-K filed on January 19, 2005
(H) Included in the Company’s Form 8-K filed on February 17, 2005
(I) Included in the Company’s Form 10-QSB filed on August 14, 2006
(J) Included in the Company’s Form 8-K filed on June 13, 2007
(K) Included in the Form SB-2 Registration Statement of the Company filed on June 13, 2007
(L) Included in Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement of the Company filed on July 24, 2007
(M) Included in the Company’s Form 8-K filed on August 14, 2007
(N) Included in the Company’s Form 8-K filed on October 23, 2007
(O) Included in the Company’s Form 10-KSB filed on March 28, 2008
(P) Included in the Company’s Form 10-Q filed on May 15, 2008
(Q)Included in the Company’s Form 8-K filed on December 30, 2008
(R)Included in the Company’s Form 8-K filed on January 14, 2009
 



 


Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MISSION COMMUNITY BANCORP


By: /s/ Anita M. Robinson
ANITA M. ROBINSON
President and Chief Executive Officer
Dated:  June 15, 2010


By: /s/ Ronald B. Pigeon
RONALD B. PIGEON
Executive Vice President and Chief Financial Officer
Dated:  June 15, 2010