10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
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	I.R.S. Employer
incorporation or organization	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 x No o

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

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

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:  1,120,576 shares of common stock outstanding as of August 1, 2008.

Mission Community Bancorp

June 30, 2008

Index

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2008, December 31, 2007 and June 30, 2007		3
Condensed Consolidated Statements of Income for the Three- and Six-Month Periods Ended June 30, 2008 and 2007		4
Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2008 and 2007		5
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and 2007		6
Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysisof Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4T.	Controls and Procedures	25
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	27
Item 6.	Exhibits	27

2

PART I

ITEM 1.  FINANCIAL STATEMENTS

Mission Community Bancorp and Subsidiary
Condensed Consolidated Balance Sheets
Unaudited
	(dollars in thousands)
	June 30, 2008			December 31, 2007			June 30, 2007
Assets
Cash and due from banks	$	2,799		$	2,212		$	3,266
Federal funds sold	160			3,315			4,275
Total cash and cash equivalents	2,959			5,527			7,541
Interest-bearing deposits in other banks	550			550			550
Investment securities available for sale	25,669			17,124			15,012
Loans held for sale	1,088			3,012			1,588
Loans, net of unearned income	147,354			123,416			123,432
Less allowance for loan losses	(2,986		)	(1,150		)	(1,045		)
Net loans	144,368			122,266			122,387
Federal Home Loan Bank stock and other stock, at cost	2,195			2,021			1,592
Premises and equipment	3,466			3,537			3,624
Company owned life insurance	2,739			2,289			2,248
Accrued interest and other assets	3,017			2,003			1,874
Total Assets	$	186,051		$	158,329		$	156,416
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	23,157		$	23,165		$	23,187
Money market, NOW and savings	38,710			32,630			36,725
Time certificates of deposit	64,313			56,638			58,275
Total deposits	126,180			112,433			118,187
Other borrowings	37,200			28,200			21,650
Junior subordinated debt securities	3,093			3,093			3,093
Accrued interest and other liabilities	1,059			1,465			1,082
Total liabilities	167,532			145,191			144,012
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
Common stock - 10,000,000 shares authorized; Issued and outstanding: 1,120,576 at June 30, 2008;  689,232 at December 31, 2007; and 674,899 at June 30, 2007	14,193			7,126			6,879
Additional paid-in capital	132			108			85
Retained earnings	3,260			4,712			4,481
Accumulated other comprehensive income - unrealized appreciation(depreciation) on available-for-sale  securities, net of tax	(150		)	108			(125		)
Total shareholders’ equity	18,519			13,138			12,404
Total Liabilities and Shareholders’ Equity	$	186,051		$	158,329		$	156,416

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

3

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
	June 30, 2008			June 30, 2007		June 30, 2008			June 30, 2007
Interest Income
Interest and fees on loans	$	2,291		$	2,802	$	4,720		$	5,445
Interest on investment securities	316			165		528			336
Other interest income	44			33		138			70
Total interest income	2,651			3,000		5,386			5,851
Interest Expense
Interest on money market, NOW and savings deposits	155			243		357			487
Interest on time certificates of deposit	515			741		1,120			1,459
Other interest expense	380			296		746			550
Total interest expense	1,050			1,280		2,223			2,496
Net interest income	1,601			1,720		3,163			3,355
Provision for loan losses	2,325			15		2,545			15
Net interest income after provision for loan losses	(724		)	1,705		618			3,340
Non-interest income
Service charges on deposit accounts	83			62		153			118
Gain on sale of loans	9			63		39			122
Loan servicing fees, net of amortization	21			11		45			32
Grants and awards	—			—		—			13
Other income and fees	26			22		57			43
Total non-interest income	139			158		294			328
Non-interest expense
Salaries and employee benefits	922			877		1,884			1,754
Occupancy expenses	158			140		279			288
Furniture and equipment	102			119		215			231
Data processing	131			117		263			230
Professional fees	82			86		173			142
Marketing and business development	57			71		90			147
Office supplies and expenses	57			52		114			107
Insurance and regulatory assessments	52			49		101			101
Loan and lease expenses	25			23		46			46
Provision for unfunded commitments	15			—		15			—
Other expenses	148			128		288			241
Total non-interest expense	1,749			1,662		3,468			3,287
Income (loss) before income taxes	(2,334		)	201		(2,556		)	381
Income tax expense (benefit)	(988		)	57		(1,104		)	109
Net income (loss)	$	(1,346	)	$	144	$	(1,452	)	$	272
Net income (loss) applicable to common stock	$	(1,205	)	$	109	$	(1,298	)	$	231
Per Common Share Data:
Net Income (Loss) - Basic	$	(1.08	)	$	0.18	$	(1.28	)	$	0.34
Net Income (Loss) - Diluted	$	(1.08	)	$	0.17	$	(1.28	)	$	0.32
Average common shares outstanding - basic	1,120,576			673,795		1,017,147			673,598
Average common shares outstanding - diluted	N/A			714,703		N/A			717,113

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

4

Mission Community Bancorp and Subsidiary

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited - dollars in thousands)

														Accumulated
						Additional								Other
	Preferred		Common Stock			Paid-In		Comprehensive			Retained			Comprehensive
	Stock		Shares	Amount		Capital		Income			Earnings			Income(Loss)			Total
Balance at January 1, 2007	$	1,084	673,399	$	6,859	$	61				$	4,209		$	(59	)	$	12,154
Exercise of stock options and related tax benefit of $5			1,500	20													20
Stock-based compensation						24											24
Comprehensive income:
Net income								$	272		272						272
Net unrealized gain on available-for-sale securities,  net of taxes of $46	—		—	—		—		(66		)	—			(66		)	(66		)
Total comprehensive income								$	206
Balance at June 30, 2007	$	1,084	674,899	$	6,879	$	85				$	4,481		$	(125	)	$	12,404
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 (loss):
Net income (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

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

5

Mission Community Bancorp and Subsidiary

Condensed Consolidated Statements of Cash Flows

	(Unaudited - dollars in thousands)
	For the Six Months Ended
	June 30, 2008			June 30, 2007
Operating Activities
Net income (loss)	$	(1,452	)	$	272
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation	176			179
Accretion of discount on securities and loans, net	(88		)	(75		)
Provision for credit losses	2,545			15
Provision for losses on unfunded loan commitments	15			—
Stock-based compensation	24			24
Gain on loan sales	(39		)	(121		)
Increase in company-owned life insurance	(45		)	(41		)
Other, net	(1,295		)	63
Proceeds from loan sales	2,712			443
Loans originated for sale	(718		)	(2,940		)
Net cash provided by (used in) operating activities	1,835			(2,181		)
Investing Activities
Net change in Federal Home Loan Bank and other stock	(135		)	(258		)
Purchase of available-for-sale securities	(12,880		)	(997		)
Proceeds from maturities, calls and paydowns of available-for-sale securities	3,922			2,285
Net (increase) decrease in loans	(24,615		)	479
Purchase of bank-owned life insurance	(405		)	—
Purchases of premises and equipment	(109		)	(79		)
Proceeds from sale of fixed assets	5			—
Net cash provided by (used in) investing activities	(34,217		)	1,430
Financing Activities
Net increase (decrease) in demand deposits and savings accounts	6,072			(3,012		)
Net increase (decrease) in time deposits	7,675			(3,081		)
Net increase in other borrowings	9,000			4,250
Proceeds from issuance of common stock in public offering, net	6,835			—
Proceeds from exercise of stock options	232			20
Net cash provided by (used in) financing activities	29,814			(1,823		)
Net decrease in cash and cash equivalents	(2,568		)	(2,574		)
Cash and cash equivalents at beginning of year	5,527			10,115
Cash and cash equivalents at end of period	$	2,959		$	7,541
Supplemental disclosures of cash flow information:
Interest paid	$	2,266		$	2,550
Taxes paid	35			20

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

6

Mission Community Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation and Management Representations

The unaudited consolidated financial statements include accounts of Mission Community Bancorp (“the Company”) and its 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-KSB for the year ended December 31, 2007, which was filed on March 28, 2008.

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, 2008 and 2007 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.  Certain 2007 amounts have been reclassified to conform to the 2008 presentation.

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-KSB.  The 1998 Stock Option Plan has been terminated with respect to the granting of future options under the Plan.  In 2008 the shareholders of the Company adopted the Mission Community Bancorp 2008 Stock Option Plan, which 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 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 for 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.

7

During the six-month periods ended June 30, 2008 and 2007, the Bank recognized pre-tax stock-based compensation expense of $24 thousand and $24 thousand, respectively, as a result of adopting SFAS 123R.  As of June 30, 2008, the Company has unvested options outstanding with unrecognized compensation expense totaling $248 thousand, which is scheduled to be recognized as follows (in thousands):

July 1 through December 31, 2008	$	40
2009	79
2010	38
2011	38
2012	38
2013	15
Total unrecognized compensation cost	$	248

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 — Recent Accounting Pronouncements

In September 2006 the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS No. 157 establishes three broad methods of determining fair value at times other than the purchase or sale of an asset or liability:

·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 would be preferable to Level 2, and Level 3 pricing would only be used if neither Level 1 nor Level 2 pricing methods were considered appropriate.  SFAS No. 157 is effective beginning with the 2008 calendar year.

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 under SFAS No. 157.  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.  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.

The following table presents information regarding the methods used to measure fair value for those balance sheet items presented at fair value:

8

(In thousands - June 30, 2008)	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities	$	—	$	25,624	$	45	$	25,669

(In thousands)	Fair Value Measurements for Available-for-Sale Securities Using Significant Unobservable Inputs  (Level 3)
Beginning balance 12/31/07	$	—
Transfers into Level 3	227
Unrealized gains (losses) included in other comprehensive income (loss)	(168		)
Purchases	—
Settlements	—
Paydowns and maturities	(14		)
Ending Balance 6/30/08	$	45
Total unrealized gains (losses) for the period relating to assets still held at the reporting date	$	(168	)

In February 2007 the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, which permits the Bank, beginning in 2008, to make an irrevocable choice to measure many financial instruments and certain other items at fair value, on an instrument-by-instrument basis.  Upon adoption of SFAS No. 159 in 2008, the Bank did not change the valuation of any of its existing cost-based financial instruments to fair value, and did not reclassify any of its available-for-sale securities to trading securities.

9

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

Forward-Looking Statements

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

Overview of Results of Operations and Financial Condition

·The Company incurred a net loss of $(1.452) million for the first half of 2008, and $(1.346) million for the second quarter, as compared with $272 thousand in net income for the first six months and $144 thousand for the second quarter of 2007. The factors resulting in the 2008 loss will be discussed below.

·The provision for loan losses increased by $2.530 million from the first six months of 2007 to the first half of 2008, due to loan growth, an increase in the level of non-accrual loans, and a decline in the quality of a few large credits during the second quarter.  As a result, management has reassessed the appropriate level for the allowance for loan losses as of June 30, 2008.

·Net interest income for the six-month period ended June 30, 2008 decreased by $192 thousand, or 6%, from the comparable period in 2007, due primarily to a decrease in the net interest margin of 80 basis points.  For the second quarter, net interest income decreased by $119 thousand, or 7%, also due to a drop in the net interest margin.  The net interest margin decrease is attributable primarily to the reduction in the prime lending rate by 3.25% over the past year.  In order to retain deposits in a competitive market, the Bank has been unable to reduce deposit rates to the same degree over that period, placing a squeeze on the net interest margin.

·For the six months ended June 30, 2008, non-interest income decreased by $34 thousand, or 10%, from the same period in 2007, primarily due to reduced sales of SBA-guaranteed loans in 2008.

10

·Non-interest expense increased by $181 thousand, or 6%, for the six months ended June 30, 2008, as compared to the first quarter of 2007, principally due to increased costs for salaries and benefits in 2008.

·Total assets increased by $27.8 million, or 17.6%, from December 31, 2007 to June 30, 2008.  Total loans increased by $22.0 million, or 17.4%, from December 31, 2007 to June 30, 2008, while deposits increased by $13.7 million, or 12.2%.

·On February 15, 2008, the Company issued 410,644 new common shares in a secondary public offering for gross cash proceeds of $7.4 million ($18.00 per share).  After deducting offering expenses, the net proceeds to the Company was $6.8 million.  Shortly after closing on this stock offering, the Company invested $6.4 million of the net proceeds into increasing the capital of the Bank.

Income Summary

For the three months ended June 30, 2008, the Company incurred a net loss of $(1.346) million.  This compares with net income of $144 thousand for the comparable period of 2007.  Return on average assets (annualized) was a negative (3.00)% for the second quarter of 2008, as compared with a positive 0.37% for the second quarter of 2007.  Annualized return on average equity was (26.8)% for the second quarter of 2008 as compared with 4.6% for the comparable 2007 period.

For the six months ended June 30, 2008, the net loss was $(1.452) million, a decrease of $1.724 million, as compared with the $272 thousand in net income for first half of 2007.  Annualized return on average assets was (1.68)% for the first six months of 2008, as compared with 0.35% for the same period in 2007.  Annualized return on average equity was (16.1)% for the first half of 2008 as compared with 4.4% for the comparable 2007 period.

The income statement components of these variances are as follows:

Pre-Tax Income Variance Summary

(In thousands)

	Effect on Pre-Tax Income
	Increase (Decrease)
	2nd Quarter			Six Months
Change from 2007 to 2008 in:
Net interest income	$	(119	)	$	(192	)
Provision for loan losses	(2,310		)	(2,530		)
Non-interest income	(19		)	(34		)
Non-interest expense	(87		)	(181		)
Change in income before income taxes	$	(2,535	)	$	(2,937	)

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, 2008, net interest income was $1.601 million, a decrease of $119 thousand, or 7%, from the comparable period in 2007.  For the six months, 2008’s net interest income was $3.163 million, down $192 thousand from 2007.

11

The net interest margin (net interest income as a percentage of average interest earning assets) was 3.85% for the three-month period ended June 30, 2008, a decrease of 90 basis points as compared to the same period in 2007.  For the six months, the net interest margin was 3.95% in 2008, down 80 basis points from the first six months of 2007.  The decrease in the net interest margin in 2008 was principally attributable to the reduction in the prime lending rate by 3.25% from January 2007 to June 2008.  In order to retain deposits in a competitive market, the Bank has been unable to reduce deposit rates to the same degree over that period, placing a squeeze 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, 2008 and 2007:

Net Interest Analysis

(Dollars in thousands)

	For the Three Months Ended
	June 30, 2008							June 30, 2007
	Average					Average		Average					Average
	Balance			Interest		Rate		Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income*	$	140,808		$	2,291	6.60	%*	$	127,876		$	2,802	8.78	%*
Investment securities*	27,147			316		4.96	%*	15,737			165		4.46	%*
Federal funds sold	594			3		2.23	%	1,449			19		5.17	%
Other interest income	2,798			41		5.87	%	2,020			14		2.78	%
Total interest-earning assets	171,347			$	2,651	6.31	%	147,082			$	3,000	8.20	%
Non-interest-earning assets:
Allowance for loan losses	(1,384		)					(1,033		)
Cash and due from banks	2,174							2,606
Premises and equipment	3,503							3,671
Other assets	4,761							4,531
Total assets	$	180,401						$	156,857
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits: Transaction accounts	$	20,828		$	90	1.73	%	$	13,882		$	102	2.91	%
Savings deposits	20,119			65		1.30	%	21,845			141		2.56	%
Certificates of deposit	59,025			515		3.51	%	60,861			741		4.83	%
Total interest-bearing deposits	99,972			670		2.70	%	96,588			984		4.04	%
Federal funds purchased	136			1		2.81	%	3			—		6.23	%
Federal Home Loan Bank advances	34,047			331		3.91	%	18,954			227		4.74	%
Subordinated debt	3,093			48		6.32	%	3,093			69		8.88	%
Total borrowed funds	37,276			380		4.10	%	22,050			296		5.32	%
Total interest-bearing liabilities	137,248			1,050		3.08	%	118,638			1,280		4.28	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits	21,681							24,461
Other liabilities	1,240							1,256
Total liabilities	160,169							144,355
Shareholders’ equity	20,232							12,502
Total liabilities and shareholders’ equity	$	180,401						$	156,857
Net interest-rate spread						3.23	%						3.92	%
Impact of non-interest-bearing sources and other changes in  balance sheet composition						0.62	%						0.83	%
Net interest income				$	1,601	3.85	%**				$	1,720	4.75	%**

*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents

** Net interest income as a % of earning assets

12

Net Interest Analysis

(Dollars in thousands)

	For the Six Months Ended
	June 30, 2008							June 30, 2007
	Average					Average		Average					Average
	Balance			Interest		Rate		Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	134,334		$	4,720	7.13	%*	$	126,374		$	5,445	8.77	%*
Investment securities*	23,081			528		4.91	%*	15,983			336		4.50	%*
Federal funds sold	3,228			50		3.14	%	1,287			34		5.27	%
Other interest income	4,070			88		4.35	%	1,953			36		3.78	%
Total interest-earning assets / interest income	164,713			5,386		6.67	%	145,597			5,851		8.20	%
Non-interest-earning assets:
Allowance for loan losses	(1,274		)					(1,030		)
Cash and due from banks	2,296							2,490
Premises and equipment	3,522							3,691
Other assets	4,613							4,588
Total assets	$	173,870						$	155,336
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	18,802		196		2.10	%	$	13,080		192		2.95	%
Savings deposits	20,495			161		1.58	%	22,924			295		2.60	%
Certificates of deposit	58,361			1,120		3.86	%	60,467			1,459		4.87	%
Total interest-bearing deposits	97,658			1,477		3.04	%	96,471			1,946		4.07	%
Federal funds purchased	68			1		2.81	%	9			—		6.34	%
Federal Home Loan Bank advances	31,136			636		4.11	%	17,389			412		4.78	%
Subordinated debt	3,093			109		7.10	%	3,093			138		8.98	%
Total borrowed funds	34,297			746		4.38	%	20,491			550		5.41	%
Total interest-bearing liabilities / interest expense	131,955			2,223		3.39	%	116,962			2,496		4.30	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits	22,435							24,721
Other liabilities	1,304							1,281
Total liabilities	155,694							142,964
Shareholders’ equity	18,176							12,372
Total liabilities and shareholders’ equity	$	173,870						$	155,336
Net interest-rate spread						3.28	%						3.90	%
Impact of non-interest-bearing sources and other changes in balance sheet composition						0.67	%						0.85	%
Net interest income / margin on earning assets				$	3,163	3.95	%**				$	3,355	4.75	%**

*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents

** Net interest income as a % of earning assets

13

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, 2008 and 2007.  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, 2008
	Compared to 2007
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	263		$	(774	)	$	(511	)
Investment securities	131			20			151
Federal funds sold	(8		)	(8		)	(16		)
Other interest income	7			20			27
Total increase (decrease) in interest income	393			(742		)	(349		)
Interest-bearing liabilities:
Transaction accounts	39			(51		)	(12		)
Savings deposits	(10		)	(66		)	(76		)
Certificates of deposit	(22		)	(204		)	(226		)
Total interest-bearing deposits	7			(321		)	(314		)
Federal funds purchased	1			—			1
FHLB advances	153			(49		)	104
Subordinated debt	—			(21		)	(21		)
Total borrowed funds	154			(70		)	84
Total increase (decrease) in interest expense	161			(391		)	(230		)
Increase (decrease) in net interest income	$	232		$	(351	)	$	(119	)

14

Rate / Volume Variance Analysis

(In thousands)

	Six Months Ended June 31, 2008
	Compared to 2007
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	327		$	(1,052	)	$	(725	)
Investment securities	160			32			192
Federal funds sold	35			(19		)	16
Other interest income	45			7			52
Total increase (decrease) in interest income	567			(1,032		)	(465		)
Interest-bearing liabilities:
Transaction accounts	69			(65		)	4
Savings deposits	(29		)	(105		)	(134		)
Certificates of deposit	(49		)	(290		)	(339		)
Total interest-bearing deposits	(9		)	(460		)	(469		)
Federal funds purchased	1			—			1
FHLB advances	288			(64		)	224
Subordinated debt	—			(29		)	(29		)
Total borrowed funds	289			(93		)	196
Total increase (decrease) in interest expense	280			(553		)	(273		)
Increase (decrease) in net interest income	$	287		$	(479	)	$	(192	)

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.

Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain stable until at least year’s end, which we expect would result in minimal changes in the Bank’s net interest margin for the balance of the year.

Provision for Loan Losses

The Bank recorded a $2.325 million provision for loan losses for the three months ended June 30, 2008, and $2.545 million for the first six months of 2008.  A $15 thousand provision was recorded in the second quarter and first half of 2007.  The Bank had $721 thousand of charge-offs and $12 thousand of recoveries for the first six months of 2008, as compared with no charge-offs and $4 thousand of recoveries for the first half of 2007.  The ratio of allowance for loan losses to total loans was 2.00% at June 30, 2008, as compared to 0.84% a year ago and 0.91% as of December 31, 2007.

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.

15

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.  For the three-month period ended June 30, 2008, non-interest income was $139 thousand, a decrease of $19 thousand, or 12%, from the same period in 2007.  For the six months, non-interest income decreased $34 thousand, or 10%.

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
	2008		2007		$			%		2008		2007		$			%
Service charges on deposit accounts	$	83	$	62	$	21		34	%	$	153	$	118	$	35		30	%
Gain on sale of loans	9		63		(54		)	-86	%	39		122		(83		)	-68	%
Loan servicing fees, net of amortization	21		11		10			91	%	45		32		13			41	%
Grants and awards	—		—		—			nm		—		13		(13		)	-100	%
Other income and fees	26		22		4			18	%	57		43		14			33	%
Total non-interest income	$	139	$	158	$	(19	)	-12	%	$	294	$	328	$	(34	)	-10	%

nm - not meaningful

The Bank typically derives a substantial portion of its non-interest income from the sale of loans, most of which are SBA-guaranteed loans.  Loan sale activity has been sluggish so far in 2008, but is expected to increase in the third and fourth quarters.

In 2005 the Company received a $135,000 CDFI technical assistance grant to help offset any costs associated with providing additional services to the un- and under-banked in its target market area.  By December 31, 2006, the Company had incurred qualifying expenses totaling $100 thousand.  That portion of the grant was recognized in non-interest income in 2006.  An additional $13 thousand of qualifying expenditures was incurred in the first quarter of 2007, and that amount is reflected as grants and awards income in the table above.

The majority of the service charge income 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 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 expenses, outside services, and other miscellaneous expenses necessary to conduct business.

Non-interest expenses increased by $87 thousand or 5% for the three months ended June 30, 2008, as compared to the second quarter of 2007.  For the six months, non-interest expense increased $181 thousand, or 6%.

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

16

Non-Interest Expense

(In thousands)

	For the Three Months Ended June 30,									For the Six Months Ended June 30,
	$ Amount				Change					$ Amount				Change
	2008		2007		$			%		2008		2007		$			%
Salaries and employee benefits	$	922	$	877	$	45		5	%	$	1,884	$	1,754	$	130		7	%
Occupancy expenses	158		140		18			13	%	279		288		(9		)	-3	%
Furniture and equipment	102		119		(17		)	-14	%	215		231		(16		)	-7	%
Data processing	131		117		14			12	%	263		230		33			14	%
Professional fees	82		86		(4		)	-5	%	173		142		31			22	%
Marketing and business development	57		71		(14		)	-20	%	90		147		(57		)	-39	%
Office supplies and expenses	57		52		5			10	%	114		107		7			7	%
Insurance and regulatory assessments	52		49		3			6	%	101		101		—			0	%
Loan and lease expenses	25		23		2			9	%	46		46		—			0	%
Other	148		128		20			16	%	288		241		47			20	%
Total non-interest expense	$	1,749	$	1,662	$	87		5	%	$	3,468	$	3,287	$	181		6	%

The increase in salaries and employee benefits—the principal reason for the increase in non-interest expense—is due to increased staffing levels (up 3% from the second quarter of 2007), as well as normal annual salary increases (average salary increase of 3%).   The increases in staffing are related to the implementation of Bank’s business banking expansion plan.  Increased professional fees are legal fees related to loan workouts and general corporate matters, as well as costs of compliance with the internal control reporting mandated by the Sarbanes-Oxley Act of 2002.

Occupancy expense was down in the first quarter of 2008 due to the termination in July 2007 of a land lease in San Luis Obispo where the Bank intended to build a new administrative and main office.  The Bank now expects to lease a yet-to-be-constructed building on the same property, with no rent payments to be made until the building is substantially complete.  In the second quarter of 2008 occupancy costs increased again, as the Bank began incurring rental expense on the site for the new Santa Maria branch office, which is expected to open during the fourth quarter of 2008.

Income Taxes

Income tax expense for the three months ended June 30, 2008, was a negative $(988) thousand, compared with a positive $57 thousand for the same period in 2007.  For the six-month periods ended June 30, 2008 and 2007, income tax expense totaled $(1,104) thousand and $109 thousand, respectively.  The effective tax rate (income tax expense as a percentage of pre-tax income) for the second quarter of 2008 was 42.3%, compared with 28.4% for the same period in 2007.  For the six months, the effective income tax rates were 43.2% and 28.6% for 2008 and 2007, respectively.  The disparity between the effective tax rates in 2008 as compared to 2007 is primarily due to tax-exempt income on municipal securities and loans comprising a larger proportion of pre-tax income(loss) in 2007 as compared to 2008.

Balance Sheet Analysis

At June 30, 2008, consolidated assets totaled $186.1 million, as compared with $158.3 million at December 31, 2007, and $156.4 million at the end of 2007’s second quarter.  This represents an increase of $27.8 million (a 35% annual rate) since December of 2007.  Total loans increased $22.0 million (a 35% annual rate) over that period, while deposits increased $13.7 million (25%

17

annualized) and shareholders’ equity increased $5.4 million over that same period. The growth in shareholders’ equity since December 31, 2007, was the result of the closing of a secondary public offering of the Company’s common stock in February 2008.  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, 2008					March 31, 2008				December 31, 2007					September 30, 2007					June 30, 2007
	$			%		$		%		$			%		$			%		$			%
Total Assets	$	13,512		31.5	%	$	14,210	36.1	%	$	(4,195	)	-10.2	%	$	6,108		15.5	%	$	1,925		5.0	%
Earning Assets	12,778			31.7	%	14,625		39.9	%	(3,420		)	-9.0	%	5,981			16.4	%	646			1.8	%
Loans	17,295			53.0	%	4,718		15.0	%	4,100			13.3	%	(2,691		)	-8.5	%	(2,316		)	-7.3	%
Deposits	6,385			21.4	%	7,362		26.3	%	(14,462		)	-45.2	%	8,708			29.2	%	(2,826		)	-9.4	%
Borrowings	9,000			128.4	%	—		0.0	%	9,550			203.2	%	(3,000		)	-55.0	%	4,750			112.7	%
Shareholders’ Equity	(1,671		)	-33.3	%	7,052		215.9	%	340			10.5	%	394			12.6	%	76			2.5	%

*Percentages shown as annualized rates

Loans

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

Loan Portfolio Composition

(Dollars in thousands)

	June 30, 2008				December 31, 2007				June 30, 2007
Type of Loan	Amount		Percentage		Amount		Percentage		Amount		Percentage
Commercial	$	29,849	20.1	%	$	26,491	20.9	%	$	22,321	17.9	%
Agricultural	—		0.0	%	122		0.1	%	122		0.1	%
Municipal loans	2,782		1.9	%	2,789		2.2	%	3,551		2.8	%
Real estate	88,059		59.3	%	72,009		57.0	%	66,070		52.8	%
Construction	24,388		16.4	%	22,513		17.8	%	30,592		24.5	%
Consumer	3,364		2.3	%	2,504		2.0	%	2,364		1.9	%
Total loans	$	148,442	100.0	%	$	126,428	100.0	%	$	125,020	100.0	%

The table shows that loan growth in the first six months of 2008 has occurred primarily in commercial and real estate loans, while construction loan activity has declined as a percentage of the total portfolio.

Asset Quality

Non-accrual loans totaled $4.9 million at June 30, 2008, as compared to $2.0 million at December 31, 2007 and $186 thousand at June 30, 2007.

Except for one investment security on which the accrual of interest has been discontinued (see the Investments section below), the Bank and the Company had no other non-performing assets as of June 30, 2008 and 2007.

The $4.9 million of non-accrual loans as of June 30, 2008, includes a $1.9 million purchased participation in a construction loan for an affordable housing project in San Diego.  Management is working closely with the management of the originating bank to determine the most effective

18

action plan for the resolution of this loan.  Also included in non-accrual loans are two loans which are secured by business assets.  These loans—originally totaling $2.1 million—were charged down in the second quarter of 2008 to $1.4 million, the amount which is currently expected to be collectible.

Management classifies loans as non-accrual when principal or interest is past due 90 days 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.

The following table presents information about the Company’s non-performing loans, including quality ratios as of June 30, 2008, December 31, 2007 and June 30, 2007:

Non-Performing Assets

(in thousands)

	June 30			December 31			June 30
	2008			2007			2007
Loans in nonaccrual status	$	4,944		$	1,988		$	186
Loans past due 90 days or more and accruing	—			68			204
Restructured loans	—			—			—
Total nonperforming loans	4,944			2,056			390
Other real estate owned	—			—			—
Total nonperforming assets	$	4,944		$	2,056		$	390
Allowance for loan losses	$	2,986		$	1,150		$	1,045
Asset quality ratios:
Non-performing assets to total assets	2.66		%	1.30		%	0.25		%
Non-performing loans to total loans	3.33		%	1.63		%	0.31		%
Allowance for loan losses to total loans	2.01		%	0.91		%	0.84		%
Allowance for loan losses to total non-performing loans	60		%	56		%	268		%

The $4.9 million of non-performing loans as of June 30, 2008, are supported by $1.0 million of SBA loan guarantees.

19

Potential Problem Loans

At June 30, 2008, the Bank had approximately $4.5 million of loans that were not categorized as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans.  This represents a $1.7 million increase from the $2.8 million of potential problem loans at December 31, 2007.  The $4.5 million of potential problem loans are supported by $1.4 million of SBA loan guarantees.  Potential problem loans were identified through the ongoing loan review process.  Based on the evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation, management does not anticipate any significant losses related to these loans.  These loans are subject to continuing management attention and are considered in the determination of the allowance for loan losses.

Credit quality, as measured by loan delinquencies and by the Bank’s internal risk grading system, indicated some deterioration in the first six months of 2008, and there can be no assurances that new problem loans will not develop in future periods.  A 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 and loan workouts, as necessary, but deteriorating economic conditions, uncertainties or other unforeseen changes may cause one or more borrowers to experience problems in the coming months, resulting in increased loan delinquencies.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) at June 30, 2008 totaled $2.986 million, an increase of $1.836 million from December 31, 2007.  The ratio of ALLL to total loans at June 30, 2008, was 2.01%, up from 0.91% at December 31, 2007, and 0.84% at June 30, 2007.  At June 30, 2008 and 2007, the ratio of ALLL to total non-performing loans was 60% and 268%, respectively.

The following table provides an analysis of the changes in the ALLL for the three- and six-month periods ended June 30, 2008 and 2007:

Allowance for Loan and Lease Losses

(dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Balance at beginning of period	$	1,356		$	1,027		$	1,150		$	1,026
Provision for loan losses	2,325			15			2,545			15
Loans charged off	(700		)	—			(721		)	—
Recoveries of previous charge-offs	5			3			12			4
Net recoveries (charge-offs)	(695		)	3			(709		)	4
Balance at end of period	$	2,986		$	1,045		$	2,986		$	1,045
Allowance for loan losses as a percentage of:
Period end loans	2.01		%	0.84		%	2.01		%	0.84		%
Non-performing loans	60		%	268		%	60		%	268		%
As a percentage of average loans (annualized):
Net charge-offs (recoveries)	1.99		%	-0.01		%	1.07		%	-0.01		%
Provision for loan losses	6.64		%	0.05		%	3.82		%	0.02		%

20

The Bank underwent both an annual external credit review and a regulatory examination in the normal course of business during the first quarter of 2008.  While there were no noted issues reflected in the first quarter reviews, recent events in the banking sector caused management to initiate an additional third party credit review in the second quarter of 2008.  After the results of this review, management and the board of directors decided to enhance the allowance for loan and lease losses (“ALLL”) by $2.3 million.  This increase is primarily in response to estimated risk in four relationships. Three of these are real estate secured for which the underlying collateral is experiencing significant stress and are now impaired.  The fourth impaired relationship includes the two loans secured by business assets mentioned above.

Enhancements have been made to credit and risk management policies and procedures in the area of credit administration to ensure timely recognition and response to any further credit issues as they might arise.

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, 2008, is sufficient to absorb losses inherent in the loan portfolio.  This assessment is based upon the best available information and does involve uncertainty and matters of judgment.  Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.

In addition, management has established a reserve for undisbursed loan commitments.  As of June 30, 2008, this reserve totaled $70,000 and is included in other liabilities in the consolidated balance sheet.

Investments

Included in the Bank’s investment securities portfolio is a collateralized mortgage obligation (“CMO”) originally issued by a manufactured housing company on the East Coast.  The parent company of the issuer filed for bankruptcy in November 2002 and securities issued by the company were downgraded to “D” by the Standard and Poor’s rating agency.  To date, the Bank has received all scheduled interest payments but none of the scheduled principal payments.

Management receives monthly reports from JPMorgan that provide detailed information on delinquency, losses and other factors.  This information is used to project, as realistically as possible, the probable loss.  Management reviews this calculation monthly.  In 2004 the Bank established a specific loss reserve for this security of $254 thousand and placed the security in non-accrual status, with interest payments going to the reserve.  As of June 30, 2008, the book value of the security was $45 thousand ($320 thousand amortized cost less the loss reserve, which totals $275 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

21

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 CMO referred to above, all securities in the Bank’s investment portfolio are rated Aa2 or higher.  The portfolio consists of a mixture of fixed-rate mortgage-backed securities (56%), floating-rate mortgage-backed securities (10%), fixed-rate US agency securities (13%), fixed-rate tax-exempt municipal securities (14%) and fixed-rate CMO’s (7%).  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 5.0 years, with a duration of 4.1 years.

Deposits

Deposits are the primary source of funding for lending and investing needs.  Total deposits were $126.2 million as of June 30, 2008, as compared with $112.4 million at December 31, 2007, and $118.2 million at June 30, 2007.

The Bank generally prices deposits at or above the median rate by classification based on periodic interest rate surveys in the local market.  The Bank continues to use an Investor Savings product that pays higher rates than normal savings, similar to money market accounts, as a special product unique in the Bank’s market, but management also expects to see the relative percentage of Investor Savings to total deposits to continue to decline.  In conjunction with its business banking focus, the Bank began offering a business money market deposit account—the Premier Business Money Market account—in the fourth quarter of 2007.  To date, this product has been well-received in the local market and has been responsible for much of the growth in deposits in the first half of 2008.  In the second quarter of 2008 the Bank rolled out a similar product for non-profit organizations.  Management expects to continue to develop unique deposit products to enhance its local deposit-gathering capabilities.

The Bank’s Mission Community Club suite of deposit products provides new bank customers with free checking, higher-than-normal yields on savings accounts and certificates of deposit, and attractive interest rates on credit cards.  As a part of the Community Club program, the Bank supported five local non-profit organizations with grants of $5,000 each in the second quarter of 2006, another five non-profit organizations in 2007, and a third group of five non-profits in 2008.

During 2006 the Bank began to capitalize on its status as 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 all of 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 over 2,000 banks with another, so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet.  As of June 30, 2008, the Bank had issued $6.8 million of certificates of deposit to local customers through the CDARS program.

While the Bank focuses mainly on its local market areas, it has also been able to attract non-local (“brokered”) certificates of deposit at market rates.  At December 31, 2007 and June 30, 2008 the Bank had $4.8 million and $12.0 million in brokered deposits, respectively, exclusive of the locally-generated CDARS deposits referred to above.  Management expects that brokered

22

deposits will continue to be used in 2008 and 2009 if locally-generated deposits are insufficient to fund loan growth.

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, 2008, borrowings from the FHLB totaled $37.2 million, with a weighted average interest rate of 3.91%.  Of the $37.2 million, $3.0 million was borrowed for 10 years to offset a specific pool of the Bank’s fixed rate loans maturing in 2013.  Another $2.5 million was borrowed for five years to “match-fund” a pool of fixed rate loans maturing in 2009.  During the second quarter of 2007, $6 million of short-term brokered deposits were replaced with $3 million of FHLB advances maturing in 2009 and another $3 million maturing in 2010.  The remaining $16.7 million was borrowed to meet shorter-term funding needs and matures on various dates from December 2008 through December 2009.

Capital Ratios

The following table shows the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at June 30, 2008, December 31, 2007, and June 30, 2007:

Mission Community Bank

Capital Ratios

(dollars in thousands)

					Amount of Capital Required
					To Be				To Be Adequately
	Actual				Well-Capitalized				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
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	%
As of December 31, 2007:
Total Capital (to Risk-Weighted Assets)	$	16,324	11.74	%	$	13,899	10.0	%	$	11,119	8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	15,119	10.88	%	$	8,340	6.0	%	$	5,560	4.0	%
Tier 1 Capital (to Average Assets)	$	15,119	9.47	%	$	7,979	5.0	%	$	6,383	4.0	%
As of June 30, 2007:
Total Capital (to Risk-Weighted Assets)	$	15,834	11.30	%	$	14,017	10.0	%	$	11,213	8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	14,734	10.51	%	$	8,410	6.0	%	$	5,607	4.0	%
Tier 1 Capital (to Average Assets)	$	14,734	9.44	%	$	7,806	5.0	%	$	6,245	4.0	%

On June 13, 2007, the Company filed a registration statement on Form SB-2 (amended July 24, 2007) with respect to a best efforts offering of between 166,667 and 597,000 shares of its common stock at a price of $18.00 per share in a secondary public offering.  The registration became effective on August 13, 2007.  On February 15, 2008, the Company closed the offering, issuing 410,644 new common shares for gross cash proceeds of $7.4 million.  After deducting offering expenses, the net proceeds to the Company was $6.8 million.  Shortly after closing on this stock offering, the Company invested $6.4 million of the net proceeds into increasing the capital of the Bank.  The Bank plans to use the bulk of this new capital to support future growth

23

of the Bank, particularly the new Hispanic Banking Division and planned expansion into Santa Maria in northern Santa Barbara county.

In addition, the Company has entered into an agreement for a private placement of approximately 225,000 additional shares of common stock at a purchase price of $18.00 per share, subject to regulatory approvals and certain other conditions precedent.  This private placement is expected to be completed in the third quarter of 2008.

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.  Short-term investments, primarily federal funds sold, is the primary means for providing immediate liquidity.  The Bank had $160 thousand in federal funds sold on June 30, 2008, and $4.3 million on June 30, 2007.

In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain appropriate liquidity and loans-to-deposits ratios.  The liquidity ratio is the sum of cash and deposits at other banks, federal funds sold, and unpledged available-for-sale securities, divided by total deposits (calculated using monthly average balances).  For the month of June 2008, the Bank’s liquidity ratio was 4.7% and the loans-to-deposits ratio was 117%.

The Bank also considers current and potential FHLB borrowings in assessing its liquidity position, as well as short-term, back-up lines of credit from correspondent banks.  Potential FHLB borrowings as of June 2008 totaled $6.7 million and correspondent bank lines of credit total $6.5 million.

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
	2008		2007		2007
Commitments to Extend Credit	$	31,133	$	28,608	$	31,313
Standby Letters of Credit	197		693		631
	$	31,330	$	29,301	$	31,944

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

24

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 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.

San Luis Obispo County continues to have one of the lowest unemployment rates in California, yet real estate values have declined somewhat in 2007 and 2008.  After several years of strong appreciation, residential and commercial sale activity has slowed over the past two years.  There can be no assurance that the economy will continue to be strong or that real estate values will return to pre-2006 levels in the short term.  As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T.  Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared.  Disclosure controls and procedures 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, 2008.

25

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 28, 2008:

Election of Directors — Election of the following nine persons to the Board of Directors to serve until the 2009 Annual Meeting of Shareholders and until their successors are elected and have qualified:

Bruce M. Breault

Roxanne Carr

William B. Coy

Richard Korsgaard

Karl F. Wittstrom

Anita M. Robinson

Robin L. Rossi

Gary E. Stemper

Brooks W. Wise

	Shares	Percent
Authority given	923,549	82.4	%
Authority withheld	22,315	2.0
Abstain	-0-	-0-

26

Approval of the 2008 Stock Incentive Plan:

	Shares	Percent
For	722,665	64.5	%
Against	103,412	9.2
Abstain	11,756	1.1
Broker nonvotes	108,031	9.6

A total of 945,864 shares (84.4% 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 #		Page
2.1	Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)
3.1	Restated Articles of Incorporation (J)
3.2	Certificate of Amendment to Articles of Incorporation (L)
3.3	Bylaws (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)
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)

27

Exhibit #		Page
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)
31.1	Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act
31.2	Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act
32.1	Certification of CEO pursuant to Section 906 of Sarbanes Oxley Act
32.2	Certification of CFO pursuant to Section 906 of Sarbanes Oxley Act

(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

28

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: August 12, 2008
By:	/s/ Ronald B. Pigeon
RONALD B. PIGEON
Executive Vice President and Chief Financial Officer
Dated: August 12, 2008

29

EX-31.1

Exhibit 31.1

SARBANES-OXLEY ACT SECTION 302 CERTIFICATION

OF CHIEF EXECUTIVE OFFICER

          I, Anita M. Robinson, Chief Executive Officer, certify that:

(1) I have reviewed this Form 10-Q of Mission Community Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

(4) The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

(5) The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: August 12, 2008

/s/ Anita M. Robinson

President and Chief Executive Officer

1

EX-31.2

Exhibit 31.2

SARBANES-OXLEY ACT SECTION 302 CERTIFICATION

OF CHIEF FINANCIAL OFFICER

          I, Ronald B. Pigeon, Chief Financial Officer, certify that:

(1) I have reviewed this Form 10-Q of Mission Community Bancorp;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

(4) The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

(5) The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: August 12, 2008

/s/ Ronald B. Pigeon

Executive Vice President and Chief Financial Officer

1

EX-32.1

Exhibit 32.1

SARBANES-OXLEY ACT SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with this quarterly report on Form 10-Q of Mission Community Bancorp (“the Company”) for the period ended June 30, 2008, I, Anita M. Robinson, President and Chief Executive Officer, hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.             This Form 10-Q for the period ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.             The information contained in this Form 10-Q for the period ended June 30, 2008 fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 12, 2008

By:	/s/ Anita M. Robinson
	Anita M. Robinson
	President and Chief Executive Officer

1

EX-32.2

Exhibit 32.2

SARBANES-OXLEY ACT SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER

In connection with this quarterly report on Form 10-QSB of Mission Community Bancorp (“the Company”) for the period ended June 30, 2008, I, Ronald B. Pigeon, Executive Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.             This Form 10-Q for the period ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.             The information contained in this Form 10-Q for the period ended June 30, 2008 fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 12, 2008

By:	/s/ Ronald B. Pigeon
	Ronald B. Pigeon
	Executive Vice President
	and Chief Financial Officer

1