10-Q/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

Amendment No. 1

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

For the quarterly period ended September 30, 2009

OR

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

Commission file number 333-12892

MISSION COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

California	77-0559736
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

581 Higuera St., San Luis Obispo, California  93401

(Address of principal executive offices)

(805) 782-5000

Issuer’s telephone number

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þNo o

Indicate by check mark whether or to registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes oNo (not yet applicable to registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes oNo þ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  1,345,602 shares of common stock outstanding as of November 9, 2009.

Mission Community Bancorp

Form 10-Q/A

EXPLANATORY NOTE

We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the nine months ended September 30, 2009 (the “Original Filing”) to amend and restate our unaudited condensed consolidated financial statements and related disclosures for the nine months ended September 30, 2009, as discussed in Note 9 to the accompanying restated unaudited condensed consolidated financial statements.  The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on November 16, 2009.This Amendment corrects and restates the original Quarterly Report on Form 10-Q, but continues to be reported as of the date of the original filing of the Form 10-Q on November 16, 2009.  The Company has not updated the disclosures in this Amendment to report as of a later date.  All information contained in this Amendment is subject to updating and supplementing as provided in the periodic reports filed with the SEC subsequent to the original filing date.

Background of the Restatement

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

Description of the Error

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

Restatement of Other Financial Statements

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

Mission Community Bancorp

September 30, 2009

Index

PART I – FINANCIAL INFORMATION

PART I

Item 1.   Financial Statements (Restated)

Mission Community Bancorp and Subsidiary
Condensed Consolidated Balance Sheets
Unaudited	(dollars in thousands)
	September 30, 2009			December 31, 2008			September 30, 2008
Assets
Cash and due from banks	$	20,536		$	7,804		$	5,177
Federal funds sold		-			9,920			22,835
Total cash and cash equivalents		20,536			17,724			28,012
Interest-bearing deposits in other banks		575			11,710			6,550
Investment securities available for sale		41,257			24,846			23,872
Loans held for sale		234			1,264			2,279
Loans, net of unearned income		142,609			152,047			149,076
Less allowance for loan losses		(3,539	)		(3,942	)		(2,946	)
Net loans		139,070			148,105			146,130
Federal Home Loan Bank stock and other stock, at cost		3,002			2,757			2,545
Premises and equipment		3,012			2,599			3,551
Other real estate owned		2,042			983			-
Company owned life insurance		2,861			2,789			2,765
Accrued interest and other assets		2,934			2,713			3,046
Total Assets	$	215,523		$	215,490		$	218,750
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	24,812		$	22,802		$	26,007
Money market, NOW and savings		52,565			32,668			34,764
Time certificates of deposit		90,446			89,334			89,422
Total deposits		167,823			144,804			150,193
Other borrowings		19,300			45,700			45,700
Junior subordinated debt securities		3,093			3,093			3,093
Accrued interest and other liabilities		1,512			1,376			1,151
Total liabilities		191,728			194,973			200,137
Shareholders' Equity:
Preferred stock - Series A (100,000 shares issued and outstanding)		392			392			392
Preferred stock - Series B (20,500 shares issued and outstanding)		192			192			192
Preferred stock - Series C (50,000 shares issued and outstanding)		500			500			500
Preferred stock - Series D (5,116 shares issued and outstanding)		5,068			-			-
Common stock - 10,000,000 shares authorized;
Issued and outstanding: 1,345,602 at September 30, 2009;
1,345,602 at December 31, 2008;
and 1,120,576 at September 30, 2008		18,042			18,042			14,193
Additional paid-in capital		224			172			152
Retained earnings (deficit)		(1,041	)		864			3,385
Accumulated other comprehensive income -
unrealized appreciation on available-for-sale
securities, net of tax		418			355			(201	)
Total shareholders' equity		23,795			20,517			18,613
Total Liabilities and Shareholders' Equity	$	215,523		$	215,490		$	218,750

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

Mission Community Bancorp and Subsidiary
Condensed Consolidated Statements of Income
Unaudited	(in thousands, except per share data)
	For the Three Months Ended					For the Nine Months Ended
	(Restated)
	September 30, 2009			September 30, 2008		September 30, 2009			September 30, 2008
Interest Income
Interest and fees on loans	$	2,193		$	2,460	$	6,812		$	7,180
Interest on investment securities		349			301		937			829
Other interest income		11			96		122			234
Total interest income		2,553			2,857		7,871			8,243
Interest Expense
Interest on money market, NOW and savings deposits		117			172		398			529
Interest on time certificates of deposit		496			624		1,769			1,744
Other interest expense		254			442		999			1,188
Total interest expense		867			1,238		3,166			3,461
Net interest income		1,686			1,619		4,705			4,782
Provision for loan losses		875			-		1,556			2,545
Net interest income after provision for loan losses		811			1,619		3,149			2,237
Non-interest income
Service charges on deposit accounts		95			109		256			262
Gain on sale of loans		143			159		317			198
Brokered loan fees		-			-		-			-
Loan servicing fees, net of amortization		34			10		82			55
Grants and awards		74			-		81			-
Gain on sale of available-for-sale securities		7			-		246			-
Loss or writedown of fixed assets or other real estate		(69	)		-		(69	)		-
Other income and fees		42			30		112			87
Total non-interest income		326			308		1,025			602
Non-interest expense
Salaries and employee benefits		886			905		2,779			2,789
Occupancy expenses		196			144		528			423
Furniture and equipment		103			119		340			334
Data processing		187			135		566			398
Professional fees		117			144		382			317
Marketing and business development		36			63		106			153
Office supplies and expenses		57			51		193			165
Insurance and regulatory assessments		164			53		462			154
Loan and lease expenses		38			32		104			78
Provision for securities losses		-			-		-			-
Provision for unfunded commitments		-			-		35			15
Other expenses		117			117		430			405
Total non-interest expense		1,901			1,763		5,925			5,231
(Loss) before income taxes		(764	)		164		(1,751	)		(2,392	)
Income tax expense (benefit)		-			39		-			(1,065	)
Net (loss)	$	(764	)	$	125	$	(1,751	)	$	(1,327	)
Net (loss) applicable to common stock	$	(760	)	$	112	$	(1,748	)	$	(1,191	)
Per Common Share Data:
Net Income (Loss) - Basic	$	(0.57	)	$	0.10	$	(1.30	)	$	(1.13	)
Net Income (Loss) - Diluted	$	(0.57	)	$	0.10	$	(1.30	)	$	(1.13	)
Average common shares outstanding - basic		1,345,602			1,120,576		1,345,602			1,051,875
Average common shares outstanding - diluted		N/A			1,127,119		N/A			N/A

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

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, 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								44											44
Comprehensive income:
Net (loss)									$	(1,327	)		(1,327	)					(1,327	)
Net unrealized loss on
available-for-sale securities,
net of taxes of $215		-		-		-		-		(309	)		-			(309	)		(309	)
Total comprehensive income (loss)									$	(1,636	)
Balance at September 30, 2008	$	1,084		1,120,576	$	14,193	$	152				$	3,385		$	(201	)	$	18,613
Balance at January 1, 2009	$	1,084		1,345,602	$	18,042	$	172				$	864		$	355		$	20,517
Issuance of 5,116 shares of
Series D preferred stock
to U.S. Treasury Department,
net of issuance costs of $48		5,068																	5,068
Dividends declared and paid
on Series D preferred stock													(154	)					(154	)
Stock-based compensation								52											52
Comprehensive income (loss):
Net (loss)									$	(1,751	)		(1,751	)					(1,751	)
Less beginning of year
unrealized gain on
securities sold during
the period, net
of taxes of $-0-										(271	)					(271	)		(271	)
Net unrealized gain on
remaining available-
for-sale securities,
net of taxes of $291		-		-		-		-		334			-			334			334
Total comprehensive income (loss)									$	(1,688	)
Balance at September 30, 2009	$	6,152		1,345,602	$	18,042	$	224				$	(1,041	)	$	418		$	23,795

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

Mission Community Bancorp and Subsidiary
Condensed Consolidated Statements of Cash Flows
	(Unaudited - dollars in thousands)
	For the Nine Months Ended
	September 30, 2009			September 30, 2008
Operating Activities
Net (loss)	$	(1,751	)	$	(1,327	)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation		326			257
Accretion of discount on securities and loans, net		(82	)		(134	)
Provision for credit losses		1,556			2,545
Provision for losses on unfunded loan commitments		35			15
Stock-based compensation		52			44
Gain on sale of securities		(246	)		-
Gain on loan sales		(317	)		(198	)
Writedown of other real estate owned		69			-
Increase in company-owned life insurance		(72	)		(71	)
Net increase in accrued taxes receivable		-			(1,125	)
Other, net		(410	)		(99	)
Proceeds from loan sales		5,691			5,059
Loans originated for sale		(4,547	)		(4,300	)
Net cash provided by operating activities		304			666
Investing Activities
Net change in Federal Home Loan Bank and other stock		(246	)		(459	)
Net decrease (increase) in deposits in other banks		11,135			(6,000	)
Purchase of available-for-sale securities		(32,442	)		(12,880	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		7,510			5,648
Proceeds from sales of available-for-sale securities		9,134			-
Net decrease (increase) in loans		6,622			(26,141	)
Purchase of bank-owned life insurance		-			(405	)
Purchases of premises and equipment		(739	)		(275	)
Proceeds from sale of fixed assets		-			5
Net cash provided by (used in) investing activities		974			(40,507	)
Financing Activities
Net increase in demand deposits and savings accounts		21,907			4,976
Net increase in time deposits		1,112			32,783
Net increase (decrease) in other borrowings		(26,400	)		17,500
Proceeds from issuance of common stock in public offering, net		-			6,835
Proceeds from issuance of preferred stock under TARP-CPP, net		5,068			-
Payment of TARP-CPP dividends		(153	)		-
Proceeds from exercise of stock options		-			232
Net cash provided by financing activities		1,534			62,326
Net increase in cash and cash equivalents		2,812			22,485
Cash and cash equivalents at beginning of year		17,724			5,527
Cash and cash equivalents at end of period	$	20,536		$	28,012
Non-cash changes:
Real estate acquired by foreclosure	$	1,127			-
Supplemental disclosures of cash flow information:
Interest paid		3,312			3,410
Taxes paid		-			35

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

Mission Community Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements (Restated)

Note 1 – Basis of Presentation and Management Representations

The unaudited consolidated financial statements include accounts of Mission Community Bancorp (“the Company”) and its subsidiary, Mission Community Bank (“the Bank”) and the Bank’s subsidiary, Mission Community Development Corporation.  All material inter-company balances and transactions have been eliminated.

These financial statements have been prepared in accordance with the Securities and Exchange Commission’s rules and regulations for quarterly reporting and, therefore, do not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles.  These financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2008, which was filed on March 16, 2009.

Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.  In the opinion of management, the unaudited financial statements for the three- and nine-month periods ended September 30, 2009 and 2008 reflect all adjustments, consisting only of normal recurring accruals and provisions, necessary for a fair presentation of the Company’s financial position and results of operations.

Note 2 – Stock Based Compensation

The Company has a stock option plan, adopted in 1998, which is more fully described in Note I to the consolidated financial statements in the Company’s Annual Report on Form 10-K.  The 1998 Stock Option Plan has been terminated with respect to the granting of future options under the Plan.  In 2008 the Company adopted the Mission Community Bancorp 2008 Stock Incentive Plan, which has been approved by the Company’s shareholders.  The 2008 Plan provides for the grant of various equity awards, including stock options.

On January 1, 2006, the Company implemented Accounting Standards Codification ASC 718-10 (previously known as SFAS 123R, or Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment), which addresses accounting for equity-based compensation arrangements, including employee stock options.  The Company adopted ASC 718-10 using the “modified prospective method,” where stock-based compensation expense is recorded beginning on the adoption date and prior periods are not restated.  Under this method, compensation expense is recognized using the fair value based method for all new awards granted after January 1, 2006.  Additionally, compensation expense for unvested options that were outstanding at December 31, 2005, is being recognized over the requisite service period based on the fair value of those options as previously calculated under the pro forma disclosures of ASC 718-10.

On May 27, 2008, the Company granted to the Bank’s two most senior officers options to purchase a total of 41,064 shares of common stock at an exercise price of $18.00 per share.  These non-qualified stock options were granted under the 2008 Stock Incentive Plan, vest over

five years, and expire ten years after the date of grant.  The fair value ascribed to those options, using the Black-Scholes option pricing model, was $4.58 per share, or a total of $188,073.

During the nine-month periods ended September 30, 2009 and 2008, the Bank recognized pre-tax stock-based compensation expense of $52 thousand and $44 thousand, respectively, as a result of adopting ASC 718-10.  As of September 30, 2009, the Company has unvested options outstanding with unrecognized compensation expense totaling $146 thousand, which is scheduled to be recognized as follows (in thousands):

October 1 through December 31, 2009         $  18

2010                                                                       38

2011                                                                       38

2012                                                                       37

2013                                                                       15

Total unrecognized compensation cost      $146

Note 3 — Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost of securities and their approximate fair values as of the balance sheet dates were as follows:

(in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
September 30, 2009:
U.S. Government agencies	$	15,346	$	79	$	-		$	15,425
Mortgage-backed securities		17,498		377		(6	)		17,869
Municipal securities		2,918		63		(7	)		2,974
Asset-backed securities		1,983		54		-			2,037
Corporate debt securities		2,804		148		-			2,952
	$	40,549	$	721	$	(13	)	$	41,257
December 31, 2008:
U.S. Government agencies	$	3,500	$	70	$	-		$	3,570
Mortgage-backed securities		15,973		460		(25	)		16,408
Municipal securities		3,581		-		(147	)		3,434
Asset-backed securities		1,437		15		(18	)		1,434
	$	24,491	$	545	$	(190	)	$	24,846
September 30, 2008:
U.S. Government agencies	$	2,496	$	14	$	-		$	2,510
Mortgage-backed securities		16,651		34		(123	)		16,562
Municipal securities		3,581		-		(230	)		3,351
Asset-backed securities		1,484		4		(39	)		1,449
	$	24,212	$	52	$	(392	)	$	23,872

During 2004, one of the Bank’s asset-backed securities was identified as “other than temporarily impaired,” and a loss reserve was established for this security.  The security is in non-accrual status, with any interest payments received being credited to the reserve.  As of September 30, 2009, the gross book value of the security was $304,000 and the reserve was $290,000, for a net book value of $14,000.  Management estimates that the fair value of this security is approximately equal to the $14,000 net book value.

The scheduled maturities of investment securities at September 30, 2009, were as follows.  Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.

(in thousands)	Available-for-Sale Securities
	Amortized		Fair
	Cost		Value
Within one year	$	1,302	$	1,315
Due in one year to five years		35,773		36,401
Due in five years to ten years		537		548
Due in greater than ten years		2,937		2,993
	$	40,549	$	41,257

Investment securities in a temporary unrealized loss position as of each balance sheet date are shown in the following table, based on the length of time they have been continuously in an unrealized loss position:

(in thousands)	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2009:
U.S. Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage-backed securities		2,034		6		-		-		2,034		6
Municipal securities		878		7		-		-		878		7
Asset-backed securities		-		-		-		-		-		-
Corporate debt securities		-		-		-		-		-		-
	$	2,912	$	13	$	-	$	-	$	2,912	$	13
December 31, 2008:
U.S. Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage-backed securities		1,721		25		-		-		1,721		25
Municipal securities		3,434		147		-		-		3,434		147
Asset-backed securities		440		6		80		11		520		17
	$	5,595	$	178	$	80	$	11	$	5,675	$	189

As of September 30, 2009, five securities have been in an unrealized loss position for less than one year and none for more than one year.  The Bank has determined that it is more likely than not that it will not be required to sell any of these five securities before a recovery in fair value,

which may be maturity.  Therefore, the unrealized losses on these investments are not considered to be other-than-temporary impairments as of September 30, 2009.  None of the Bank’s securities has exhibited a decline in value as a result of changes in credit risk.

During the third quarter and first nine months of 2009, the Bank sold $1,408,000 and $9,134,000 of investment securities for net gains of $7,000 and $246,000, respectively.  No securities were sold in 2008.

Investments securities carried at $4,449,000 as of September 30, 2009, were pledged to secure public deposits as required by law, and securities carried at $7,167,000 were pledged to secure borrowings from the Federal Home Loan Bank of San Francisco.

Note 4 — 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 5 — Preferred Stock

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

Note 6 —Income taxes

The Company recognized no income tax expense or benefit for the nine months ended September 30, 2009, as compared with a $1.065 million tax benefit for the same period in 2008.  No tax benefit was recorded for the 2009 period due to a limitation on the Company’s ability to recognize deferred tax assets.

Note 7 — Fair Value Measurement

The Company has adopted ASC 820-10 (previously known as Statement of Financial Accounting Standards No. 157, Fair Value Measurements.  ASC 820-10, which was effective for financial assets and liabilities on January 1, 2008, and for non-financial assets and liabilities on January 1, 2009, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  This Statement establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Statement describes three levels of inputs that may be used in fair value measurement:

· Level 1—Quoted prices in active markets for identical assets or liabilities

· Level 2—Estimates based on significant other observable inputs that market participants would use in pricing the asset or liability

· Level 3—Estimates based on significant unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

When feasible, Level 1 pricing is preferable to Level 2, and Level 3 pricing would only be used if neither Level 1 nor Level 2 pricing methods were considered appropriate.

The Bank has one security in its available-for-sale portfolio that has been assessed as “impaired” since 2004.  Prior to January 1, 2008, the Bank has used a pricing method for this security that would be considered Level 2 pricing.  Upon adoption of SFAS No. 157 in 2008, the Bank concluded that Level 3 pricing was more appropriate for this security, given the lack of observable inputs to the estimation process.  Due to the illiquidity in the secondary market for this security, this fair value estimate cannot be corroborated by observable market data.  This change in estimate resulted in a reduction in the fair value of this security by $168 thousand as of January 1, 2008.  Because this security remains in the available-for-sale portfolio, this change in estimate was included in other comprehensive income but had no effect on reported net income (loss).

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value as of September 30, 2009:

(in thousands)	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
Financial assets measured at fair value on a recurring basis:
Available-for-sale securities	$	-	$	41,243	$	14	$	41,257
Financial sssets measured at fair value on a non-recurring basis:
Collateral-Dependent Impaired
Loans, Net of Specific Reserves	$	-	$	-	$	5,361	$	5,361
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-		2,042	$	2,042

Collateral-dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying value of $5,982,000, with a specific reserve of $621,000, as of September 30, 2009.

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first nine months of 2008 and 2009:

(in thousands)	Level 3 Securities Available for Sale
	Nine Months Ended September 30
	2009			2008
Balance at beginning of year	$	32		$	-
Transfers into Level 3		92			227
Unrealized gains (losses)
included in other comprehensive income (loss)		-			(168	)
Purchases		-			-
Settlements		-			-
Paydowns and maturities		(110	)		(7	)
Balance at end of period	$	14		$	52
Total unrealized gains (losses)
for the period relating to assets still held at the reporting date	$	-		$	(168	)

The following methods and assumptions were used to estimate the fair value of significant financial instruments that are not carried at fair value in the consolidated balance sheet:

Financial Assets.  The carrying amounts of cash and short-term investments are considered to approximate fair value.  Short-term investments include federal funds sold and interest bearing deposits with other banks.  The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available.

Financial Liabilities.  The carrying amounts of deposit liabilities payable on demand and short-term borrowed funds are considered to approximate fair value.  For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities.  The fair value of long-term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities.

Off-Balance Sheet Financial Instruments.  The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements.  The fair value of these financial instruments is not material.

The estimated fair value of financial instruments is summarized as follows:

	September 30, 2009
	Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	20,536	$	20,536
Federal funds sold		-		-
Interest-bearing deposits in other banks		575		575
Investment securities		41,257		41,257
Loans, net		139,304		139,211
Federal Home Loan Bank and other stocks		3,002		3,002
Company owned life insurance		2,861		2,861
Accrued interest receivable		876		876
Financial Liabilities:
Deposits		167,823		168,239
Other borrowings		19,300		19,626
Junior subordinated debt securities		3,093		3,265
Accrued interest and other liabilities		1,512		1,512

Note 8 — Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed.” FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157.  FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.

Also in April 2009, the FASB issued FSP FAS 115-2 and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  The FSP amends FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairment guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements.  This statement applies to other-than-temporary impairments of debt and equity securities and requires a company to assert that (a) it does not have the intent to sell the security in question and (b) it is more likely than not that it will not have to sell the security in question before recovery of its cost basis to avoid an impairment being considered other-than-temporary.  This FSP also changes the amount of impairment losses recognized in earnings.  Under this FSP impairments are separated into two components: (i) the amount of impairments related to credit losses and (ii) and the amount related to other factors.  The amount of impairment related to credit losses is reflected as a charge to earnings, while the amount deemed to be related to other factors is reflected as an adjustment to shareholders’ equity through other comprehensive income.

And also in April 2009 the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  This FSP amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.

The standards summarized in the preceding paragraphs were implemented by the Company beginning with the financial reporting period ended June 30, 2009, and did not have a material effect on the Company’s financial condition or results of operations.  The new interim disclosures required by FSP FAS No. 107-1 and APB 28-1 are included in Note 7 – Fair Value Measurement.

The Company implemented Statement of Financial Accounting Standards No. 165, “Subsequent Events” (SFAS 165), beginning with the financial reporting period ended June 30, 2009. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of SFAS 165 did not impact the Company’s financial position or results of operations. The Company evaluated all events or transactions that occurred after September 30, 2009 up through November 13, 2009, the date these financial statements were available to be issued. During this period the Company did not have any material recognizable subsequent events that are not reflected in these financial statements.

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets” (now known as ASC 860-20).  The standard is an amendment of SFAS 140.  ASC 860-20 eliminates the concept of a qualifying special purpose entity, establishes more stringent requirements for derecognition of a portion of a financial asset, and creates new conditions for reporting the transfer of a portion of a financial asset as a sale.

Terms of the Bank’s SBA loan sales typically provide for limited recourse if the borrower defaults on any of the first three payments.  ASC 860-20 would not permit a loan transfer to the buyer to be recognized as a sale until that recourse period has expired, which would result in a  delay of approximately three months in recognizing gains on most sales of SBA loans beginning January 1, 2010, the date the Company will adopt ASC 860-20.

Note 9 — Restated Financial Statements

When initially issued, the Company’s financial statements reflected a $479 thousand tax benefit for the first three months of 2009 and a $32 thousand tax benefit for the second quarter.  The recognition of the tax benefits was based on management’s understanding at the time that, under the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Company would be able to carry back 2008’s net operating loss (“NOL”) to five prior years rather than two years, and thereby increase the Company’s current tax receivable.  ARRA, which was enacted in February, 2009, provided (for tax year 2008 only) an extended NOL carryback period of up to five years for an electing “eligible small business.”  Eligible small business was defined to be a small business with average “gross receipts” for 2006-2008 of $15 million or less.  Based on total income per the Company’s consolidated tax returns for 2006 and 2007 and estimated total income expected to be reported for its 2008 tax return, management believed that the Company’s average gross receipts were less than $15 million.  However, management was unaware at that time that—for banks—the term “gross receipts” has been interpreted under the tax law to include gross sales of securities and loans.  When gross sales of SBA loans, not merely the gains on sale, are included in gross receipts, the Company’s three-year average gross receipts exceeds $15 million.  Therefore, the Company did not qualify for the extended carryback period under ARRA.  The error had been corrected on a year-to-date basis as of September 30, 2009.  These restated financial statements reflect the appropriate portion of that correction in the first and second quarters of 2009, rather than in the third quarter.

The accompanying financial statements reflect the following changes from those originally issued as of and for the three and nine months ended September 30, 2009:

· In the condensed consolidated statement of income, income tax expense has been changed from $511 thousand for the three months to zero.  The net loss of $(1.275) million for the three months has been changed to a net loss of $(764) thousand.  No change has been made to income taxes or net income for the nine-month period.  Net loss applicable to common stock for the three months has been changed from $(1.229) million to a loss of $(760) thousand.  Basic and diluted earnings (loss) per share for the three months have both been changed from $(0.91) to $(0.57).  No changes were made to loss before inocme taxes.

· No changes have been made to the consolidate balance sheets, the consolidated statements of shareholders’ equity or the consolidated statements of cash flows.

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

Forward-Looking Statements

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

Restatements of Results of Operations and Financial Condition

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

Further information on this restatement and the specific accounts affected are detailed in Note 9 to the Notes to Condensed Consolidated Financial Statements (Restated).

Overview of Results of Operations and Financial Condition

· The Company incurred a net loss of $(764) thousand for the third quarter of 2009, as compared with net income of $125 thousand for the third quarter of 2008.  For the first nine months of 2009, the Company’s net loss was $(1.751) million, as compared with a net loss of $(1.327) million for the first nine months of 2008.  The factors resulting in the 2009 results will be discussed below.

· Net interest income for the three-month period ended September 30, 2009 increased by $67 thousand, or 4%, from the comparable period in 2008, due primarily to an increase in the volume of interest-earning assets.  For the nine months of 2009, net interest income declined by $77 thousand, or 2%, from the first nine months of 2008, principally due to a 72 basis-point decline in the net interest margin due in part to an increase in the level of non-accrual loans.

· The provision for loan losses increased by $875 thousand from the third quarter of 2008 to the same quarter in 2009.  For the nine months, the loan loss provision declined by $989 thousand, or 39%, due to an unusually large provision for loan losses in the second quarter of 2008.  Increased risk in a few large relationships, along with a general downturn in the economy in 2008, caused management and the board of directors to enhance the allowance for loan and lease losses (“ALLL”) by $2.3 million in the second quarter of last year.

· For the three months ended June 30, 2009, non-interest income increased by $18 thousand, or 6%, from the same period in 2008.  For the first nine months of 2009, non-interest income was up $423 thousand, or 70%, over the same period in 2008.  In addition to increased gains on sales of SBA-guaranteed loans, non-interest income for the first nine months of 2009 included $246 thousand of net gains on the sale of securities.

· Non-interest expense increased by $138 thousand, or 8%, for the third quarter of 2009, as compared to the third quarter of 2008.  For the first nine months of 2009, non-interest expense was up $694 thousand, or 13%.  These increases were principally due to material increases in FDIC insurance assessments, the cost of outsourcing Information Technology management, costs associated with opening a new branch office in Santa Maria, and professional fees primarily related to problem loan resolution.

· No tax benefit was recorded for the three months or nine months ended September 30, 2009, due to a limitation on the Company’s ability to recognize deferred tax assets.

· Total assets increased by $33 thousand from December 31, 2008 to September 30, 2009.  Total loans decreased by $10.5 million, or 6.8%, over that period, while deposits increased by $23.0 million, or 15.9%.

· On January 9, 2009, the Company issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of a new Series D Fixed Rate Cumulative Perpetual Preferred Stock (“Series D Preferred”) at $1,000 per share.  This transaction is a part of the Capital Purchase Program of the TARP.  The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital.

Income Summary

For the three months ended September 30, 2009, the Company incurred a net loss of $(764) thousand.  This compares with net income of $125 thousand for the comparable period of 2008.

For the first nine months of 2009, the Company’s net loss was $(1.751) million, as compared with a net loss of $(1.327) million for the first nine months of 2008.

Return on average assets (annualized) was (0.71)% for the third quarter of 2009, as compared with 0.25% for the third quarter of 2008.  Annualized return on average equity was (6.21)% for the third quarter of 2009 as compared with 2.66% for the comparable 2008 period.  For the first nine months of 2009, return on average assets was (1.07)%, as compared with (0.97)% for the same period in 2008.  Return on average equity was (9.53)% for the first nine months of 2009, as compared with (9.66)% for the comparable period in 2008.

Excluding taxes, the Company incurred a loss of $(764) thousand for the third quarter of 2009, as compared to pre-tax income of $164 thousand for the same period in 2008.  For the first nine months of 2009, the Company’s pre-tax loss was $(1.751) million—a $641 thousand reduction from the $(2.392) million loss before taxes for the first nine months of 2008.

The income statement components of this are as follows:

Pre-Tax Income Variance Summary
(In thousands)	Effect on Pre-Tax Income
	Increase (Decrease)
	3rd Quarter			Nine Months
Change from 2008 to 2009 in:
Net interest income	$	67		$	(77	)
Provision for loan losses		(875	)		989
Non-interest income		18			423
Non-interest expense		(138	)		(694	)
Change in income (loss) before income taxes	$	(928	)	$	641

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 September 30, 2009, net interest income was $1.686 million, an increase of $67 thousand, or 4%, from the comparable period in 2008.  For the first nine months of 2009, net interest income was $4.705 million, down $77 thousand, or 2%, from the first nine months of 2008.

The net interest margin (net interest income as a percentage of average interest earning assets) was 3.33% for the three-month period ended September 30, 2009, a decrease of 15 basis points as compared to the same period in 2008, but a 28 basis point improvement over the second quarter of 2009.  As short-term interest rates dropped throughout 2008—2.25% in the first four months of 2008 and 1.75% in the fourth quarter—the Bank experienced increasing pressure on the margin, as competition for deposits in the local market would not permit decreases in deposit rates at the same speed or to the same degree as loan rates were falling.  In addition, the Bank has received an influx of CD deposits since mid-year 2008, as local depositors sought out safety,

with yield often a secondary concern (see the Deposits section of this report).  Opportunities to place those new funds in assets earning higher rates than the CD’s have been limited this year, putting additional pressure on the net interest margin.

The following tables show the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three- and nine-month periods ended September 30, 2009 and 2008:

Net Interest Analysis
(Dollars in thousands)
	For the Three Months Ended
	September 30, 2009								September 30, 2008
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	147,412		$	2,193		5.95	% *	$	148,990		$	2,460		6.62	% *
Investment securities*		42,452			349		3.43	% *		25,216			301		5.05	% *
Federal funds sold		9			-		0.51	%		10,563			50		1.90	%
Other interest income		15,405			11		0.29	%		4,938			45		3.61	%
Total interest-earning assets / interest income		205,278		$	2,553		5.00	%		189,707		$	2,856		6.07	%
Non-interest-earning assets:
Allowance for loan losses		(3,404	)							(2,968	)
Cash and due from banks		2,878								2,855
Premises and equipment		2,865								3,468
Other assets		8,021								5,635
Total assets	$	215,638							$	198,697
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	14,148		$	34		0.95	%	$	16,337		$	25		0.62	%
Savings and Money Market deposit accounts		33,327			83		0.99	%		17,633			147		3.31	%
Certificates of deposit		93,296			496		2.11	%		78,453			623		3.16	%
Total interest-bearing deposits		140,771			613		1.73	%		112,423			795		2.82	%
Federal funds purchased		10			-		0.00	%		-			-		-
Federal Home Loan Bank advances		21,963			227		4.10	%		40,823			392		3.82	%
Subordinated debt		3,093			27		3.51	%		3,093			50		6.39	%
Total borrowed funds		25,066			254		4.03	%		43,916			442		4.00	%
Total interest-bearing liabilities / interest expense		165,837			867		2.07	%		156,339			1,237		3.15	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		23,968								22,733
Other liabilities		1,314								937
Total liabilities		191,119								180,009
Shareholders' equity		24,519								18,688
Total liabilities  and shareholders' equity	$	215,638							$	198,697
Net interest-rate spread							2.93	%							2.92	%
Impact of non-interest-bearing
sources and other changes in
balance sheet composition							0.40	%							0.56	%
Net interest income / margin on earning assets				$	1,686		3.33	% **				$	1,619		3.48	% **
*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents
** Net interest income as a % of earning assets

Net Interest Analysis
(Dollars in thousands)
	For the Nine Months Ended
	September 30, 2009								September 30, 2008
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	151,708		$	6,812		6.05	% *	$	139,255		$	7,180		6.94	% *
Investment securities*		34,375			937		4.07	% *		23,798			829		5.25	% *
Federal funds sold		9,919			16		0.21	%		5,691			101		2.37	%
Other interest income		14,588			106		0.98	%		4,361			133		4.07	%
Total interest-earning assets / interest income		210,590			7,871		5.07	%		173,105			8,243		6.45	%
Non-interest-earning assets:
Allowance for loan losses		(3,697	)							(1,843	)
Cash and due from banks		2,751								2,483
Premises and equipment		2,721								3,504
Other assets		7,076								4,950
Total assets	$	219,441							$	182,199
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	10,652			108		1.35	%	$	3,205			33		1.39	%
Savings and Money Market deposit accounts		29,131			290		1.33	%		34,304			496		1.93	%
Certificates of deposit		96,420			1,769		2.45	%		65,107			1,744		3.58	%
Total interest-bearing deposits		136,203			2,167		2.13	%		102,616			2,273		2.96	%
Federal funds purchased		13			-		0.61	%		45			1		2.81	%
Federal Home Loan Bank advances		31,886			909		3.81	%		34,388			1,028		3.99	%
Subordinated debt		3,093			90		3.91	%		3,093			159		6.86	%
Total borrowed funds		34,992			999		3.82	%		37,526			1,188		4.23	%
Total interest-bearing liabilities / interest expense		171,195			3,166		2.47	%		140,142			3,461		3.30	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		22,287								22,535
Other liabilities		1,203								1,181
Total liabilities		194,685								163,858
Shareholders' equity		24,756								18,341
Total liabilities and shareholders' equity	$	219,441							$	182,199
Net interest-rate spread							2.60	%							3.15	%
Impact of non-interest-bearing
sources and other changes in
balance sheet composition							0.46	%							0.63	%
Net interest income / margin on earning assets				$	4,705		3.06	% **				$	4,782		3.78	% **
*Yields on municipal securities and loans have been adjusted to their fully-taxable equivalents
** Net interest income as a % of earning assets

Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by the Bank and the Company on those assets and liabilities for the three- and nine-month periods ended September 30, 2009 and 2008.  Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.

Rate / Volume Variance Analysis
(In thousands)	Three Months Ended September 30, 2009
	Compared to 2008
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(26	)	$	(241	)	$	(267	)
Investment securities		162			(114	)		48
Federal funds sold		(29	)		(21	)		(50	)
Other interest income		34			(68	)		(34	)
Total increase (decrease) in interest income		141			(444	)		(303	)
Interest-bearing liabilities:
Transaction accounts		(4	)		13			9
Savings deposits		79			(143	)		(64	)
Certificates of deposit		104			(231	)		(127	)
Total interest-bearing deposits		179			(361	)		(182	)
Federal funds purchased		-			-			-
FHLB advances		(193	)		28			(165	)
Subordinated debt		-			(23	)		(23	)
Total borrowed funds		(193	)		5			(188	)
Total increase (decrease) in interest expense		(14	)		(356	)		(370	)
Increase (decrease) in net interest income	$	155		$	(88	)	$	67

Rate / Volume Variance Analysis
(In thousands)	Nine Months Ended September 30, 2009
	Compared to 2008
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	608		$	(976	)	$	(368	)
Investment securities		315			(207	)		108
Federal funds sold		44			(129	)		(85	)
Other interest income		132			(159	)		(27	)
Total increase (decrease) in interest income		1,099			(1,471	)		(372	)
Interest-bearing liabilities:
Transaction accounts		76			(1	)		75
Savings deposits		(67	)		(139	)		(206	)
Certificates of deposit		679			(654	)		25
Total interest-bearing deposits		688			(794	)		(106	)
Federal funds purchased		(1	)		-			(1	)
FHLB advances		(73	)		(46	)		(119	)
Subordinated debt		-			(69	)		(69	)
Total borrowed funds		(74	)		(115	)		(189	)
Total increase (decrease) in interest expense		614			(909	)		(295	)
Increase (decrease) in net interest income	$	485		$	(562	)	$	(77	)

The tables above reflect the impact of lower yields received on loans due to the reduction in the prime rate over the past year as well as the increased level of non-accrual loans, while growth in the balances of loans and other interest-earning assets have had a positive, albeit lesser, impact.  On the liability side, the rate reductions have also had a beneficial effect, but not enough to offset the reduction in loan yields.  Overall, the pressure we have experienced on the net interest margin over the past several quarters is beginning to ease up as we move through 2009.

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

Provision for Loan Losses

The Bank recorded an $875 thousand provision for loan losses for the three months ended September 30, 2009, as compared with no provision for the third quarter of 2008.  For the nine months ended September 30, 2009, the loan loss provision totaled $1.556 million, down from $2.545 million in the first nine months of 2008.

During the first quarter of last year, in the normal course of business, the Bank underwent both an annual external credit review and a regulatory examination.  While there were no noted issues reflected in those reviews, the downturn in the economy, combined with events in the banking sector last year, caused management to initiate an additional third party review of the Bank’s loan portfolio in the second quarter of 2008.  After the results of that review, management and the board of directors decided to enhance the allowance for loan and lease losses by $2.3 million, resulting in the unusually large loan loss provision in the second quarter of last year.

Loan charge-offs totaled $820 thousand and recoveries totaled $10 thousand for the third quarter of 2009, as compared with $47 thousand of charge-offs and $7 thousand of recoveries for the same period in 2008.  For the nine months, charge-offs were $1.993 million and recoveries were $34 thousand in 2009, as compared with $768 thousand of charge-offs and $19 thousand of recoveries for the first nine months of 2008.The ratio of allowance for loan losses to total loans was 2.48% at September 30, 2009, as compared to 1.95% a year ago and 2.57% as of December 31, 2008.

The provision for loan losses and allowance for loan losses reflect management’s consideration of the various risks in the loan portfolio.  Additional discussion of loan quality and the allowance for loan losses is provided in the Asset Quality, Potential Problem Loans and Allowance for Loan and Lease Losses sections of this report.

Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including fees from the sale of loans and gains on sales of securities.

For the three-month period ended September 30, 2009, non-interest income was $326 thousand, an increase of $18 thousand, or 6%, from the same period in 2008.  This increase was primarily due to the receipt of a $74 thousand Bank Enterprise Award from the U.S. Treasury’s Community Development Financial Institutions Fund, partially offset by $69 thousand of writedowns to the carrying value of other real estate owned.  For the first nine months of 2009, non-interest income totaled $1.025 million, up from $602 thousand in the first nine months of 2008.  The increase in non-interest income for the first nine months of 2009 was also due to the sale of $9.1 million of securities, on which the Bank recognized $246 thousand in gains, as well as increased gains on the sale of SBA loans.  After several months of a nearly frozen secondary market for SBA loans, the market began to thaw toward the end of the first quarter of this year.

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

Non-Interest Income
(In thousands)	For the Three Months Ended September 30,											For the Nine Months Ended September 30,
	$ Amount					Change						$ Amount					Change
	2009			2008					$		%		2009			2008	$					%
Service charges on deposit accounts	$	95		$	109	$	(14	)		-13	%	$	256		$	262	$	(6	)		-2	%
Gain on sale of loans		143			159		(16	)		-10	%		317			198		119			60	%
Loan servicing fees, net of amortization		34			10		24			240	%		82			55		27			49	%
Grants and awards		74			-		74		nm				81			-		81		nm
Gain on sale of available-for-sale securities		7			-		7		nm				246			-		246		nm
Loss or writedown of other real estate		(69	)		-		(69	)	nm				(69	)		-		(69	)	nm
Other income and fees		42			30		12			40	%		112			87		25			29	%
Total non-interest income	$	326		$	308	$	18			6	%	$	1,025		$	602	$	423			70	%
nm - not meaningful

The majority of the service charge income shown in the table relates to NSF fee income and other fees not directly assessed on deposit accounts.  Many of the Bank’s deposit products and services have low or no monthly fees.  Management is currently reviewing its service charge strategy to determine if increases would be appropriate at this time for certain products or levels of activity.

Non-Interest Expense

Non-interest expense represents salaries and benefits, occupancy expenses, professional fees, outside services, and other miscellaneous expenses necessary to conduct business.

Non-interest expenses increased by $138 thousand, or 8%, for the three months ended September 30, 2009, as compared to the third quarter of 2008.  For the first nine months of 2009, non-interest expenses were up $694 thousand, or 13%, over the same period in 2008.

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

Non-Interest Expense
(In thousands)	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	$ Amount				Change						$ Amount				Change
	2009		2008					$		%		2009		2008	$				%
Salaries and employee benefits	$	886	$	905	$	(19	)		-2	%	$	2,779	$	2,789	$	(10	)	0	%
Occupancy expenses		196		144		52			36	%		528		423		105		25	%
Furniture and equipment		103		119		(16	)		-13	%		340		334		6		2	%
Data processing		187		135		52			39	%		566		398		168		42	%
Professional fees		117		144		(27	)		-19	%		382		317		65		21	%
Marketing and business development		36		63		(27	)		-43	%		106		153		(47	)	-31	%
Office supplies and expenses		57		51		6			12	%		193		165		28		17	%
Insurance and regulatory assessments		164		53		111			209	%		462		154		308		200	%
Loan and lease expenses		38		32		6			19	%		104		78		26		33	%
Provision for unfunded loan commitments		-		-		-		nm				35		15		20		133	%
Other		117		117		-			0	%		430		405		25		6	%
Total non-interest expense	$	1,901	$	1,763	$	138			8	%	$	5,925	$	5,231	$	694		13	%
nm = not meaningful

The increase in non-interest expense was principally due to material increases in FDIC insurance assessments (FDIC insurance increased $93 thousand for the third quarter of 2009 vs. 2008, and $284 thousand for the nine months), the cost of outsourcing Information Technology management ($46 thousand for the third quarter and $150 thousand for the nine months—included in data processing expense), and professional fees (down $27 thousand for the third quarter but up $65 thousand for the nine months).  The increase in professional fees is related to problem loan resolution.  Insurance and regulatory assessments for the first nine months of 2009 include a $97 thousand special FDIC assessment.

Salaries and benefits have been essentially flat, despite the increased staff for the Santa Maria branch office, which opened in December 2008.  For the third quarter, the Santa Maria branch added $82 thousand in salaries and benefits expense, as compared to the third quarter of 2008.  For the nine months, the additional salaries and benefits totaled $221 thousand.  In all, Santa Maria represents increased non-interest expenses of $162 thousand for the third quarter and $460 thousand for the nine months.

Income Taxes

The Company recognized no income tax expense or benefit for the nine months ended September 30, 2009, due to a limitation on the Company’s ability to recognize deferred tax assets, as compared with a $1.065 million tax benefit recognized for the same period in 2008.  The effective tax rate (income tax benefit as a percentage of pre-tax loss) for the first nine months of 2009 was 0.0%, as compared with 44.52% for the same period in 2008.

Balance Sheet Analysis

At September 30, 2009, consolidated assets totaled $215.5 million, as compared with $215.5 million at December 31, 2008, and $218.8 million at the end of 2008’s third quarter.  This represents a decrease of $3.3 million (2%) over the past twelve months.  Total loans decreased

$8.5 million (6%) over that period, while deposits increased $17.6 million (12%) and shareholders’ equity increased $5.2 million (28%).  The growth in shareholders’ equity was the result of a private placement of common stock in December 2008 for a total of $3.8 million, and the issuance in January 2009 of $5.1 million of preferred stock to the United States Department of the Treasury under the Capital Purchase Program of the TARP.  See the Capital Ratios section of this report.

The following table shows balance sheet growth trends over the past five quarters:

Balance Sheet Growth
(dollars in thousands)	Increase(Decrease) From Previous Quarter End*
	September 30, 2009					June 30, 2009					March 31, 2009					December 31, 2008					September 30, 2008
	$				%	$				%	$				%	$				%	$			%
Total Assets	$	(3,800	)	-6.9	%	$	(6,330	)	-11.3	%	$	10,163		19.1	%	$	(3,260	)	-5.9	%	$	32,699	69.9	%
Earning Assets		(2,821	)	-5.4	%		(8,757	)	-16.4	%		14,967		30.4	%		(4,825	)	-9.4	%		29,791	67.8	%
Loans		(8,600	)	-22.5	%		(2,903	)	-7.5	%		1,035		2.7	%		1,956		5.1	%		2,913	7.8	%
Deposits		7,138		17.6	%		(407	)	-1.0	%		16,288		45.6	%		(5,389	)	-14.3	%		24,013	75.7	%
Borrowings		(10,744	)	-141.9	%		(5,256	)	-59.7	%		(10,400	)	-92.3	%		-		0.0	%		8,500	90.9	%
Shareholders' Equity		(389	)	-6.4	%		(908	)	-14.5	%		4,575		90.4	%		1,904		40.7	%		94	2.0	%
*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)
	September 30, 2009					December 31, 2008					September 30, 2008
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Commercial	$	21,458		15.0	%	$	24,454		16.0	%	$	26,847		17.7	%
Agricultural		-		0.0	%		-		0.0	%		-		0.0	%
Leases, net of unearned income		1,452		1.0	%		1,491		1.0	%		1,099		0.7	%
Municipal loans		2,483		1.8	%		2,729		1.8	%		2,733		1.8	%
Real estate		102,082		71.5	%		98,049		63.9	%		92,737		61.3	%
Construction		12,158		8.5	%		22,857		14.9	%		24,342		16.1	%
Consumer		3,210		2.2	%		3,731		2.4	%		3,597		2.4	%
Total loans	$	142,843		100.0	%	$	153,311		100.0	%	$	151,355		100.0	%

The table shows a net decrease in loans outstanding over the first nine months of 2009.  Real estate loans, which are predominately commercial real estate loans, have increased but that increase has been more than offset by decreases in construction and commercial loans.  Of the total real estate and construction loans as of September 30, 2009, 72% are commercial mortgage loans, and 47% of those are owner-occupied properties.  Approximately 4% of the owner-occupied commercial mortgage loans contain SBA guarantees.

Asset Quality

Non-accrual loans totaled $6.6 million at September 30, 2009, as compared to $3.6 million at December 31, 2008 and $3.6 million at September 30, 2008.

Management classifies loans as non-accrual when principal or interest is past due 90 days or more based on the contractual terms of the loan, unless the loan is well-secured and in the process of collection.  Loans that are not past-due 90 days or more will also be classified as non-accrual when, in the opinion of management, there exists a reasonable doubt as to the full and timely collection of either principal or interest.  Once a loan is classified as non-accrual, it may not be reclassified as an accruing loan until all principal and interest payments are brought current and the loan is considered to be collectible as to both principal and interest.

Restructured loans are those loans with concessions in interest rates or repayment terms due to a decline in the financial condition of the borrower.  Foreclosed real estate represents real estate acquired in satisfaction of loans through foreclosure or other means and is carried on an individual asset basis at the lower of the recorded investment in the related loan or the estimated fair value of the property, less selling expenses.

The following table presents information about the Company’s non-performing loans, including quality ratios as of September 30, 2009, December 31, 2008 and September 30, 2008:

Non-Performing Assets
(in thousands)	September 30			December 31			September 30
	2009			2008			2008
Loans in nonaccrual status	$	6,637		$	3,557		$	3,609
Loans past due 90 days or more and accruing		910			265			-
Restructured loans		843			675			675
Total nonperforming loans		8,390			4,497			4,284
Foreclosed real estate		1,142			83			-
Total nonperforming assets	$	9,532		$	4,580		$	4,284
Allowance for loan losses	$	3,539		$	3,942		$	2,946
Asset quality ratios:
Non-performing assets to total assets		4.42	%		2.13	%		1.96	%
Non-performing loans to total loans		5.87	%		2.93	%		2.83	%
Allowance for loan losses to total loans		2.48	%		2.57	%		1.95	%
Allowance for loan losses to total
non-performing loans		42	%		88	%		69	%

The high level of non-performing loans over the past year has been due to the significant downturn in the economy and reduction in real estate collateral values in 2008 and 2009.  The $8.4 million of non-performing loans as of September 30, 2009, include $2.2 million of SBA loans, which are supported by $1.4 million of SBA loan guarantees.  The remaining $6.2 million

of non-performing loans include $5.7 million of loans determined to be impaired under SFAS 114.  A determination of impairment under SFAS 114 is one of expected payment performance, but not necessarily probability of loss.  Based on a loan-by-loan analysis of collateral values or the present value of estimated cash flows, the extent of the impairment of those impaired loans is estimated to be $648 thousand, and that amount has been provided in the allowance for loan and lease losses.

Potential Problem Loans

At September 30, 2009, the Bank had approximately $20.4 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 $2.8 million increase from the $17.6 million of potential problem loans at December 31, 2008.  The $20.4 million of potential problem loans are supported by $440 thousand of SBA loan guarantees and $18.2 million are secured by real estate.

Potential problem loans were identified through the ongoing loan review process and are subject to continuing management attention.  Management has provided in the allowance for loan and lease losses for potential losses related to these loans, based on an evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation.

While credit quality, as measured by loan delinquencies and by the Bank’s internal risk grading system, appears to be manageable as of September 30, 2009, there can be no assurances that new problem loans will not develop in future periods.  A continuing decline in economic conditions in the Bank’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general.  The Bank has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) at September 30, 2009 totaled $3.5 million, a decrease of $433 thousand from December 31, 2008.  The ratio of ALLL to total loans at September 30, 2009, was 2.48%, as compared with 2.57% at December 31, 2008, and 1.95% at September 30, 2008.  At September 30, 2009 and 2008, the ratio of ALLL to total non-performing loans was 42% and 69%, respectively.

The following table provides an analysis of the changes in the ALLL for the three- and nine-month periods ended September 30, 2009 and 2008:

Allowance for Loan and Lease Losses
(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Balance at beginning of period	$	3,474		$	2,986		$	3,942		$	1,150
Provision for loan losses		875			-			1,556			2,545
Loans charged off		(820	)		(47	)		(1,993	)		(768	)
Recoveries of previous charge-offs		10			7			34			19
Net recoveries (charge-offs)		(810	)		(40	)		(1,959	)		(749	)
Balance at end of period	$	3,539		$	2,946		$	3,539		$	2,946
Allowance for loan losses as a percentage of:
Period end loans		2.48	%		1.95	%		2.48	%		1.95	%
Non-performing loans		42	%		69	%		42	%		69	%
As a percentage of average loans (annualized):
Net charge-offs (recoveries)		2.18	%		0.11	%		1.73	%		0.72	%
Provision for loan losses		2.35	%		0.00	%		1.37	%		2.44	%

Loans, or portions of loans, charged off in the third quarter of 2009 included one non-owner-occupied commercial lot loan ($217 thousand), seven non-owner-occupied residential lot loans (total of $336 thousand), three small commercial loans secured by non-real-estate assets (total of $110 thousand), one unsecured commercial loan ($100 thousand), one consumer loan secured by non-real-estate assets ($20 thousand) and one residential real estate loan ($14 thousand).  Charge-offs in the first nine months of 2009 also included one construction loan for a mini-storage facility ($498 thousand), two owner-occupied commercial real estate loans (total of $207 thousand), one home equity loan ($115 thousand) primarily due to declining property values, one non-owner-occupied residential lot loan ($59 thousand), the balance remaining upon payoff of one construction loan for a multi-family residential project ($68 thousand), and several small commercial loans secured by non-real-estate assets (total of $218 thousand).  For the first nine months of 2008, loan charge-offs included seven non-real-estate secured commercial loans totaling $755 thousand.

The Bank makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the level of risk in the loan portfolio.  At least quarterly, management conducts an assessment of the overall quality of the loan portfolio and general economic trends in the local market.  The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the volume and type of lending conducted, the amount of identified potential loss associated with specific nonperforming loans, collateral values, regulatory policies, general economic conditions, and other factors related to the collectibility of loans in the portfolio.

As mentioned in the Asset Quality section above, although non-performing loans have increased in 2009, the $8.4 million of non-performing loans as of September 30, 2009, include $1.4 million of SBA loan guarantees.  The remaining $6.2 million of unguaranteed non-performing loans include $5.7 million of loans determined to be impaired under SFAS 114.  A determination of impairment under SFAS 114 is one of expected payment performance, but not necessarily

probability of loss.  Based on a loan-by-loan analysis of collateral values or the present value of estimated cash flows, the extent of the extent of potential loss on those impaired loans is estimated to be $648 thousand, and that amount has been provided in the allowance for loan and lease losses.

Based on its quarterly review, management believes that the allowance for loan losses at September 30, 2009, is sufficient to absorb losses inherent in the loan portfolio.  This assessment is based upon the best available information and does involve uncertainty and matters of judgment.  Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.

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

Investments

In 2004, management established a loss reserve for one of the Bank’s asset-backed securities after concluding it was “other than temporarily impaired.”  The security is in non-accrual status, with interest payments, which have been received to date on a regular basis, being credited to the reserve.  As of September 30, 2009, the book value of the security was $14 thousand ($304 thousand amortized cost less the loss reserve, which totals $290 thousand).

While management has made a best effort to determine the probable loss on this security, no assurances can be given that future changes in the underlying collateral and payments will not materially affect the value of this security with either positive or negative changes.  However, management will continue to closely monitor this investment and, if needed, recognize additional write-downs.

Excluding the impaired asset-backed security referred to above, all securities in the Bank’s investment portfolio are considered to be investment grade.  The portfolio consists of a mixture of fixed-rate US agency securities (38%), fixed-rate mortgage-backed securities (35%), floating-rate mortgage-backed securities (7%), fixed-rate tax-exempt municipal securities (7%), floating-rate corporate debt securities (7%) and fixed-rate CMO’s (6%).  The Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages.  None of the Bank’s municipal securities may be called before 2011.  The average life of the portfolio is projected to be 2.5 years, with a duration of 2.3 years.

Deposits

Deposits are the primary source of funding for lending and investing needs.  Total deposits were $167.8 million as of September 30, 2009, as compared with $144.8 million at December 31, 2008, and $150.2 million at September 30, 2008.

The Bank generally prices deposits at or above the median rate by classification based on periodic interest rate surveys in the local market.  Deposit rates are then adjusted to balance the cost of funds versus funding needs and asset and liability considerations.  The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for the first nine months of 2009 and 2008.

The Bank is one of only two banks in San Luis Obispo county participating in the Certificate of Deposit Account Registry Service (“CDARS”) program.  This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC, up to $50 million.  The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of nearly 3,000 banks with other network banks (in increments of less than the per-depositor FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet.  The CDARS program has become very attractive since mid-year 2008, as local depositors sought out safety with yield often a secondary concern.  As of September 30, 2009, the Bank had issued $45.5 million of certificates of deposit to local customers through the CDARS program, up from $16.2 million as of September 30, 2008.

On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”).  The legislation was in response to the financial crises affecting the banking system and financial markets.  EESA temporarily (until December 31, 2009) raised the basic limit on FDIC deposit insurance coverage from $100,000 to $250,000 per depositor.  Since then, the FDIC has extended the $250,000 limit through the end of 2013.  See also Effects of Inflation and Economic Issues below, for a discussion of the Emergency Economic Stabilization Act of 2008 (“EESA”), and its potential impact on the Company.

On October 14, 2008, the FDIC announced another temporary program (until December 31, 2009) to provide full FDIC insurance coverage for non-interest bearing transaction accounts, regardless of dollar amount.  Management and the board of directors evaluated the additional cost of this optional insurance program and determined that it would be in the Bank’s best interests to provide this coverage to its depositors.  On August 26, 2009, the FDIC extended the unlimited insurance coverage for non-interest bearing accounts through June 30, 2010, for institutions that chose to remain in program by November 2, 2009, and the Bank opted to remain in the program.

Borrowings

In addition to the Company’s junior subordinated debt securities, the Bank has borrowed funds 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.  Although the Bank expects to continue to have borrowings from the FHLB, the Bank has paid down those borrowings by $26.4 million in the first nine months of 2009.  Management plans to continue to reduce its FHLB borrowings in the fourth quarter of 2009.

As of September 30, 2009, borrowings from the FHLB totaled $19.3 million, with a weighted average interest rate of 4.25%.  Of the $19.3 million, $ 13.3 million matures during the fourth

quarter of 2009 and bears interest at an average rate of 3.91%.  Another $3.0 million (at 5.13%) matures in the second quarter of 2010 and the remaining $3.0 million (at 4.89%) matures in the fourth quarter of 2013.

Capital

Total shareholders’ equity has increased $4.8 million, or 26%, over the past twelve months.  The growth in shareholders’ equity was the result of 1) a private placement on December 2, 2008 of 225,026 shares of common stock sold to the Carpenter Community BancFund-A, L.P. at a price of $17.10 per share, for aggregate gross proceeds to the Company of $3.8 million, and 2) the issuance on January 9, 2009, of 5,116 shares of a Series D Fixed Rate Cumulative Perpetual Preferred Stock to the United States Department of the Treasury at $1,000 per share.  The preferred stock issue is part of the Capital Purchase Program of the TARP.  The Company invested a total of $8.1 million from these two capital transactions in Mission Community Bank as Tier 1 capital.

The following table shows the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at September 30, 2009, December 31, 2008, and September 30, 2008:

Mission Community Bank
Capital Ratios						Amount of Capital Required
(dollars in thousands)						To Be					To Be Adequately
	Actual					Well-Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2009:
Total Capital (to Risk-Weighted Assets)	$	26,373		16.29	%	$	16,192		10.0	%	$	12,954		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	24,329		15.03	%	$	9,715		6.0	%	$	6,477		4.0	%
Tier 1 Capital (to Average Assets)	$	24,329		11.31	%	$	10,754		5.0	%	$	8,604		4.0	%
As of December 31, 2008:
Total Capital (to Risk-Weighted Assets)	$	22,467		13.27	%	$	16,937		10.0	%	$	13,550		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,326		12.00	%	$	10,162		6.0	%	$	6,775		4.0	%
Tier 1 Capital (to Average Assets)	$	20,326		9.47	%	$	10,729		5.0	%	$	8,583		4.0	%
As of September 30, 2008:
Total Capital (to Risk-Weighted Assets)	$	22,601		13.25	%	$	17,056		10.0	%	$	13,644		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,458		11.99	%	$	10,233		6.0	%	$	6,822		4.0	%
Tier 1 Capital (to Average Assets)	$	20,458		10.35	%	$	9,886		5.0	%	$	7,909		4.0	%

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

Liquidity

The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded.  The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit.  Cash and cash equivalents (primarily federal funds sold) are the primary means for providing immediate liquidity.  The Bank had $20.5 million in cash and cash equivalents on September 30, 2009, as compared with $17.7 million as of December 31, 2008 and $28.0 million on September 30, 2008.

In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain an appropriate ratio of loans to deposits, and to maintain sufficient off-balance-sheet sources of funds which may be drawn upon when needed.  For the month of June 2009, the Bank’s loans-to-deposits ratio was 83%.  The sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 33% as of September 30, 2009.

One of the Bank’s off-balance-sheet sources of funds is potential borrowing capacity through the FHLB.  FHLB borrowings are collateralized by loans and/or investments and can be structured over various terms ranging from overnight to ten years.  As of September 30, 2009, the Bank had outstanding borrowings from the FHLB totaling $19.3 million.  Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased.  The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets.  Based on this limitation and loans and securities pledged as of September 30, 2009, an additional $22.0 million could be borrowed from the FHLB if needed.  The Bank has been reducing its FHLB borrowings as they have matured over the past several months, and it expects to continue to do so in 2009 and 2010.  However, FHLB borrowings may be used from time to time when needed as part of the Bank’s normal liquidity management to fund asset growth on a cost-effective basis.

The Bank also has access to the Federal Reserve Bank of San Francisco’s (“FRB-SF”) “Discount Window” for additional secured borrowing should the need arise.  As of September 30, 2009, the Bank had pledged $29.8 million of its loan portfolio to the FRB-SF, which provided the Bank with $16.3 million in additional short-term borrowing capacity.

On October 14, 2008, The FDIC announced a new program, the Temporary Liquidity Guarantee Program (“TLGP”), in which the Bank and the Company chose to participate.  TLGP provides FDIC guarantees for qualifying unsecured debt issued on or before June 30, 2009.  No qualifying debt was issued by the Bank or the Company on or before the June 30 deadline.  Therefore, participation in the TLGP program has resulted in no cost to the Bank or the Company.

Off-Balance-Sheet Arrangements

In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers, including commitments to extend credit and standby letters of

credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheet.

As of the dates indicated, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:

Loan Commitments
(in thousands)	September 30		December 31		September 30
	2009		2008		2008
Commitments to Extend Credit	$	18,372	$	28,427	$	31,666
Standby Letters of Credit		329		304		294
	$	18,701	$	28,731	$	31,960

The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  Management has established a reserve for undisbursed loan commitments.  As of September 30, 2009, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheet.

The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements.  The effect on the Bank’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted, as there is no guarantee the lines of credit will ever be used.

Effects of Inflation and Economic Issues

A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively little investments in fixed assets or inventories.  Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal 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.

While the national economy appears to have begun a recovery phase, the recovery still appears fragile at this stage, and largely reliant on federal stimulus.  After a 20-consecutive-month downward trend, the Index of Leading Indicators has turned positive for the past six consecutive months (thru September), increasing 1.0% in July, 0.4% in August and another 1.0% in September.  The Index of Coincident Indicators turned positive in July (0.1%) and August

(0.1%), but was unchanged in September—a reflection that the recovery is still weak at this stage.

Most economic forecasts predict further increases in the national unemployment rate—typically a lagging economic indicator, topping out several months after the recovery has begun.  California’s statewide unemployment rate stands at 12.2% as of September 2009, significantly above the national average of 9.8% for September and 10.2% for October.  For San Luis Obispo and Santa Barbara Counties, unemployment has trended upward over the past twelve months to stand at 9.0% and 8.5%, respectively.  However, these continue to be some of the lowest unemployment rates in the state.  After several years of strong appreciation, local real estate values began to decline in 2007, as residential and commercial sale activity slowed, and have continued to decline, although at a slower rate in recent months.  There can be no assurance that the economy will not deteriorate further or that real estate values will return to pre-2007 levels in the short term or at all.  As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.

The EESA gave the U.S. Treasury the authority to, among other things; invest in preferred stock of financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  There can be no assurance, however, as to the ultimate impact the EESA will have on the financial markets.  Although the extreme level of volatility experienced in the fourth quarter of 2008 has abated to a large extent and credit availability, while still limited, appears to be improving, if the EESA fails to achieve its goal to help stabilize the financial markets or if financial market conditions worsen, the Company’s financial condition or results of operations could be materially and adversely affected.

On October 14, 2008, the U.S. Treasury Department announced that it would utilize a portion of the EESA funding to directly purchase up to $250 billion of preferred stock in banks.   Management and the board of directors evaluated the initial terms of this capital purchase program and determined that it would be in the Company’s best interests to apply for the maximum amount of capital that might be made available to the Company and submitted its application in November 2008.  The Treasury Dept., in consultation with the Federal Reserve Bank of San Francisco, which serves as the primary federal regulator of the Bank, subsequently determined that the Company was eligible for $5.1 million of capital, which was issued in the form of Series D preferred stock on January 9, 2009.

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T.                      Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this report was being prepared.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls over financial reporting in the Company’s fiscal quarter ended September 30, 2009.

PART II - OTHER INFORMATION

Item 1.    Legal  Proceedings

There are no material legal proceedings to which the Company is a party or to which any of its property is subject.

Item 1A.    Risk Factors

Not applicable.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

Item 5.    Other Information

None.

Item 6.                         Exhibits

Exhibit Index:

Exhibit #
2.1	Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)
3.1	Restated Articles of Incorporation  (I)
3.2	Certificate of Amendment to Articles of Incorporation (L)
3.3	Bylaws, as amended  (B),(S)
4.1	Certificate of Determination for Series A Non-Voting Preferred Stock (B)
4.2	Certificate of Determination for Series B Non-Voting Preferred Stock (B)
4.3	Certificate of Determination for Series C Non-Voting Preferred Stock (D)
4.4	Purchase Agreement dated October 10, 2003, by and among Registrant, Mission Community Capital Trust I, and Bear Stearns & Co., Inc. (E)
4.5	Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (E)
4.6	Declaration of Trust of Mission Community Capital Trust I dated  October 10, 2003 (E)
4.7	Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (E)
4.8	Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (E)
4.9	Fee Agreement dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Co., Bear Stearns & Co., Inc. and Mission Community Capital Trust I (E)
4.10	Certificate of Determination for Series D Preferred Stock (R)
10.1	Purchase and Sale Agreement and Lease dated January, 1997, as amended (B)
10.2	Intentionally omitted
10.3	Lease Agreement – Paso Robles (B)
10.4	Lease Agreement – San Luis Obispo (B)
10.5	Lease Agreement – Arroyo Grande (B)
10.6	1998 Stock Option Plan, as amended (B)
10.7	Lease Agreement – 569 Higuera, San Luis Obispo (D)
10.8	Lease Agreement – 671 Tefft Street, Nipomo CA (C)
10.9	Intentionally omitted
10.10	Lease Agreement – 3480  S. Higuera, San Luis Obispo (F)
10.11	Salary Protection Agreement — Mr. Pigeon (G)
10.12	Salary Protection Agreement — Mr. Judge (H)
10.13	Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J)
10.14	Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J)
10.15	Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K)
10.16	Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M)

Exhibit #
10.17	Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N)
10.18	Lease Agreement – 1670 South Broadway, Santa Maria (O)
10.19	Mission Community Bancorp 2008 Stock Incentive Plan (P)
10.20	Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q)
10.21	Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q)
10.22	Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q)
10.23	Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which includes the Securities Purchase Agreement—Standard Terms attached thereto, with respect to the issuance and sale of the Series D Preferred Stock (R)
10.24	Side Letter Agreement dated January 9, 2009 amending the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R)
10.25	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R)
10.26	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R)
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 (Q)Included in the Company’s Form 8-K filed on December 30, 2008 (R)Included in the Company’s Form 8-K filed on January 14, 2009 (S)Included in the Company’s Form 10-Q filed on August 14, 2009

Signatures

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

MISSION COMMUNITY BANCORP

By: /s/ Anita M. Robinson

ANITA M. ROBINSON

President and Chief Executive Officer

Dated:  June 15, 2010

By: /s/ Ronald B. Pigeon

RONALD B. PIGEON

Executive Vice President and Chief Financial Officer

Dated:  June 15, 2010

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:  June 15, 2010

/s/ Anita M. Robinson

President and Chief Executive Officer

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:  June 15, 2010

/s/ Ronald B. Pigeon

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

SARBANES-OXLEY ACT SECTION 906 CERTIFICATION CHIEF EXECUTIVE OFFICER

In connection with this quarterly report on Form 10-Q of Mission Community Bancorp (“the Company”) for the period ended September 30, 2009, 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 September 30, 2009 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 September 30, 2009 fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  June 15, 2010

By:         /s/ Anita M. Robinson

Anita M. Robinson

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

SARBANES-OXLEY ACT SECTION 906 CERTIFICATION  CHIEF FINANCIAL OFFICER

In connection with this quarterly report on Form 10-Q of Mission Community Bancorp (“the Company”) for the period ended September 30, 2009, 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 September 30, 2009 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 September 30, 2009 fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  June 15, 2010

By:         /s/ Ronald B. Pigeon

Ronald B. Pigeon

Executive Vice President

and Chief Financial Officer