Mission Bancorp : 2022 Q2 Financial Highlights

Mission Bancorp

July 29, 2022

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markets. Additionally, Dustin Della and his superstar team in Visalia, California have already funded nearly $50 million of loans since joining us in March!"

Net Income Available to Common Shareholders

Net income available to common shareholders for the second quarter of 2022 was $6.1 million, or $2.65 per basic common share, compared with $4.2 million, or $1.82 per basic common share, for the quarter ended March 31, 2022. Net income available to common shareholders was $4.5 million, or $1.99 per basic common share, for the second quarter of 2021.

Notable trends for the linked quarter included a substantial increase in non-interest income and an increase in net interest income, which more than offset much smaller increases in the provision for loan losses and non-interest expense. Compared to the second quarter of 2021, non-interest income increased significantly, and there was also a sizable increase in net interest income, which more than offset much smaller increases in the non-interest expense and the provision for loan losses.

Net income available to common shareholders for the six months ended June 30, 2022, was $10.3 million, or $4.48 per basic common share as compared to $8.8 million or $3.88 per basic common share for the six months ended June 30, 2021. Compared to the first six months of 2021, increases in net interest income and non-interest income more than offset smaller increases in non-interest expense and the provision for loan losses.

Net Interest Income

Net interest income was $12.1 million, or 3.37% of average earning assets ("net interest margin"), for the second quarter of 2022 compared with $10.9 million, or a 3.25% net interest margin, for the same period a year earlier, and $11.1 million, or a 3.08% net interest margin, for the quarter ended March 31, 2022.

Net interest income increased by $1.2 million or 10.6%, compared to the same prior year period as the increase in average balances offset the decline in yields on average interest earning assets. Despite a nearly $1.1 million decline in PPP loan interest income and fee accretion from the second quarter of 2021 to the current quarter, non-PPP loan growth more than offset the loss of PPP related income resulting in an overall $0.5 million or 4.9% increase in loan interest income. In addition to the increase in loan interest income, the Company also experienced $0.4 million increase in interest earning deposits in other banks due to an increase in yields, and a $0.3 million increase in investment securities, due to increases in both average balances and yields. Additionally, interest expense did not change meaningfully for the current quarter as compared to the same prior year period.

Net interest income increased for the quarter ended June 30, 2022, as compared to the linked quarter by $1.0 million, or 9.1%, due primarily to an increase in loan interest income of $0.6 million attributable to a 5.7% increase in average loans as well as smaller increases in interest earning deposits in other banks and investment securities. Interest expense was nearly unchanged for the current quarter as compared to the linked quarter.

Mission Bancorp

July 29, 2022

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The net interest margin was 3.37% for the second quarter of 2022 compared to 3.25% for the same prior year period, and 3.08% for the linked quarter ended March 31, 2022. The year-over-year 12 basis point increase in the net interest margin is attributable primarily to rising yields for both interest earning deposits in other banks and investment securities, and secondarily due to a shift in the earning asset to higher yielding investment securities from lower yielding interest earning deposits in other banks.

The 29 basis point increase in the net interest margin for the second quarter of 2022, compared to the linked quarter is primarily attributable to an increase in the proportion of average loans to total average earning assets.

The cost of total funding has been stable over the last year, unchanged at 0.18% for the quarter ended June 30, 2022, and the current quarter. The cost of total funding increased by 1 basis point from 0.17% during the linked quarter to 0.18% for the current quarter.

Provision for Loan and Lease Losses

A $0.9 million provision for loan and lease losses was recorded for the quarter ended June 30, 2022, compared to $0.6 million for the linked-quarter and $0.6 million for the same period a year ago. The Company's quarterly loan loss provisions over the past year have been recorded primarily to account for growth in the loan portfolio. rather than in response to changing conditions in the Company's loan portfolio, which have remained stable, demonstrating a low risk profile during the past twelve months.

Non-Interest Income

Non-interest income for the second quarter of 2022 was $3.5 million, compared to $1.4 million for the linked quarter, and $1.7 million for the same period a year earlier. Non-interest income for the current quarter increased by $2.1 million, or 149.0% compared to the linked quarter, and by $1.9 million, or 110.1% as compared to the same prior year period. The increases for the current quarter as compared to both the linked quarter and the second quarter of 2021 are primarily due to the recording of a $1.6 million gain attributable to the sale of our Ridgecrest Business Banking Center, and additionally due to receipt of $0.3 million of partnership income. Partially offsetting these increases for the current quarter as compared to the second quarter of 2021 was a $0.2 million decrease in the gain on sale of securities.

Non-Interest Expense

Non-interest expense increased by $0.2 million, or 2.7%, to $6.3 million for the quarter ended June 30, 2022, compared to $6.2 million for the linked quarter and increased by $0.5 million, or 7.8%, as compared to $5.9 million for the quarter ended June 30, 2021.

The increase in non-interest expense for the second quarter of 2022 as compared to the linked quarter was primarily attributable to a $0.2 million increase other expenses attributable to both an increase in marketing, travel and entertainment expense, and operating losses. In addition to the linked quarter

Mission Bancorp

July 29, 2022

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increase in other expenses, professional services increased by $0.1 million attributable to higher systems, information technology and consulting expenses. Offsetting these linked quarter increases was a $0.2 million decline in salaries and benefits expense attributable to an increase in deferred loan origination costs, lower vacation accrual expense, payroll tax expense, and equity compensation expense, which were all partially offset by an increase in base compensation expense.

The increase in non-interest expense for the second quarter of 2022 as compared to the second quarter of 2021 was due to a $0.2 million increase in salaries and benefits expense and a $0.1 million increase in other expenses. The largest component of the increase in salaries and benefits expense for the current quarter as compared to the same quarter last year was a $0.2 million increase in base compensation expense. The year over year quarterly increase in other expenses is primarily attributable to an increase in marketing, travel and entertainment expenses.

Operating Efficiency

The Company's operating efficiency ratio decreased to 40.6% for the second quarter of 2022 as compared to 46.7% for the second quarter of 2021, and from 49.5% for the linked quarter. Total non- interest expense as a percentage of average assets, another measure of the Company's efficiency, was 1.68% for the second quarter of 2022 compared to 1.67% for the second quarter of 2021, and 1.64% for the quarter ended March 31, 2022.

Income Taxes

Income tax expense was $2.3 million for the second quarter of 2022 compared to $1.6 million for the quarter ended June 30, 2021, and the $1.5 million for the linked quarter ended March 31, 2022. The Company's effective tax rate for the second quarter of 2022 was 27.0% compared to 26.0% for the same period a year ago, and 26.3% for the quarter ended March 31, 2022.

Asset and Equity Returns

The quarterly return on average equity for the second quarter of 2022 was 21.56%, up from 16.84% for the same prior year period and from 14.11% for the linked quarter. The quarterly return on average assets for the second quarter of 2022 was 1.61%, increasing from 1.28% for the same prior year period and from 1.11% for the linked quarter.

The rise in returns on both average equity and assets for the quarter ended June 30, 2022, as compared to the second quarter of 2021 is primarily attributable to the 35.9% increase in net income for the current quarter as compared to the same prior year period.

The rise in returns on both average equity and assets for the quarter ended June 30, 2022, as compared to the linked quarter is primarily attributable to the 46.4% increase in net income for the second quarter of 2022, compared to the first quarter of 2022.

Mission Bancorp

July 29, 2022

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Balance Sheet

Total assets increased by $13.6 million, or 0.9%, to $1.5 billion at June 30, 2022 compared to June 30 2021, and declined by $71.5 million, or 4.7%, compared to March 31, 2022. Cash and cash equivalents decreased by $100.1 million, or 32.6%, to $207.1 million at June 30, 2022 compared to the same prior year period, and decreased by $124.5 million, or 37.5%, compared to March 31, 2022. The decline in the Company's cash position over the last year is primarily the result of loan growth and investment securities growth, which outpaced deposit growth over the last year. The decline in the Company's cash position over the past quarter is due both to loan growth and deposit contraction, which contraction is primarily attributable to a $42.9 million decline in our 1031 Exchange deposit accounts due to the conclusion of tax-free real estate exchanges.

Investment securities increased by $18.0 million or 9.2%, to $214.2 million at June 30, 2022, compared to $196.2 million at June 30, 2021, and decreased by $14.1 million, or 6.2%, compared to $228.3 million at March 31, 2022. The decline in the balance of investment securities portfolio during the second quarter of 2022, as compared to the linked quarter is primarily attributable to the increase in unrealized losses on the investment portfolio attributable to the continued increase in capital market interest rates of various terms across the yield curve. The increase in the investment securities portfolio over the last year is attributable to new bond purchases, net of amortization and the decline in fair market value of the investment portfolio attributable to the rise in interest rates.

Total gross loans increased by $88.8 million, or 9.9%, to $986.3 million at June 30, 2022 compared to June 30, 2021, and by $62.1 million, or 6.7%, compared to March 31, 2022. Gross loans, adjusted for

1. loan forgiveness and pay-off, grew by $168.6 million, or 20.6%, to $985.3 million at June 30,
   2022 compared to $816.8 million at June 30, 2021, and by $63.4 million or 6.9% compared to $921.9 million at March 31, 2022. Loan growth during the last year has been concentrated in the construction and land development and owner occupied commercial real estate segments of the portfolio and has offset contraction in the commercial and industrial segment of the portfolio, which contraction was primarily attributable to the forgiveness and pay-off of PPP loans.

Total deposits increased by $20.6 million, or 1.6%, to $1.31 billion as of June 30, 2022, from $1.29 billion as of June 30, 2021, and contracted by $66.6 million, or 4.8%, from $1.38 billion at March 31, 2022. Noninterest-bearing deposits declined by $10.7 million, or 1.5%, during the last year, and by $11.8 million, or 1.6%, since March 31, 2022. The deposit growth achieved over the last year is attributable to relationship building efforts, and activity in our De Novo markets, while the linked- quarter contraction in total deposits can primarily be attributed to a $42.9 million outflow of 1031 Exchange deposit accounts due to completion of tax-free exchanges. Noninterest-bearing deposits as a percentage of total deposits equaled 55.2% at June 30, 2022.

Total shareholders' equity was $111.1 million at June 30, 2022, an increase of $0.6 million, or 0.6%, compared to June 30, 2021, and a decrease of $4.2 million, or 3.6%, compared to March 31, 2022, due primarily to quarterly earnings, net of changes in accumulated other comprehensive income or loss. The change in the unrealized loss in the securities portfolio resulted in a decrease of total equity of $10.6 million, and of $21.3 million during the past quarter, and year, respectively.