Note 5 - Credit Quality and the Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2013

Allowance for Credit Losses [Text Block]

Note 5 — Credit Quality and the Allowance for Loan and Lease Losses

An allowance for loan and lease losses is provided for loans held for investment (i.e., not held for sale).  Loans held for sale are carried on the consolidated balance sheets at the lower of cost or fair value, therefore no related allowance for loan losses is provided.

Following is a summary of the changes in the allowance for loan and lease losses for the three-month periods ended March 31:

(in thousands)	Three Months Ended March 31,
	2013			2012
Balance at beginning of period	$	4,242		$	3,326
Provision for loan and lease losses charged to expense		100			225
Loans charged off		(123	)		(1	)
Recoveries on loans previously charged off		18			12
Balance at end of period	$	4,237		$	3,562

Changes in the allowance for loan and lease losses for the three-month periods ended March 31, 2013 and 2012, are shown below disaggregated by portfolio segment:

	Threee Months Ended March 31, 2013
Loan Portfolio Segment	Balance at Beginning of Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	321	$	51		$	-		$	-	$	372
Commercial real estate - owner-occupied		463		(106	)		-			-		357
Commercial real estate - non-owner-occupied		730		(131	)		-			-		599
Residential real estate		906		197			(117	)		3		989
All other real estate loans		35		30			-			-		65
Commercial and industrial loans		1,735		(80	)		-			15		1,670
Consumer and all other loans and lease financing		51		30			(6	)		-		75
Unallocated		1		109			-			-		110
Totals	$	4,242	$	100		$	(123	)	$	18	$	4,237

	Three Months Ended March 31, 2012
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	157	$	(8	)	$	-		$	-	$	149
Commercial real estate - owner-occupied		253		3			-			-		256
Commercial real estate - non-owner-occupied		675		(136	)		-			-		539
Residential real estate		640		71			-			-		711
All other real estate loans		4		-			-			-		4
Commercial and industrial loans		1,363		190			(1	)		10		1,562
Consumer and all other loans and lease financing		124		59			-			2		185
Unallocated		110		46			-			-		156
Totals	$	3,326	$	225		$	(1	)	$	12	$	3,562

The Company assigns an asset quality rating to all loans except pools of homogeneous loans and those asset quality ratings are continuously reviewed and updated by management at least quarterly or as conditions dictate.  These asset quality ratings are subject to semi-annual examination by independent specialists engaged by the Company and also by its regulators.  During its internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans.  These credit quality indicators are used to assign an asset quality rating to each individual loan.  The asset quality ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan meets all of the Company’s underwriting criteria and provides adequate protection for the Bank through the paying capacity of the borrower and/or the value and marketability of the collateral.

Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date.  Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any.  Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  Substandard loans have a high probability of payment default, or they have other well defined weaknesses, and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Loss – Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future.  Loans classified as loss are charged off immediately.

The following table shows the Company’s loan portfolio (excluding loans held for sale) allocated by management’s internal asset quality ratings as of the dates indicated:

Loans by Asset Quality Rating (excluding loans held for sale*)	Asset Quality Ratings
(in thousands)			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
As of March 31, 2013:
Construction and land development	$	11,960	$	-	$	751	$	-	$	12,711
Commercial real estate - owner-occupied		60,643		-		5,699		-		66,342
Commercial real estate - non-owner-occupied		68,501		-		1,139		-		69,640
Residential real estate		28,197		84		1,709		186		30,176
All other real estate		12,661		-		25		-		12,686
Commercial and industrial		44,284		154		4,012		-		48,450
Consumer and all other loans and lease financing		4,059		-		-		-		4,059
Total loans, net of unearned income	$	230,305	$	238	$	13,335	$	186	$	244,064
As of December 31, 2012:
Construction and land development	$	11,440	$	-	$	555	$	-	$	11,995
Commercial real estate - owner-occupied		65,132		-		5,896		-		71,028
Commercial real estate - non-owner-occupied		66,799		1,396		1,166		-		69,361
Residential real estate		28,588		-		2,268		185		31,041
All other real estate		8,319		-		29		-		8,348
Commercial and industrial		44,921		161		4,272		-		49,354
Consumer and all other loans and lease financing		2,614		-		-		-		2,614
Total loans, net of unearned income	$	227,813	$	1,557	$	14,186	$	185	$	243,741
As of March 31, 2012:
Construction and land development	$	13,923	$	148	$	1,034	$	-	$	15,105
Commercial real estate - owner-occupied		64,194		-		5,781		-		69,975
Commercial real estate - non-owner-occupied		49,454		5,129		5,890		-		60,473
Residential real estate		26,788		484		4,606		189		32,067
All other real estate		1,889		-		-		-		1,889
Commercial and industrial		32,263		234		4,375		85		36,957
Consumer and all other loans and lease financing		3,630		-		-		-		3,630
Total loans, net of unearned income	$	192,141	$	5,995	$	21,686	$	274	$	220,096

* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

The following table shows an aging analysis of the loan portfolio (excluding loans held for sale) as of the dates indicated.  Also shown are loans on non-accrual, those that are past due and still accruing interest and troubled debt restructurings:

(in thousands)			Commercial Real Estate										Consumer and All
	Construction and Land Development		Owner- Occupied		Non-Owner- Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Other Loans and Leases		Total Loans
As of March 31, 2013:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	-	$	-	$	377	$	-	$	262	$	-	$	639
60-89 Days		-		894		-		76		-		6		9		985
90+ Days		-		758		-		158		-		866		-		1,782
Total Past Due		-		1,652		-		611		-		1,134		9		3,406
Loans in Current Payment Status		12,711		64,690		69,640		29,565		12,686		47,316		4,050		240,658
Total Loans	$	12,711	$	66,342	$	69,640	$	30,176	$	12,686	$	48,450	$	4,059	$	244,064
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		11		-		706		-		-		-		717
Loans in Non-accrual Status		751		3,626		827		912		25		2,851		-		8,992
As of December 31, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	55	$	-	$	325	$	-	$	620	$	69	$	1,069
60-89 Days		-		916		-		-		-		44		-		960
90+ Days		-		820		-		343		-		227		-		1,390
Total Past Due		-		1,791		-		668		-		891		69		3,419
Loans in Current Payment Status		11,995		69,237		69,361		30,373		8,348		48,463		2,545		240,322
Total Loans	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614	$	243,741
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		13		-		709		-		-		-		722
Loans in Non-accrual Status		555		3,779		845		842		29		3,018		-		9,068
As of March 31, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	133	$	977	$	-	$	-	$	-	$	240	$	8	$	1,358
60-89 Days		-		-		-		-		-		112		-		112
90+ Days		-		594		-		459		-		205		-		1,258
Total Past Due		133		1,571		-		459		-		557		8		2,728
Loans in Current Payment Status		14,972		68,404		60,473		31,608		1,889		36,400		3,622		217,368
Total Loans	$	15,105	$	69,975	$	60,473	$	32,067	$	1,889	$	36,957	$	3,630	$	220,096
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		200		-		-		-		-		-		-		200
Loans in Non-accrual Status		279		1,756		108		1,640		-		1,692		-		5,475

1 Includes pooled loans acquired with deteriorated credit quality.  Management evaluates estimated cash flows subsequent to acquisition.  If cash flows have not decreased, the pooled acquired loans remain in performing status.

The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are generally considered to be troubled debt restructurings (“TDR’s”). TDR’s typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Both non-accrual loans and TDR’s are generally considered to be impaired.

Concessions granted in TDR’s typically are intended to reduce the borrower’s cash requirements, such as an extension of the payment terms or a change in the interest rate charged.  TDR’s with extended payment terms are reported as impaired until adequate performance is established, at which time they will no longer be reported as a TDR, but will continue to be analyzed for impairment.  A reduction in the interest rate for a borrower experiencing financial difficulties would result in a change to TDR status if the restructured loan yield is below the yield for a new loan with comparable risk. TDR’s with below-market rates are considered permanently impaired until fully collected.   TDR’s may be reported as non-accrual, rather than TDR, if they are not performing under the restructured terms or if adequate payment performance under the restructured terms has yet to be established.

Six loans totaling $697,000 were restructured in TDR’s during the first three months of 2013 and four loans totaling $743,000 were restructured in the first three months of 2012.  No TDR’s were in accruing status and more than 90 days past due as of March 31, 2013 or December 31, 2012.  The Bank has no commitments to lend additional funds under loans classified as TDR’s as of March 31, 2013.

Following are summaries of the investment in loans (by impairment method, excluding loans held for sale) as of the dates indicated, including the related allowance for loan losses and cash-basis income recognized:

(in thousands)	Construction		Commercial Real Estate										Consumer and All Other
	and Land Development		Owner- Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial  and Industrial		Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of March 31, 2013:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	294	$	553	$	733	$	892	$	26	$	601	$	-			$	3,099
Impaired Loans With No Allowance Recorded		-		894		-		-		-		217		-				1,111
Total Loans Individually Evaluated For Impairment		294		1,447		733		892		26		818		-				4,210
Loans Collectively Evaluated For Impairment		10,390		49,348		57,294		24,749		12,660		46,592		3,881				204,914
Loans Acquired With Deteriorated Credit Quality		2,027		15,547		11,613		4,535		-		1,040		178				34,940
Total Loans Held for Investment	$	12,711	$	66,342	$	69,640	$	30,176	$	12,686	$	48,450	$	4,059			$	244,064
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	294	$	553	$	733	$	892	$	26	$	1,347	$	-			$	3,845
Impaired Loans With No Allowance Recorded		-		894		-		-		-		217		-				1,111
Total Loans Individually Evaluated For Impairment		294		1,447		733		892		26		1,564		-				4,956
Loans Collectively Evaluated For Impairment		10,390		49,348		57,294		24,749		12,660		46,592		3,881				204,914
Loans Acquired With Deteriorated Credit Quality		5,435		17,315		13,114		6,438		-		2,369		182				44,853
Total Loans Held for Investment	$	16,119	$	68,110	$	71,141	$	32,079	$	12,686	$	50,525	$	4,063			$	254,723
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	93	$	24	$	54	$	396	$	2	$	721	$	-			$	1,290
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		93		24		54		396		2		721		-				1,290
Loans Collectively Evaluated For Impairment		279		333		545		593		63		948		75	$	111		2,947
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	372	$	357	$	599	$	989	$	65	$	1,669	$	75	$	111	$	4,237
For the Three Months Ended March 31, 2013:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	299	$	561	$	742	$	893	$	27	$	614	$	-			$	3,136
Impaired Loans With No Allowance Recorded		-		905		-		-		-		229		-				1,134
Total Loans Individually Evaluated For Impairment	$	299	$	1,466	$	742	$	893	$	27	$	843	$	-			$	4,270
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10

(in thousands)	Construction		Commercial Real Estate										Consumer and All Other
	and Land Development		Owner-Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of December 31, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	385	$	686	$	749	$	894	$	29	$	1,354	$	-			$	4,097
Impaired Loans With No Allowance Recorded		170		1,599		-		-		-		1,298		-				3,067
Total Loans Individually Evaluated For Impairment		555		2,285		749		894		29		2,652		-				7,164
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		2,455		16,906		11,554		4,534		-		967		179				36,595
Total Loans Held for Investment	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614			$	243,741
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	404	$	731	$	763	$	899	$	30	$	2,040	$	-			$	4,867
Impaired Loans With No Allowance Recorded		177		1,745		-		-		-		1,427		-				3,349
Total Loans Individually Evaluated For Impairment		581		2,476		763		899		30		3,467		-				8,216
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		6,264		18,575		13,184		6,468		-		2,489		183				47,163
Total Loans Held for Investment	$	15,830	$	72,888	$	71,005	$	32,980	$	8,349	$	51,691	$	2,618			$	255,361
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	103	$	53	$	66	$	324	$	2	$	683	$	-			$	1,231
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		103		53		66		324		2		683		-				1,231
Loans Collectively Evaluated For Impairment		218		410		664		582		33		1,052		51	$	1		3,011
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	321	$	463	$	730	$	906	$	35	$	1,735	$	51	$	1	$	4,242
For the Year Ended December 31, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	198	$	655	$	303	$	291	$	6	$	791	$	-			$	2,244
Impaired Loans With No Allowance Recorded		533		1,378		109		782		-		1,425		-				4,227
Total Loans Individually Evaluated For Impairment	$	731	$	2,033	$	412	$	1,073	$	6	$	2,216	$	-			$	6,471
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10
Impaired Loans With No Allowance Recorded		-		-		1		-		-		-		-				1
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	1	$	10	$	-	$	-	$	-			$	11

(in thousands)	Construction		Commercial Real Estate				Residential				Commercial		Consumer and All Other
	and Land Development		Owner-Occupied		Non-Owner-Occupied		Real Estate		All Other Real Estate		and Industrial		Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of March 31, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	-	$	-	$	-	$	189	$	-	$	450	$	-			$	639
Impaired Loans With No Allowance Recorded		-		1,571		-		-		-		396		-				1,967
Total Loans Individually Evaluated For Impairment		-		1,571		-		189		-		846		-				2,606
Loans Collectively Evaluated For Impairment		12,224		51,429		48,512		26,516		1,889		33,153		3,444				177,167
Loans Acquired With Deteriorated Credit Quality		2,881		16,975		11,961		5,362		-		2,958		186				40,323
Total Loans Held for Investment	$	15,105	$	69,975	$	60,473	$	32,067	$	1,889	$	36,957	$	3,630			$	220,096
Unpaid Principal Balance:																		-
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	190	$	-	$	483	$	-			$	673
Impaired Loans With No Allowance Recorded		-		1,615		-		-		-		351		-				1,966
Total Loans Individually Evaluated For Impairment		-		1,615		-		190		-		834		-				2,639
Loans Collectively Evaluated For Impairment		12,224		51,429		48,512		26,516		1,889		33,153		3,444				177,167
Loans Acquired With Deteriorated Credit Quality		6,630		18,799		13,792		7,400		-		5,089		190				51,900
Total Loans Held for Investment	$	18,854	$	71,843	$	62,304	$	34,106	$	1,889	$	39,076	$	3,634			$	231,706
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	128	$	-	$	264	$	-			$	392
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		-		-		-		128		-		264		-				392
Loans Collectively Evaluated For Impairment		149		192		539		583		4		1,132		185	$	156		2,940
Loans Acquired With Deteriorated Credit Quality		-		64		-		-		-		166		-				230
Total Loans Held for Investment	$	149	$	256	$	539	$	711	$	4	$	1,562	$	185	$	156	$	3,562
For the Three Months Ended March 31, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	94	$	-	$	464	$	-			$	558
Impaired Loans With No Allowance Recorded		-		1,606		-		-		-		383		-				1,989
Total Loans Individually Evaluated For Impairment	$	-	$	1,606	$	-	$	94	$	-	$	847	$	-			$	2,547
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	-	$	-	$	-	$	-			$	-
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-			$	-

The amount of the allowance for loan losses provided for impaired loans represents the aggregate amount by which the recorded investment in each impaired loan exceeds its fair value.  Fair value for this purpose is determined by computing either the present value of expected future cash flows discounted at the loan’s effective interest rate or, if repayment is expected solely from the collateral, the fair value of the underlying collateral less estimated costs to sell, based on current appraisals.  In some cases, impaired loans are partially charged off, such that there is no excess of the recorded investment over the fair value of the loan, as determined above.

Changes in the accretable discount for loans purchased with credit quality deterioration follows:

	For the Three Months Ended March 31,
(in thousands)	2013			2012
Balance at beginning of year	$	1,734		$	3,289
Measurement period adustments to Santa Lucia Bank fair values		-			(428	)
Accretion to interest income		(708	)		(260	)
Loans reclassified to held for sale		-			(355	)
Transfers from non-accretable discount to accretable		1,812			-
Balance at end of period	$	2,838		$	2,246