SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2011

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.)

3380 S. 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 the 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).

þ Yes oNo

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:  7,094,274 shares of common stock outstanding as of November 7, 2011.

Page 1

Mission Community Bancorp

September 30, 2011

Index

PART I – FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets at

September 30, 2011, December 31, 2010 and September 30, 2010

for the Three- and Nine-Month Periods Ended September 30, 2011 and 2010

for the Nine-Month Periods Ended September 30, 2011 and 2010

for the Three- and Nine-Month Periods Ended September 30, 2011 and 2010

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Page 2

PART I

Item 1.   Financial Statements

Mission Community Bancorp and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(dollars in thousands)
	September 30, 2011			December 31, 2010			September 30, 2010
Assets
Cash and due from banks	$	15,894		$	10,817		$	19,335
Interest-bearing deposits in other banks		302			550			400
Investment securities available for sale		90,159			75,435			60,222
Loans held for sale		9,951			15,115			15,147
Loans, net of unearned income		109,275			105,110			107,716
Less allowance for loan and lease losses		(3,164	)		(3,198	)		(3,573	)
Net loans		106,111			101,912			104,143
Federal Home Loan Bank stock and other stock, at cost		2,410			2,682			2,733
Premises and equipment		3,047			3,199			3,282
Other real estate owned		1,889			3,137			2,480
Company owned life insurance		3,048			2,980			2,956
Accrued interest and other assets		1,836			1,974			1,507
Total Assets	$	234,647		$	217,801		$	212,205
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	33,732		$	22,910		$	22,214
Money market, NOW and savings		70,515			70,010			59,871
Time certificates of deposit		87,299			80,320			83,536
Total deposits		191,546			173,240			165,621
Other borrowings		-			349			4,470
Junior subordinated debt securities		3,093			3,093			3,093
Accrued interest and other liabilities		1,951			1,975			1,769
Total liabilities		196,590			178,657			174,953
Shareholders' equity:
Preferred stock - 10,000,000 shares authorized:
Series A (100,000 shares issued and outstanding)		392			392			392
Series B (20,500 shares issued and outstanding)		192			192			192
Series C (50,000 shares issued and outstanding)		500			500			500
Series D (5,116 shares issued and outstanding)		5,068			5,068			5,068
Common stock - 50,000,000 shares authorized;
issued and outstanding: 7,094,274 at September 30, 2011
and December 31, 2010, and 6,345,602 at September 30, 2010		46,387			46,427			42,860
Additional paid-in capital		432			327			294
Retained deficit		(16,101	)		(13,220	)		(13,200	)
Accumulated other comprehensive income (loss)		1,187			(542	)		1,146
Total shareholders' equity		38,057			39,144			37,252
Total Liabilities and Shareholders' Equity	$	234,647		$	217,801		$	212,205

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

Page 3

Mission Community Bancorp and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
(dollars in thousands, except per share data)
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Interest Income
Interest and fees on loans	$	1,785		$	1,853		$	5,271		$	5,841
Interest on investment securities		470			344			1,350			957
Other interest income		6			14			22			31
Total interest income		2,261			2,211			6,643			6,829
Interest Expense
Interest on money market, NOW and savings deposits		86			113			305			349
Interest on time certificates of deposit		217			296			693			927
Other interest expense		25			79			80			264
Total interest expense		328			488			1,078			1,540
Net interest income		1,933			1,723			5,565			5,289
Provision for loan and lease losses		300			350			300			5,800
Net interest income (loss) after provision for loan and lease losses		1,633			1,373			5,265			(511	)
Non-interest income
Service charges on deposit accounts		114			101			312			275
Gain on sale of loans		31			126			172			307
Loan servicing fees, net of amortization		38			38			97			111
Gain on sale or call of available-for-sale securities		4			-			4			58
Other real estate income		-			-			38			-
Net gains(losses) and writedowns of fixed assets or other real estate		(94	)		(4	)		(71	)		(454	)
Net gains(losses) on disposition of loans held for sale		209			-			255			-
Other income and fees		138			40			222			126
Total non-interest income		440			301			1,029			423
Non-interest expense
Salaries and employee benefits		1,601			1,029			4,364			2,873
Occupancy expenses		341			318			993			933
Furniture and equipment		120			116			346			352
Data processing		276			187			739			551
Professional fees		369			183			902			501
Marketing and business development		47			34			140			104
Office supplies and expenses		66			59			192			177
Insurance and regulatory assessments		86			187			312			583
Loan and lease expenses		42			87			202			144
Other real estate expenses		15			19			113			58
Provision for unfunded commitments		180			-			180			-
Other expenses		178			132			495			364
Total non-interest expense		3,321			2,351			8,978			6,640
Loss before income taxes		(1,248	)		(677	)		(2,684	)		(6,728	)
Income tax expense		1			-			6			-
Net loss	$	(1,249	)	$	(677	)	$	(2,690	)	$	(6,728	)
Net loss applicable to common stock	$	(1,290	)	$	(827	)	$	(2,833	)	$	(6,700	)
Per Common Share Data:
Net loss - basic	$	(0.18	)	$	(0.11	)	$	(0.40	)	$	(1.82	)
Average common shares outstanding - basic		7,094,274			6,345,602			7,094,274			3,682,598

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

Page 4

Mission Community Bancorp and Subsidiaries
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		Loss			Deficit			Income (Loss)			Total
Balance at January 1, 2010	$	6,152		1,345,602	$	18,042		$	242				$	(6,280	)	$	482		$	18,638
Issuance of common stock
in private placement,
net of issuance costs of $153				5,000,000		24,818														24,818
Dividends declared and paid
on Series D preferred stock														(192	)					(192	)
Stock-based compensation									52											52
Comprehensive loss:
Net (loss)										$	(6,728	)		(6,728	)					(6,728	)
Less beginning of year unrealized
gain on securities sold during
the period, net of taxes of $-0-											(22	)					(22	)		(22	)
Net unrealized gain on remaining
available-for-sale securities,
net of taxes of $-0-		-		-		-			-		686			-			686			686
Total comprehensive loss										$	(6,064	)
Balance at September 30, 2010	$	6,152		6,345,602	$	42,860		$	294				$	(13,200	)	$	1,146		$	37,252
Balance at January 1, 2011	$	6,152		7,094,274	$	46,427		$	327				$	(13,220	)	$	(542	)	$	39,144
Dividends declared and paid
on Series D preferred stock														(191	)					(191	)
Stock-based compensation									105											105
Additional expenses of 2010
shareholder rights offering						(40	)													(40	)
Comprehensive loss:
Net (loss)										$	(2,690	)		(2,690	)					(2,690	)
Net unrealized gain on
available-for-sale securities,
net of taxes of $-0-		-		-		-			-		1,729			-			1,729			1,729
Total comprehensive loss										$	(961	)
Balance at September 30, 2011	$	6,152		7,094,274	$	46,387		$	432				$	(16,101	)	$	1,187		$	38,057

Total comprehensive loss for the three months ended September 30, 2011 and 2010 were $(444) thousand and $(501) thousand, respectively.

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

Page 5

Mission Community Bancorp and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited - dollars in thousands)
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Operating Activities
Net loss	$	(1,249	)	$	(677	)	$	(2,690	)	$	(6,728	)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation		127			125			379			384
Accretion of discount on securities and loans, net		174			52			431			28
Provision for credit losses		300			350			300			5,800
Provision for losses on unfunded loan commitments		180			-			180			-
Stock-based compensation		36			33			105			52
Gain on sale or call of available-for-sale securities		(4	)		-			(4	)		(58	)
Gain on sale of loans		(31	)		(126	)		(172	)		(307	)
Losses (gains) on disposition of loans held for sale		(209	)		-			(255	)		-
Net losses (gains) and writedowns of fixed assets or other real estate		94			4			71			454
Increase in company-owned life insurance		(23	)		(23	)		(68	)		(70	)
Net increase in accrued taxes receivable		-			(3	)					(3	)
Other, net		194			77			(66	)		381
Proceeds from loan sales		477			1,961			1,917			6,363
Loans originated for sale		(426	)		(1,525	)		(1,988	)		(5,108	)
Net cash (used in) provided by operating activities		(360	)		248			(1,860	)		1,188
Investing Activities
Net decrease in Federal Home Loan Bank and other stock		79			80			272			269
Net decrease in deposits in other banks		-			-			248			25
Purchase of available-for-sale securities		(4,619	)		(16,662	)		(26,652	)		(39,822	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		7,038			4,105			13,180			14,765
Proceeds from sales of available-for-sale securities		-			-			-			5,622
Net (increase) decrease in loans		(3,232	)		855			(72	)		3,134
Purchases of premises and equipment		(36	)		(72	)		(227	)		(412	)
Additional investments in other real estate owned		-			-			(111	)		-
Proceeds from sale of other real estate owned		1,067			419			2,574			1,024
Net cash provided by (used in) investing activities		297			(11,275	)		(10,788	)		(15,395	)
Financing Activities
Net increase in demand deposits and savings accounts		9,530			8,299			11,327			3,325
Net (decrease) increase in time deposits		(264	)		(3,804	)		6,979			(1,474	)
Net increase (decrease) in other borrowings		-			328			(349	)		(1,530	)
Proceeds from common stock issued, net of issuance costs		-			(29	)		(40	)		24,818
Payment of TARP-CPP dividends		(64	)		(64	)		(192	)		(192	)
Net cash provided by financing activities		9,202			4,730			17,725			24,947
Net increase (decrease) in cash and cash equivalents		9,139			(6,297	)		5,077			10,740
Cash and cash equivalents at beginning of period		6,755			25,632			10,817			8,595
Cash and cash equivalents at end of period	$	15,894		$	19,335		$	15,894		$	19,335
Non-cash changes:
Change in unrealized gains (losses)
on available-for-sale securities	$	804			176		$	1,729			664
Real estate acquired by foreclosure		217			1,375			1,286			1,752
Loans reclassified to held for sale		-			-			-			16,689
Supplemental disclosures of cash flow information:
Interest paid		326			460			1,086			1,595
Taxes paid		2			2			4			2

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

Page 6

Mission Community Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 – Basis of Presentation and Management Representations

The unaudited consolidated financial statements include accounts of Mission Community Bancorp (“the Company”) and its subsidiaries, Mission Community Bank (“the Bank”) and Mission Asset Management, Inc. (“MAM”), 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, 2010, which was filed on March 31, 2011.

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, 2011 and 2010 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.

Management has determined that since all of the banking products and services offered by the Bank are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits. The Bank participated in the FDIC’s Transaction Account Guarantee Program (“TAGP”). Under the program, through December 31, 2010, all noninterest-bearing transaction accounts were fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules.  The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the current standard maximum deposit insurance amount to $250,000 and extended full deposit insurance coverage for non-interest bearing transaction accounts to December 31, 2012.

Certain reclassifications have been made to prior period balances to conform to classifications in 2011, with no impact to previously reported net loss or shareholders’ equity.

Note 2 – Stock Based Compensation Plans

The Company has a stock option plan, adopted in 1998, which is more fully described in Note J 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 provides for the grant of various equity awards, including stock options.

Page 7

On September 27, 2011 the Board of Directors of the Company approved and adopted the Mission Community Bancorp 2011 Equity Incentive Plan (the “2011 Plan”).  The 2011 Plan has also been approved by the Company’s shareholders.  The 2011 Plan provides for the issuance of both “incentive” and “nonqualified” stock options, restricted stock awards, stock appreciation rights and stock awards.  Awards under the 2011 Plan may be made to salaried officers and employees of the Company and its affiliates, to non-employee directors of the Company and its affiliates, and to consultants providing services to the Company and its affiliates.  Awards under the 2011 Plan may be granted on such terms and conditions as are established by the Board of Directors or an authorized Committee of the Board of Directors in its discretion.  Awards may be granted as performance-based compensation under section 162(m) of the Internal Revenue Code.

The Company determines the fair value of options granted on the date of grant using a Black-Scholes-Merton option pricing model, which uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. The Company also makes assumptions regarding estimated forfeitures that will impact the total compensation expenses recognized.

The fair values of options granted in the nine months ended September 30, 2011, were estimated on the date of grant using the following assumptions:

Date of grant	1/25/2011	4/4/2011	7/26/2011
Number of options granted	20,000	20,000	20,000
Exercise price	$5.00	$5.00	$5.00
Market price of common stock	$3.65	$3.61	$3.55
Expected stock price volatility	37.4%	37.3%	36.2%
Expected option life	6 years	6 years	6.5 years
Risk-free interest rate	2.32%	2.53%	2.07%
Weighted average fair value of all options granted during the period:
3 months ended 9/30/11			$1.03
9 months ended 9/30/11			$1.06

For the nine months ended September 30, 2010, the fair values of options granted were estimated on the date of grant using the following assumptions:

Date of grant	7/1/2010
Number of options granted	100,368
Exercise price	$5.00
Market price of common stock	$5.00
Expected stock price volatility	45.6%
Expected option life	10 years
Risk-free interest rate	1.80%
Weighted average fair value of all options granted during the period:
3 months ended 9/30/10	$2.85
9 months ended 9/30/10	$2.85

During the three-month periods ended September 30, 2011 and 2010, the Company recognized pre-tax stock-based compensation expense of $36,000 and $33,000, respectively.  For the nine-month periods ended September 30, 2011 and 2010, stock-based compensation expense was recognized totaling $105,000 and $52,000, respectively.  As of September 30, 2011, the Company has unvested options outstanding with unrecognized compensation expense totaling $287,000, which is scheduled to be recognized as follows (in thousands):

October 1 through December 31, 2011	$	36
2012		146
2013		76
2014		13
2015		12
2016		4
Total unrecognized compensation cost	$	287

No options outstanding were “in the money” as of September 30, 2011.

The following table summarizes information about stock option activity for the nine months ended September 30, 2011:

						Weighted-			Aggregate
				Weighted-		Average			Intrinsic
				Average		Remaining			Value of
				Exercise		Contractual			In-the-Money
	Shares			Price		Term			Options
Outstanding at beginning of year		183,432		$	10.39
Options granted		60,000			5.00
Options exercised		-
Options cancelled		(13,000	)		7.90
Outstanding at end of period		230,432		$	9.13		7.8	Years	$	-
Options exercisable at end of period		87,094		$	13.47		6.1	Years	$	-
Options Vested or Expected to Vest		230,432		$	9.13		7.8	Years	$	-

Note 3 — Investment Securities

Investment securities have been classified in the consolidated balance sheets as available for sale 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			Fair
	Cost		Gains		Losses			Value
September 30, 2011:
U.S. Government agencies	$	27,786	$	183	$	(27	)	$	27,942
Residential mortgage-backed securities		56,472		941		(4	)		57,409
Municipal securities		2,917		103		-			3,020
Asset-backed securities		1,797		4		(13	)		1,788
	$	88,972	$	1,231	$	(44	)	$	90,159
December 31, 2010:
U.S. Government agencies	$	21,083	$	47	$	(270	)	$	20,860
Residential mortgage-backed securities		49,831		215		(566	)		49,480
Municipal securities		2,917		20		(15	)		2,922
Corporate debt securities		1,981		20		-			2,001
Asset-backed securities		165		7		-			172
	$	75,977	$	309	$	(851	)	$	75,435

The scheduled maturities of investment securities at September 30, 2011, 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	$	2,072	$	2,077
Due in one year to five years		22,756		22,895
Due in five years to ten years		15,706		15,991
Due in greater than ten years		48,438		49,196
	$	88,972	$	90,159

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, 2011:
U.S. Government agencies		2,070	$	27	$	-	$	-	$	2,070	$	27
Residential mortgage-backed securities		-		-		3,958		4		3,958		4
Municipal securities		-		-		-		-		-		-
Corporate debt securities		-		-		-		-		-		-
Asset-backed securities		1,676		13		-		-		1,676		13
	$	3,746	$	40	$	3,958	$	4	$	7,704	$	44
December 31, 2010:
U.S. Government agencies	$	15,985	$	270	$	-	$	-	$	15,985	$	270
Residential mortgage-backed securities		37,274		566		-		-		37,274		566
Municipal securities		1,169		15		-		-		1,169		15
Corporate debt securities		-		-		-		-		-		-
Asset-backed securities		-		-		-		-		-		-
	$	54,428	$	851	$	-	$	-	$	54,428	$	851

As of September 30, 2011, the Company held two securities that had been in an unrealized loss position for less than 12 months.  Two additional securities have been in an unrealized loss position for 12 months or longer as of September 30, 2011.  The unrealized losses relate principally to changes in market interest rate conditions.  All of the securities continue to pay as scheduled.  When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery.  As of September 30, 2011, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis.  Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of September 30, 2011 are other than temporarily impaired.

During the first quarter of 2010, the Bank sold $5,532,000 of investment securities for gross gains of $58,000.  No securities were sold in the first nine months of 2011.  However, a gain of $4,000 was recognized in the third quarter of 2011 on securities called for redemption.

As of September 30, 2011, investment securities carried at $11,078,000 were pledged to secure public deposits, as required by law.  Investment securities carried at $17,469,000 as of September 30, 2011, were pledged to secure borrowing facilities from the Federal Home Loan Bank of San Francisco.

Page 8

Note 4 — Loans

The Company’s loan portfolio consists primarily of loans to borrowers within the Central Coast area of California.  Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company’s market area and, as a result, the loan and collateral portfolios are concentrated in those industries and in that geographic area.

The following table shows the composition of the Company’s loans by type:

Loan Composition
(Dollars in thousands)
	September 30, 2011					December 31, 2010					September 30, 2010
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	10,817		9.1	%	$	8,972		7.4	%	$	8,752		7.1	%
Commercial real estate - owner-occupied		29,866		25.0	%		35,135		29.2	%		34,683		28.2	%
Commercial real estate - non-owner-occupied		35,454		29.7	%		32,240		26.8	%		33,358		27.2	%
Residential real estate		15,962		13.4	%		16,641		13.9	%		17,364		14.1	%
All other real estate loans		2,923		2.4	%		2,989		2.5	%		3,003		2.5	%
Commercial and industrial loans		16,641		14.0	%		17,701		14.7	%		19,728		16.1	%
Agricultural loans		3,531		3.0	%		1,022		0.9	%		403		0.3	%
Municipal loans		2,397		2.0	%		2,987		2.5	%		2,991		2.4	%
Leases, net of unearned income		708		0.6	%		1,047		0.9	%		1,110		0.9	%
Consumer loans		927		0.8	%		1,491		1.2	%		1,471		1.2	%
Total loans	$	119,226		100.0	%	$	120,225		100.0	%	$	122,863		100.0	%

The table above includes loans held for sale as follows:

Loans Held for Sale*
(Dollars in thousands)
	September 30, 2011					December 31, 2010					September 30, 2010
Type of Loan	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Commercial	$	232		0.2	%	$	32		0.0	%	$	63		0.1	%
Real estate		6,342		5.3	%		10,545		8.8	%		10,333		8.4	%
Construction and land development		3,377		2.8	%		4,538		3.8	%		4,751		3.9	%
Total loans held for sale	$	9,951		8.3	%	$	15,115		12.6	%	$	15,147		12.3	%
* Includes all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

Loans and leases, other than those held for sale, are carried at the principal amount outstanding, net of any deferred loan origination fee income and deferred direct loan origination costs, and net of any unearned interest on discounted loans.  A separate allowance for loan and lease losses is provided for loans held for investment.  Loans held for sale, including $4,731,000 of impaired loans, are carried at the lower of cost or fair value, with no allowance for loan losses.

As of September 30, 2011, and December 31, 2010, loans totaling $95,525,000 and $60,681,000, respectively, were pledged to secure potential borrowing facilities from the Federal Home Loan Bank of San Francisco.

Page 9

Included in commercial loans at December 31, 2010, were $349,458 in guaranteed portions of SBA loans sold and subject to a 90-day premium refund obligation.  In accordance with accounting standards for the sale of a portion of a loan, the Bank recorded the proceeds from the sale of the guaranteed portion of those SBA loans, which totaled $385,546, as a secured borrowing and included $349,458 of that amount in other borrowings on the consolidated balance sheet, with $36,088 recorded as a deferred premium and included in other liabilities.  The 90-day premium refund obligation elapsed during the first quarter of 2011 and the transaction was recorded as a sale during that quarter, with the guaranteed portions of loans and the secured borrowings removed from the balance sheet and the resulting gain on sale recorded.  In February 2011, the SBA eliminated the refund obligation period, so the Bank is no longer required to defer gain recognition for SBA loan sales.  As of September 30, 2011, no SBA loan sales have been deferred.

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

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

Following is a summary of the changes in the allowance for loan and lease losses for the three- and nine-month periods ended September 30:

	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Balance at beginning of period	$	3,181,992		$	3,731,468		$	3,197,636		$	5,536,929
Provision for loan and lease losses charged to expense		300,000			350,000			300,000			5,800,000
Loans charged off		(359,976	)		(516,304	)		(459,589	)		(7,803,804	)
Recoveries on loans previously charged off		41,787			7,775			125,756			39,814
Balance at end of period	$	3,163,803		$	3,572,939		$	3,163,803		$	3,572,939

Changes in the allowance for loan and lease losses for the three and nine months ended September 30, 2011, and year ended December 31, 2010, are shown below disaggregated by portfolio segment:

	Three Months Ended September 30, 2011
Loan Portfolio Segment	Balance at Beginning of Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	122,646	$	10,446		$	-		$	-	$	133,092
Commercial real estate - owner-occupied		392,479		(73,189	)		(21,070	)		-		298,220
Commercial real estate - non-owner-occupied		713,095		188,405			(124,513	)		-		776,987
Residential real estate		516,219		29,177			(69,633	)		35,000		510,763
All other real estate loans		4,053		(508	)		-			-		3,545
Commercial and industrial loans		1,038,001		381,555			(114,500	)		4,203		1,309,259
Consumer and all other loans and lease financing		113,222		(38,687	)		(30,260	)		2,584		46,859
Unallocated		282,277		(197,199	)		-			-		85,078
Totals	$	3,181,992	$	300,000		$	(359,976	)	$	41,787	$	3,163,803
	Nine Months Ended September 30, 2011
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	530,473	$	(397,381	)	$	-		$	-	$	133,092
Commercial real estate - owner-occupied		165,181		143,634			(21,070	)		10,475		298,220
Commercial real estate - non-owner-occupied		696,239		205,261			(124,513	)		-		776,987
Residential real estate		501,008		113,879			(152,633	)		48,509		510,763
All other real estate loans		3,289		256			-			-		3,545
Commercial and industrial loans		1,021,240		349,825			(123,064	)		61,258		1,309,259
Consumer and all other loans and lease financing		123,727		(44,073	)		(38,309	)		5,514		46,859
Unallocated		156,479		(71,401	)		-			-		85,078
Totals	$	3,197,636	$	300,000		$	(459,589	)	$	125,756	$	3,163,803
	Year Ended December 31, 2010
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Year
Construction and land development	$	1,529,114	$	1,737,805		$	(2,755,179	)	$	18,733	$	530,473
Commercial real estate - owner-occupied		669,727		822,197			(1,326,743	)		-		165,181
Commercial real estate - non-owner-occupied		1,272,180		234,669			(810,610	)		-		696,239
Residential real estate		162,505		1,679,365			(1,340,862	)		-		501,008
All other real estate loans		248,029		(9,279	)		(235,461	)		-		3,289
Commercial and industrial loans		866,580		1,710,065			(1,582,702	)		27,297		1,021,240
Consumer and all other loans and lease financing		275,646		(18,153	)		(134,401	)		635		123,727
Unallocated		513,148		(356,669	)		-			-		156,479
Totals	$	5,536,929	$	5,800,000		$	(8,185,958	)	$	46,665	$	3,197,636

Page 10

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

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

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

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

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

 Loss – Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted.  Loans classified as loss are charged off immediately.

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

Page 11

Loans by Risk Rating (excluding loans held for sale*)	Risk Ratings
(in thousands)			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
As of September 30, 2011:
Construction and land development	$	5,954	$	162	$	1,323	$	-	$	7,439
Commercial real estate - owner-occupied		23,291		5,119		802		-		29,212
Commercial real estate - non-owner-occupied		27,022		2,726		2,821		-		32,569
Residential real estate		14,681		181		-		19		14,881
All other real estate		1,289		-		-		-		1,289
Commercial and industrial		13,732		227		2,155		-		16,114
Consumer and all other loans and lease financing		7,725		-		46		-		7,771
Total loans, net of unearned income	$	93,694	$	8,415	$	7,147	$	19	$	109,275
As of December 31, 2010:
Construction and land development	$	2,932	$	179	$	1,324	$	-	$	4,435
Commercial real estate - owner-occupied		29,590		-		1,023		-		30,613
Commercial real estate - non-owner-occupied		22,477		6,077		781		-		29,335
Residential real estate		15,322		-		-		-		15,322
All other real estate		1,315		-		-		-		1,315
Commercial and industrial		14,872		150		877		13		15,912
Consumer and all other loans and lease financing		8,046		-		132		-		8,178
Total loans, net of unearned income	$	94,554	$	6,406	$	4,137	$	13	$	105,110
As of September 30, 2010:
Construction and land development	$	2,492	$	184	$	1,324	$	-	$	4,000
Commercial real estate - owner-occupied		28,337		-		1,582		-		29,919
Commercial real estate - non-owner-occupied		22,876		2,773		4,772		-		30,421
Residential real estate		15,577		370		336		-		16,283
All other real estate		1,318		-		-		-		1,318
Commercial and industrial		13,837		350		3,342		13		17,542
Consumer and all other loans and lease financing		7,990		15		228		-		8,233
Total loans, net of unearned income	$	92,427	$	3,692	$	11,584	$	13	$	107,716
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

Page 12

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

Loans by Delinquency Status (excluding loans held for sale*)														Accruing		Past Due
(in thousands)	Recorded Balance of Loans Past Due													Troubled		90+ Days
		30-59		60-89		90	+	Total						Debt		and		Non-Accrual
	Days		Days		Days			Past Due		Current		Total Loans		Restructurings		Accruing		Loans
As of September 30, 2011:
Construction and land development	$	-	$	-	$	1,323		$	1,323	$	6,116	$	7,439	$	-	$	-	$	1,323
Commercial real estate - owner-occupied		-		1,022		-			1,022		28,190		29,212		-		-		24
Commercial real estate - non-owner-occupied		-		-		269			269		32,300		32,569		-		-		269
Residential real estate		-		-		-			-		14,881		14,881		-		-		19
All other real estate		-		-		-			-		1,289		1,289		-		-		-
Commercial and industrial		19		-		100			119		15,995		16,114		-		-		837
Consumer and all other loans and lease financing		-		-		-			-		7,771		7,771		-		-		-
Total loans, net of unearned income	$	19	$	1,022	$	1,692		$	2,733	$	106,542	$	109,275	$	-	$	-	$	2,472
As of December 31, 2010:
Construction and land development	$	-	$	-	$	-		$	-	$	4,435	$	4,435	$	-	$	-	$	-
Commercial real estate - owner-occupied		-		681		-			681		29,932		30,613		-		-		641
Commercial real estate - non-owner-occupied		-		-		-			-		29,335		29,335		-		-		-
Residential real estate		-		-		-			-		15,322		15,322		-		-		-
All other real estate		-		-		-			-		1,315		1,315		-		-		-
Commercial and industrial		237		165		821			1,223		14,689		15,912		-		-		1,352
Consumer and all other loans and lease financing		38		-		-			38		8,140		8,178		-		-		-
Total loans, net of unearned income	$	275	$	846	$	821		$	1,942	$	103,168	$	105,110	$	-	$	-	$	1,993
As of September 30, 2010:
Construction and land development	$	-	$	-	$	-		$	-	$	4,000	$	4,000	$	-	$	-	$	-
Commercial real estate - owner-occupied		-		-		-			-		29,919		29,919		-		-		748
Commercial real estate - non-owner-occupied		431		-		225			656		29,765		30,421		-		-		656
Residential real estate		-		370		236			606		15,677		16,283		-		-		236
All other real estate		-		-		-			-		1,318		1,318		-		-		-
Commercial and industrial		520		535		942			1,997		15,545		17,542		-		-		2,313
Consumer and all other loans and lease financing		-		-		-			-		8,233		8,233		108		-		-
Total loans, net of unearned income	$	951	$	905	$	1,403		$	3,259	$	104,457	$	107,716	$	108	$	-	$	3,953
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

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

Concessions granted in TDR’s typically are intended to reduce the borrower’s cash requirements, such as an extension of the payment terms or a change in the interest rate charged.  TDR’s with extended payment terms are accounted for as impaired until adequate performance is established.  A reduction in the interest rate for a borrower experiencing financial difficulties would result in a change to TDR status if the restructured loan yield is below the yield for a new loan with

Page 13

comparable risk. TDR’s with below-market rates are considered impaired until fully collected.   TDR’s may be reported as non-accrual, rather than TDR, if they are not performing under the restructured terms or if adequate payment performance under the restructured terms has yet to be established.

No loans modified during the third quarter of 2011 were considered to be TDR’s.  During the first six months of 2011 two loans were modified in troubled debt restructurings.  One owner-occupied commercial real estate loan with an outstanding balance of $30 thousand, both before and after the restructuring, was extended for three years with monthly amortization required; and one commercial loan with an $80 thousand outstanding balance, both before and after the restructuring, was extended for three months beyond its original maturity.  There was no financial impact for specific reserves or from charge-offs for these modified loans during the nine months ended September 30, 2011.  Both of these loans were in non-accrual status as of September 30, 2011, and as of that date no TDR’s modified within the previous twelve months have defaulted under the restructured terms.

Page 14

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

Impaired Loans (excluding loans held for sale*)							For the Nine Months Ended				Three Months Ended
(in thousands)	As of September 30, 2011						September 30, 2011				September 30, 2011
			Unpaid				Average		Interest Income		Average
	Recorded		Principal		Related		Recorded		Recognized		Recorded
	Investment		Balance		Allowance		Investment		While Impaired		Investment
Impaired Loans With a Related Allowance for Loan and Lease Losses:
Construction and land development	$	-	$	-	$	-	$	267	$	-	$	178
Commercial real estate - owner-occupied		-		-		-		-		-		-
Commercial real estate - non-owner-occupied		-		-		-		165		-		331
Residential real estate		19		19		19		14		-		29
All other real estate		-		-		-		-		-		-
Commercial and industrial		466		474		93		478		-		405
Consumer and all other loans and lease financing		-		-		-		4		-		4
Total Impaired Loans With An Allowance Recorded		485		493		112		928		-		947
Impaired Loans With No Related Allowance for Loan and Lease Losses:
Construction and land development		1,323		1,323		-		662		-		1,323
Commercial real estate - owner-occupied		24		25		-		264		-		189
Commercial real estate - non-owner-occupied		269		269		-		-		-		-
Residential real estate		-		-		-		18		-		36
All other real estate		-		-		-		-		-		-
Commercial and industrial		371		429		-		407		-		382
Consumer and all other loans and lease financing		-		-		-		-		-		-
Total Impaired Loans With No Allowance Recorded		1,987		2,046		-		1,351		-		1,930
Total Loans Individually Evaluated for Impairment:
Construction and land development		1,323		1,323		-		929		-		1,501
Commercial real estate - owner-occupied		24		25		-		264		-		189
Commercial real estate - non-owner-occupied		269		269		-		165		-		331
Residential real estate		19		19		19		32		-		65
All other real estate		-		-		-		-		-		-
Commercial and industrial		837		903		93		885		-		787
Consumer and all other loans and lease financing		-		-		-		4		-		4
Total Loans Individually Evaluated For Impairment	$	2,472	$	2,539	$	112	$	2,279	$	-	$	2,877
Loans Collectively Evaluated for Impairment:
Construction and land development	$	6,116	$	6,116	$	133
Commercial real estate - owner-occupied		29,188		29,188		298
Commercial real estate - non-owner-occupied		32,300		32,300		777
Residential real estate		14,862		14,862		492
All other real estate		1,289		1,289		4
Commercial and industrial		15,277		15,277		1,216
Consumer and all other loans and lease financing		7,771		7,771		47
Unallocated		-		-		85
Total Loans Collectively Evaluated For Impairment	$	106,803	$	106,803	$	3,052
Total Loans:
Construction and land development	$	7,439	$	7,439	$	133
Commercial real estate - owner-occupied		29,212		29,213		298
Commercial real estate - non-owner-occupied		32,569		32,569		777
Residential real estate		14,881		14,881		511
All other real estate		1,289		1,289		4
Commercial and industrial		16,114		16,180		1,309
Consumer and all other loans and lease financing		7,771		7,771		47
Unallocated		-		-		85
Total Loans	$	109,275	$	109,342	$	3,164
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

Page 15

Impaired Loans (excluding loans held for sale*)							For the Year Ended
(in thousands)	As of December 31, 2010						December 31, 2010
			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
	Investment		Balance		Allowance		Investment		While Impaired
Impaired Loans With a Related Allowance for Loan and Lease Losses:
Construction and land development	$	-	$	-	$	-	$	1,817	$	-
Commercial real estate - owner-occupied		-		-		-		2,053		-
Commercial real estate - non-owner-occupied		-		-		-		1,393		-
Residential real estate		-		-		-		94		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,010		1,424		9		1,193		-
Consumer and all other loans and lease financing		-		-		-		226		-
Total Impaired Loans With An Allowance Recorded		1,010		1,424		9		6,776		-
Impaired Loans With No Related Allowance for Loan and Lease Losses:
Construction and land development		356		375		-		307		-
Commercial real estate - owner-occupied		326		396		-		46		-
Commercial real estate - non-owner-occupied		-		-		-		958		-
Residential real estate		-		-		-		-		-
All other real estate		-		-		-		-		-
Commercial and industrial		301		322		-		299		27
Consumer and all other loans and lease financing		-		-		-		-		-
Total Impaired Loans With No Allowance Recorded		983		1,093		-		1,610		27
Total Loans Individually Evaluated for Impairment:
Construction and land development		356		375		-		2,124		-
Commercial real estate - owner-occupied		326		396		-		2,099		-
Commercial real estate - non-owner-occupied		-		-		-		2,351		-
Residential real estate		-		-		-		94		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,311		1,746		9		1,492		27
Consumer and all other loans and lease financing		-		-		-		226		-
Total Loans Individually Evaluated For Impairment	$	1,993	$	2,517	$	9	$	8,386	$	27
Loans Collectively Evaluated for Impairment:
Construction and land development	$	4,079	$	4,079	$	531
Commercial real estate - owner-occupied		30,287		30,287		165
Commercial real estate - non-owner-occupied		29,335		29,335		696
Residential real estate		15,322		15,322		501
All other real estate		1,315		1,315		3
Commercial and industrial		14,601		14,601		1,012
Consumer and all other loans and lease financing		8,178		8,178		124
Unallocated		-		-		157
Total Loans Collectively Evaluated For Impairment	$	103,117	$	103,117	$	3,189
Total Loans:
Construction and land development	$	4,435	$	4,454	$	531
Commercial real estate - owner-occupied		30,613		30,683		165
Commercial real estate - non-owner-occupied		29,335		29,335		696
Residential real estate		15,322		15,322		501
All other real estate		1,315		1,315		3
Commercial and industrial		15,912		16,347		1,021
Consumer and all other loans and lease financing		8,178		8,178		124
Unallocated		-		-		157
Total Loans	$	105,110	$	105,634	$	3,198
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

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

Note 6 — Shareholders’ Equity and Loss Per Share

Common Stock

On April 27, 2010, there was an initial closing (the “Initial Closing”) under the Securities Purchase Agreement dated December 22, 2009, as amended (the “Securities Purchase Agreement”), by and between the Company and Carpenter Fund Manager GP, LLC (“Carpenter”) on behalf of and as General Partner of Carpenter Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community BancFund—CA, L.P.  (the “Investors”).   At the Initial Closing the Investors purchased an aggregate of 2,000,000 shares of the common stock of the Company paired with warrants to purchase 2,000,000 shares of the common stock of the Company for an aggregate purchase price of $10 million.  The warrants are exercisable for a term of five years from issuance at an exercise price of $5.00 per share and contain customary anti-dilution provisions.

On June 15, 2010, the Investors purchased an aggregate of 3,000,000 additional shares of common stock and warrants to purchase 3,000,000 shares of common stock at a purchase price of $5.00 per unit of one share of common stock and one warrant (five-year term and $5.00

Page 17

exercise price) in the second closing under the Securities Purchase Agreement (the “Second Closing”), for an aggregate purchase price of $15 million.

The Company used a substantial majority of the proceeds from the Second Closing to enable a newly-formed wholly-owned subsidiary of the Company, Mission Asset Management, Inc., to purchase from the Bank certain non-performing loans and other real estate owned assets.

The Securities Purchase Agreement further provided that the Company would conduct a rights offering to its existing shareholders, pursuant to which each shareholder was offered the right to purchase 15 additional shares of common stock, paired with a warrant, for each share held, at a price of $5.00 per unit of common stock and warrant (five-year term and $5.00 exercise price).  The rights offering closed on December 15, 2010, with 748,672 shares being issued. Net proceeds from the rights offering totaled $3,527,000.

Prior to the Initial Closing, Carpenter was the largest shareholder of the Company, beneficially owning 333,334 shares of the common stock of the Company or 24.7% of the issued and outstanding shares.  Following the Second Closing and the rights offering, Carpenter was the beneficial owner of 5,333,334 shares of the common stock of the Company (not including warrants), or 75.2% of the issued and outstanding shares.

Loss per Share

The following table shows the calculation of earnings (loss) per common share and the allocation of the Company’s net loss among common stock and the various classes of preferred stock:

(in thousands, except per share data)	Three Months Ended						Nine Months Ended
	September 30, 2011			September 30, 2010			September 30, 2011			September 30, 2010
Net income (loss)	$	(1,249	)	$	(677	)	$	(2,690	)	$	(6,728	)
Less net income (loss) allocated to preferred stock:
Convertible preferred (Series A & C)		(18	)		(10	)		(40	)		(182	)
Non-convertible preferred (Series B)		(4	)		(1	)		(8	)		(38	)
TARP preferred (Series D)		63			64			191			192
Net income (loss) allocated to all classes of preferred stock		41			53			143			(28	)
Income (loss) allocated to common stock	$	(1,290	)	$	(730	)	$	(2,833	)	$	(6,700	)
Average common shares outstanding		7,094,274			6,345,602			7,094,274			3,682,598
Basic earnings (loss) per common share	$	(0.18	)	$	(0.11	)	$	(0.40	)	$	(1.82	)

No presentation of diluted earnings (loss) per common share has been presented because the result would be anti-dilutive.

Note 7 —Income taxes

Due to a limitation on the Company’s ability to recognize deferred tax assets, no federal income tax expense or benefit was recognized for the nine-month periods ended September 30, 2011, although a minimum state franchise tax expense of $1 thousand for the third quarter and $6 thousand for the nine months was recorded.  For the first nine months of 2010, no federal or state income tax expense or benefit was recognized due to the deferred tax asset limitation.

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Note 8 — Fair Value Measurement

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

· 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.  Valuation techniques include management’s judgment, which may be a significant factor.

For some assets or liabilities, the inputs used to measure fair value may fall into more than one level of the fair value hierarchy.  In such cases, the asset or liability is identified based on the lowest level input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

(in thousands)	Fair Value Measurements Using
September 30, 2011	Level 1		Level 2		Level 3		Total
Available for sale securities:
U.S. Government agencies	$	-	$	27,942	$	-	$	27,942
Mortgage-backed securities		-		57,409		-		57,409
Municipal securities		-		3,020		-		3,020
Corporate debt securities		-		-		-		-
Asset-backed securities		-		1,788		-		1,788
Total available-for-sale securities		-		90,159		-		90,159
Loans held for sale		-		-		9,951		9,951
Total assets measured at fair value on a recurring basis	$	-	$	90,159	$	9,951	$	100,110
December 31, 2010
Available for sale securities:
U.S. Government agencies	$	-	$	20,860	$	-	$	20,860
Mortgage-backed securities		-		49,480		-		49,480
Municipal securities		-		2,922		-		2,922
Corporate debt securities		-		2,001		-		2,001
Asset-backed securities		-		172		-		172
Total available-for-sale securities		-		75,435		-		75,435
Loans held for sale		-		-		15,115		15,115
Total assets measured at fair value on a recurring basis	$	-	$	75,435	$	15,115	$	90,550

The fair value of securities available for sale equals quoted market prices, if available.  If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.  There were no changes in the valuation techniques used during 2011 or 2010 and there were no transfers into or out of Levels 1, 2 or 3 of the fair value hierarchy during the nine months ended September 30, 2011.

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Loans held for sale that are measured at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary.  Those loans are carried at the lower of cost or fair value and, accordingly, have been subject to recurring fair value adjustments.  Fair value for those loans is determined by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows to MAM, including collateral liquidation if repayment weaknesses exist.

Management monitors the availability of observable market data to assess the appropriate classifications of financial instruments within the fair value hierarchy.  Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

(in thousands)									Current
									Period
	Fair Value Measurements Using								Gains
September 30, 2011	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of charge-offs and specific reserves--
Construction and land development	$	-	$	-	$	1,323	$	1,323	$	(21	)
Commercial real estate - owner-occupied		-		-		24		24		-
Commercial real estate - non-owner-occupied		-		-		269		269		(125	)
Residential real estate		-		-		-		-		(87	)
Commercial and industrial		-		-		744		744		(127	)
Consumer and all other loans and lease financing		-		-		-		-		-
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	2,360	$	2,360	$	(360	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	1,889	$	1,889	$	(71	)
									Full Year
	Fair Value Measurements Using								Gains
December 31, 2010	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of charge-offs and specific reserves--
Commercial and industrial	$	-	$	-	$	1,010	$	1,010	$	(648	)
Commercial real estate - owner-occupied		-		-		326		326		(97	)
Construction and land development		-		-		356		356		(10	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	1,692	$	1,692	$	(755	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	3,137	$	3,137	$	(486	)

The following methods were used to estimate the fair value of each class of assets above.  The fair value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less estimated costs to sell if repayment is expected solely from the collateral.  Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.  Collateral-dependent impaired loans are categorized as Level 3

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due to ongoing real estate conditions resulting in inactive market data which, in turn, required the use of unobservable inputs and assumptions in fair value measurements.  Impaired loans were measured and reported at fair value through specific valuation allocations of the allowance for loan and lease losses and/or partial charge-offs of the impaired loans.

The fair value of other real estate owned is based on the values obtained through property appraisals, which can include observable and unobservable inputs.  Other real estate owned fair values are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data which required the use of unobservable inputs and assumptions in fair value measurements.

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 2011 and 2010:

(in thousands)	Level 3 Available-for-Sale Securities and Loans Held for Sale
	Nine Months Ended September 30
	2011			2010
Balance at beginning of year	$	15,115		$	913
Securities transfered into Level 3		-			-
Net increase (decrease) in SBA loans held for sale		232			(904	)
Loans held for sale transfered into Level 3		-			16,689
Unrealized gains (losses)
included in other comprehensive income (loss)		-			-
Purchases		-			-
Settlements - principal reductions in loans held for sale		(4,252	)		(1,493	)
Loans held for sale transferred to other real estate owned		(1,069	)		-
Securities valuation reserve		-			(9	)
Loans held for sale valuation reserve		(75	)		(49	)
Balance at end of period	$	9,951		$	15,147

“Settlements” in the above table relate to actual cash payments received from borrowers on loans held for sale and do not represent refinancings or write-downs to fair value.  

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.  For investment securities, fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of values provided by brokers.  The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available.  The carrying value of accrued interest receivable approximates fair value.  The fair value of Company owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers.  The carrying amount of FHLB and FRB stock approximate their fair value.

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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:

(in thousands)	September 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	15,894	$	15,894	$	10,817	$	10,817
Interest-bearing deposits in other banks		302		302		550		550
Investment securities		90,159		90,159		75,435		75,435
Loans held for sale		9,951		9,951		15,115		15,115
Loans, net of allowance for loan and lease losses		106,111		105,227		101,912		102,926
Federal Home Loan Bank and other stocks		2,410		2,410		2,682		2,682
Company owned life insurance		3,048		3,048		2,980		2,980
Accrued interest receivable		770		770		697		697
Financial Liabilities:
Deposits		191,546		190,929		173,240		173,590
Other borrowings		-		-		349		349
Junior subordinated debt securities		3,093		1,379		3,093		1,333
Accrued interest payable		173		173		180		180

Note 9 — Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements.  ASU 2010-06 revised two disclosure requirements concerning fair value measurements and clarified two others.  It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers.  It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis.  The amendments also clarified that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.  ASU 2010-06 became effective for the Company’s financial statements as of December 31, 2010, except for the disclosure requirements related to the presentation of purchases, sales, issuances and settlements within Level 3, which were adopted by the Company on January 1, 2011.  The adoption of the remaining provisions of ASU 2010-06 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 requires more robust and disaggregated disclosures about the credit quality of financing receivables (loans) and allowances for loan and lease losses, including disclosure about credit quality indicators, past due information and modifications of finance receivables.  The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on  and  after  December 15, 2010.    The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The adoption of this guidance has significantly expanded disclosure requirements related to accounting policies and disclosures related to the allowance for loan and lease losses but did not have an impact on the Company’s financial position, results of operations or cash flows.

Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310):  Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  ASU 2011-01 approved the deferral of certain disclosure requirements surrounding TDRs included in ASU 2010-20, which were scheduled to be effective on January 1, 2011. The disclosure requirements were delayed until the FASB finalized the standards update related to their exposure draft, Clarifications to Accounting for Troubled Debt Restructurings by Creditors.  In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.  ASU 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR.  The new guidance requires creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR.  The amendments became effective for the Company on July 1, 2011.  The disclosures deferred by ASU 2011-01 are required for interim and annual periods beginning on or after June 15, 2011.  The adoption of this guidance has resulted in additional disclosures regarding TDR’s but did not have a material impact on the Company’s financial position or results of operations.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  ASU 2011-05 will require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement would present total net income and its components followed consecutively by a second statement that would present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented.  For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be applied retrospectively.  Early adoption is permitted.

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Note 10 — Subsequent Event

On October 21, 2011 the two mergers contemplated under the Agreement and Plan of Merger dated June 24, 2011 by and among the Company, Carpenter Fund Manager GP, LLC (“Carpenter”), as General Partner of Carpenter Community BancFund L.P. and Carpenter Community BancFund-A., L.P. (the “Funds”), the Bank, Santa Lucia Bancorp (“SL Bancorp”) and Santa Lucia Bank (“SL Bank”) (the “Merger Agreement”) were consummated.

Subject to the terms and conditions of the Merger Agreement, SL Bancorp was merged with CCI One Acquisition Corporation, a newly-formed wholly-owned subsidiary of the Funds (“CCI One”), with SL Bancorp being the surviving corporation (the “Merger”).  At the effective time of the Merger, each outstanding share of SL Bancorp common stock, other than any shares dissenting from the Merger, was converted into the right to receive $0.35 in cash or an aggregate of approximately $700,000 (the “Merger Consideration”).  In addition, immediately prior to the Merger, CCI One purchased from the United States Department of the Treasury the outstanding preferred stock and warrants issued by SL Bancorp in the Troubled Asset Relief Program for an aggregate purchase price of $2.8 million.  Also immediately following the Merger, SL Bank, the wholly-owned subsidiary of SL Bancorp, was merged with and into the Bank, the wholly-owned subsidiary of the Company, with the Bank being the surviving bank (the “Bank Merger”).  In connection with the Bank Merger, the Company assumed the payment obligations of SL Bancorp under an Indenture pursuant to which an aggregate of $5,155,000 in Junior Subordinated Debt Securities due July 7, 2036 (the “Debt Securities”) were issued by SL Bancorp.

The Bank Merger was undertaken to increase the Company’s market share in its primary market—San Luis Obispo County and northern Santa Barbara County.  The combined bank had approximately $450 million in assets and $410 million in deposits immediately following the Bank Merger and continues to operate under the Mission Community Bank name, with full-service branch offices in San Luis Obispo and Santa Barbara counties in the cities of San Luis Obispo, Paso Robles, Atascadero, Arroyo Grande and Santa Maria.  For the three months and nine months ended September 30, 2011, the Company incurred acquisition-related expenses totaling $176,000 and $430,000, respectively, which are included in professional fees in the consolidated statement of operations.  Complete financial and pro forma financial information is impractical to provide at the time these financial statements are being issued because the initial accounting for the acquisition is incomplete.

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

Forward-Looking Statements

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

Overview of Results of Operations and Financial Condition

· The Company incurred a net loss of $(1.249) million for the third quarter of 2011, as compared with a net loss of $(677) thousand for the third quarter of 2010.  For the nine-month period ended September 30, 2011, the net loss was $(2.690) million, as compared to a net loss of $(6.728) million for the comparable period in 2010.

· A $300 thousand provision for loan losses was recorded in the third quarter of 2011, a decrease of $50 thousand from the third quarter of 2010.  For the first nine months of 2011, a provision of $300 thousand was recognized, as compared with $5.800 million in the first nine months of 2010.

· Net interest income for the three-month period ended September 30, 2011, was $1.933 million, an increase of $210 thousand from the same period in 2010.  For the first nine months of 2011, net interest income was $5.565 million, up $276 thousand from the comparable 2010 period.  The increases in net interest income were primarily due to continued decreases in deposit rates as well as a $4.1 million decrease in the average balance of borrowed funds (a $4.8 million average decrease for the nine months).

· The net interest margin (net interest income as a percentage of average interest earning assets) increased by 13 basis points, to 3.61%, for the three-month period ended September 30, 2011, as compared to the same period in 2010.  For the nine months, net interest margin decreased by 27 basis points, to 3.47%.

· For the three months ended September 30, 2011, non-interest income increased by $139 thousand from the same period in 2010.  The nine-month results reflect a $606 thousand improvement in non-interest income.  The improvement was due gains on the disposition of loans held for sale and, for the nine-month period, to a reduction in losses on other real estate.

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· Non-interest expense increased by $970 thousand for the third quarter of 2011, as compared to the same quarter in 2010.  For the nine months, the increase in non-interest expense was $2.338 million.  Principal factors relating to the increase were salaries and benefits for newly hired officers, increased professional fees related to the Santa Lucia Bank acquisition ($176 thousand for the third quarter and $430 thousand for the nine months), and a $180 thousand provision for unfunded loan commitments in the third quarter of 2011.

· Total assets increased by $16.8 million (7.7 %) from December 31, 2010 to September 30, 2011.

· Non-performing assets decreased from $14.6 million as of December 31, 2010 to $8.7 million on September 30, 2011.

Income Summary

For the three months ended September 30, 2011, the Company incurred a net loss of $(1.249) million.  This compares with a net loss of $(677) thousand for the comparable period of 2010.  The increased quarterly net loss was the result of increased hiring since mid-year 2010 in preparation for planned growth, a $180 thousand increase in the provision for unfunded loan commitments, and $176 thousand in professional fees related to the Santa Lucia Bank acquisition.

For the nine-month period ended September 30, 2011, the net loss was $(2.690) million, as compared to a net loss of $(6.728) million for the comparable period in 2010.  The improvement in the nine month results was primarily attributable to a $5.5 million reduction in the loan loss provision, partially offset by increases in non-interest expense.

Loss on average assets (annualized) was (2.17)% for the third quarter of 2011, as compared with (1.29)% for the third quarter of 2010.  For the nine months, annualized loss on average assets was (1.61)%, as compared with (4.47)% for the same period in 2010.   Annualized loss on average equity was (12.86)% for the third quarter of 2011 as compared with (7.09)% for the comparable 2010 period.  Loss on equity for the first nine months was (9.34)% as compared with (31.41)% for the first half of 2010.

Net Interest Income

Net interest income is the largest source of the Bank’s operating income.  For the three-month period ended September 30, 2011, net interest income was $1.933 million, an increase of $210 thousand from the same period in 2010, primarily due to continued decreases in deposit rates as well as a $4.1 million decrease in the average balance of borrowed funds.  The beneficial impact of the reduction in interest expense was largely offset, however, as increased liquidity was invested in lower-earning investment securities rather than loans, due to weak loan demand.

The net interest margin (net interest income as a percentage of average interest earning assets) was 3.61% for the three-month period ended September 30, 2011, an increase of 13 basis points as compared to the same period in 2010.  Short-term interest rates have remained at the current very low level since 2009.  The initial drop placed severe pressure on our interest margin, but as rates stabilized higher-rate liabilities have rolled off or repriced downward, significantly reducing our interest cost.  Offsetting the beneficial impact of lower interest expense has been a

Page 26

reduction in interest income on loans, as demand for quality credits has significantly declined and the balance of non-accrual loans, though declining, has remained at a historically high level.

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, 2011 and 2010:

Consolidated Net Interest Analysis
(Dollars in thousands)
	For the Three Months Ended
	September 30, 2011							September 30, 2010
	Average				Average			Average					Average
	Balance		Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	112,778	$	1,785		6.02	% *	$	125,352		$	1,853		5.87	% *
Investment securities*		89,818		470		2.25	% *		50,228			344		2.72	% *
Other interest income		10,858		6		0.18	%		21,180			14		0.27	%
Total interest-earning assets / interest income		213,454		2,261		4.22	%		196,760			2,211		4.46	%
Non-interest-earning assets:
Allowance for loan losses		3,124							(3,612	)
Cash and due from banks		1,666							3,077
Premises and equipment		3,101							3,312
Other assets		7,141							8,704
Total assets	$	228,486						$	208,241
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	12,029	$	14		0.47	%	$	15,520		$	29		0.74	%
Savings and Money Market deposit accounts		57,606		72		0.53	%		37,760			84		0.89	%
Certificates of deposit		86,986		217		0.98	%		86,459			296		1.36	%
Total interest-bearing deposits		156,621		303		0.78	%		139,739			409		1.16	%
Other short-tems borrowings		-		-		-			1,106			14		4.91	%
Federal Home Loan Bank advances		22		-		-			3,000			37		4.89	%
Trust preferred securities		3,093		25		3.24	%		3,093			28		3.52	%
Total borrowed funds		3,115		25		3.24	%		7,199			79		4.31	%
Total interest-bearing liabilities / interest expense		159,736		328		0.83	%		146,938			488		1.32	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		28,880							21,839
Other liabilities		1,323							1,554
Total liabilities		189,939							170,331
Shareholders' equity		38,547							37,910
Total liabilities  and shareholders' equity	$	228,486						$	208,241
Net interest-rate spread						3.39	%							3.14	%
Impact of non-interest-bearing
sources and other changes in
balance sheet composition						0.22	%							0.34	%
Net interest income / margin on earning assets			$	1,933		3.61	% **				$	1,723		3.48	% **
*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Net loan fees (costs) included in loan interest income for the three-month periods ended September 30, 2011 and 2010, were $(17) thousand and $(19) thousand, respectively.
** Net interest income as a % of earning assets

Consolidated Net Interest Analysis
(Dollars in thousands)
	For the Nine Months Ended
	September 30, 2011								September 30, 2010
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	118,740		$	5,271		5.94	% *	$	130,740		$	5,841		5.97	% *
Investment securities*		82,725			1,350		2.18	% *		43,321			957		2.95	% *
Other interest income		12,733			22		0.23	%		15,017			31		0.28	%
Total interest-earning assets / interest income		214,198			6,643		4.15	%		189,078			6,829		4.83	%
Non-interest-earning assets:
Allowance for loan losses		(3,200	)							(4,501	)
Cash and due from banks		1,608								3,799
Premises and equipment		3,160								3,341
Other assets		7,696								9,510
Total assets	$	223,462							$	201,227
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	11,613		$	52		0.60	%	$	18,483		$	107		0.77	%
Savings and Money Market deposit accounts		54,714			253		0.62	%		36,025			242		0.90	%
Certificates of deposit		86,986			693		1.07	%		85,369			927		1.45	%
Total interest-bearing deposits		153,313			998		0.87	%		139,877			1,276		1.22	%
Other short-tems borrowings		127			4		4.75	%		413			15		5.02	%
Federal Home Loan Bank advances		7			-		0.11	%		4,571			171		4.99	%
Trust preferred securities		3,093			76		3.27	%		3,093			78		3.36	%
Total borrowed funds		3,227			80		3.32	%		8,077			264		4.36	%
Total interest-bearing liabilities / interest expense		156,540			1,078		0.92	%		147,954			1,540		1.39	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		27,090								22,914
Other liabilities		1,320								1,720
Total liabilities		184,950								172,588
Shareholders' equity		38,512								28,639
Total liabilities and shareholders' equity	$	223,462							$	201,227
Net interest-rate spread							3.23	%							3.44	%
Impact of non-interest-bearing
sources and other changes in
balance sheet composition							0.24	%							0.30	%
Net interest income / margin on earning assets				$	5,565		3.47	% **				$	5,289		3.74	% **
*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Net loan fees (costs) included in loan interest income for the nine-month periods ended September 30, 2011 and 2010, were $(1) thousand and $58 thousand, respectively.
** 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, together with changes in 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, 2011 and 2010.  Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.

Consolidated Rate / Volume Variance Analysis
(In thousands)	Three Months Ended September 30, 2011
	Compared to 2010
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(194	)	$	126		$	(68	)
Investment securities		222			(96	)		126
Other interest income		(5	)		(3	)		(8	)
Total increase (decrease) in interest income		23			27			50
Interest-bearing liabilities:
Transaction accounts		(5	)		(10	)		(15	)
Savings deposits		34			(46	)		(12	)
Certificates of deposit		2			(81	)		(79	)
Total interest-bearing deposits		31			(137	)		(106	)
Other short-term borrowings		(14	)		-			(14	)
FHLB advances		(19	)		(18	)		(37	)
Trust preferred securities		-			(3	)		(3	)
Total borrowed funds		(33	)		(21	)		(54	)
Total increase (decrease) in interest expense		(2	)		(158	)		(160	)
Increase (decrease) in net interest income	$	25		$	185		$	210

Consolidated Rate / Volume Variance Analysis
(In thousands)	Nine Months Ended September 30, 2011
	Compared to 2010
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(540	)	$	(30	)	$	(570	)
Investment securities		650			(257	)		393
Other interest income		(2	)		(7	)		(9	)
Total increase (decrease) in interest income		108			(294	)		(186	)
Interest-bearing liabilities:
Transaction accounts		(35	)		(20	)		(55	)
Savings deposits		95			(84	)		11
Certificates of deposit		17			(251	)		(234	)
Total interest-bearing deposits		77			(355	)		(278	)
Other short-term borrowings		(6	)		(5	)		(11	)
FHLB advances		(171	)		-			(171	)
Trust preferred securities		-			(2	)		(2	)
Total borrowed funds		(177	)		(7	)		(184	)
Total increase (decrease) in interest expense		(100	)		(362	)		(462	)
Increase (decrease) in net interest income	$	208		$	68		$	276

The tables above reflect the impact of lower rates paid on deposit accounts, the payoff of all remaining FHLB borrowings, the $13 million increase in average interest-bearing deposits over

Page 27

the past year ($17 million increase for the three-month periods), and a significant shift in the earning asset mix.  The overall rate decline on CD’s resulted from maturing CD’s repricing downward in the current low rate environment.

Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain at a very low level through the remainder of 2011 and the first quarter of 2012.  If so, we expect to see certificate of deposit rates continue to decline, although the pace of that decline has begun to slow.  With loan rates remaining relatively stable, this decrease in deposit rates should result in a slight improvement in our net interest margin.  In the early stage of the next cycle of rising interest rates we would expect to see deposits reprice slightly faster than loans, as “floors” (minimum rates) have been implemented on approximately 57% of the variable rate loan portfolio, or approximately $36 million in loans.  Many of those floor rates are currently higher than the rate would be without the imposition of the floor.  As a result, that portion of the variable rate loan portfolio will not generate a material increase in interest income until the prime rate increases by at least two percentage points from its current level.  The remaining 43% of variable rate loans will respond to rising rates much more quickly, however.  A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months.  Additional non-accrual loans would put downward pressure on the net interest margin.

Provision for Loan Losses

The Bank recorded a $300 thousand provision for loan losses for the three months and nine months ended September 30, 2011, as compared with a $5.800 million provision for the first nine months of 2010 and $350 thousand for the third quarter of 2010.

Loan charge-offs totaled $360 thousand (with $42 thousand in recoveries) for the third quarter of 2011, as compared with $516 thousand of charge-offs and $8 thousand of recoveries for the same period in 2010.  For the first nine months of 2011 loan charge-offs totaled $460 thousand (with $126 thousand of recoveries), as compared with $7.804 million of charge-offs and $40 thousand of recoveries in the first nine months of 2010.  The ratio of allowance for loan losses to total loans was 2.65% at September 30, 2011, as compared with 2.91% a year ago and 2.66% as of December 31, 2010.

The Bank makes provisions for loan losses when required to bring the total allowance for loan losses to a level deemed appropriate for the risk in the loan portfolio. The determination of the appropriate level for the allowance is based on such factors as historical loss experience, the volume and type of lending conducted, the amount of nonperforming loans, regulatory standards, general economic conditions, and other factors related to the collectability of loans in the portfolio.

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.

Page 28

Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including gains and servicing fees from the sale of loans and gains or losses on sales of securities and other real estate owned.  For the three-month period ended September 30, 2011, non-interest income was $440 thousand, an increase of $139 thousand from the same period in 2010.  For the first nine months of 2011, non-interest income increased $606 thousand—to $1.029 million—from the comparable period in 2010.

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
	2011			2010						$		%		2011			2010					$		%
Service charges on deposit accounts	$	114		$	101		$	13			13	%	$	312		$	275		$	37			13	%
Gain on sale of loans		31			126			(95	)		-75	%		172			307			(135	)		-44	%
Loan servicing fees, net of amortization		38			38			-			0	%		97			111			(14	)		-13	%
Gain on sale of available-for-sale securities		4			-			4		nm				4			58			(54	)		-93	%
Other real estate income		-			-			-		nm				38			-			38		nm
Net gains(losses) or writedowns of fixed assets or other real estate		(94	)		(4	)		(90	)	nm				(71	)		(454	)		383		nm
Gain on disposition of loans held for sale		209			-			209		nm				255			-			255		nm
Other income and fees		138			40			98			245	%		222			126			96			76	%
Total non-interest income	$	440		$	301		$	139			46	%	$	1,029		$	423		$	606			143	%
nm - not meaningful

The improvement in non-interest income was due to gains on the disposition of loans held for sale and, for the nine months, to reduced losses on other real estate owned, partially offset by reduced gains on sales of SBA loans.  No gains on sales of SBA loans were recognized in the first quarter of 2010 due to the 90-day limited recourse period (see Note 4 to the condensed consolidated financial statements).

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 $970 thousand, or 41%, for the three months ended September 30, 2011, as compared to the third quarter of 2010.  For the first nine months of 2011, non-interest expense increased by $2.338 million, or 35%, from the comparable period in 2010.

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
	2011		2010					$		%		2011		2010				$		%
Salaries and employee benefits	$	1,601	$	1,029	$	572			56	%	$	4,364	$	2,873	$	1,491			52	%
Occupancy expenses		341		318		23			7	%		993		933		60			6	%
Furniture and equipment		120		116		4			3	%		346		352		(6	)		-2	%
Data processing		276		187		89			48	%		739		551		188			34	%
Professional fees		369		183		186			102	%		902		501		401			80	%
Marketing and business development		47		34		13			38	%		140		104		36			35	%
Office supplies and expenses		66		59		7			12	%		192		177		15			8	%
Insurance and regulatory assessments		86		187		(101	)		-54	%		312		583		(271	)		-46	%
Loan and lease expenses		42		87		(45	)		-52	%		202		144		58			40	%
Other real estate expenses		15		19		(4	)		-21	%		113		58		55			95	%
Provision for unfunded loan commitments		180		-		180		nm				180		-		180		nm
Other		178		132		46			35	%		495		364		131			36	%
Total non-interest expense	$	3,321	$	2,351	$	970			41	%	$	8,978	$	6,640	$	2,338			35	%
nm = not meaningful

The increase in non-interest expense was principally from:

· An increase in salaries and benefits due to additional officers hired since mid-year 2010 in preparation for planned growth,

· Stock option compensation for recently-hired officers (an increase of only $3 thousand for the third quarter but a $53 thousand increase for the nine months),

· A $180 thousand provision for unfunded loan commitments recorded in the third quarter of 2011, due to two credit relationships that were downgraded during the quarter,

· Increased software and network management costs (included in data processing expenses in the table above),

· Expenses of operating additional other real estate, and

· Professional fees related to the Santa Lucia Bank acquisition, which totaled $176 thousand for the third quarter and $430 for the first nine months of 2011 (see Note 10 to the condensed consolidated financial statements).

These increased expenses were partially offset by a significant decrease in our FDIC insurance assessment (a $105 thousand decrease for the third quarter of 2011 vs. 2010, and a $277 thousand decrease for the first nine months of 2011 as compared to the comparable 2010 period).  The decrease in the assessment was due to improvement in the Bank’s deposit insurance risk category based on its most recent regulatory examination, and also to the change in the FDIC assessment formula as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Page 29

Income Taxes

Due to a limitation on the Company’s ability to recognize deferred tax assets, no federal income tax expense or benefit was recognized for the three- and nine-month periods ended September 30, 2011, although a minimum state franchise tax expense of $1 thousand for the third quarter and $6 thousand for the nine months was recorded.  For the first nine months of 2010, no federal or state income tax expense or benefit was recognized, due to the deferred tax asset limitation.

Balance Sheet Analysis

At September 30, 2011, consolidated assets totaled $234.6 million, as compared with $217.8 million at December 31, 2010, and $212.2 million at the end of 2010’s third quarter.  This represents an increase of $22.4 million (11%) over the past twelve months.  Total loans decreased $3.6 million (3%) over that period, while securities and cash equivalents increased $23.0 million (23%), deposits increased $23.0 million (23%), borrowed funds decreased $4.5 million (100%) and shareholders’ equity increased $0.8 million (2%).  The increases in securities, cash equivalents and shareholders’ equity were due to the growth in deposits, as well as the issuance of 748,672 shares of common stock in the fourth quarter of 2010, for net proceeds of $3.5 million.  The Company’s net losses over the past year offset a substantial portion of the increase in capital from the stock issuance.  See also the Capital 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, 2011						June 30, 2011						March 31, 2011						December 31, 2010						September 30, 2010
				$		%				$		%				$		%				$		%				$		%
Total Assets	$	9,378			4.2	%	$	7,650			3.5	%	$	(182	)		-0.1	%	$	5,596			2.6	%	$	3,423			1.6	%
Earning Assets		9,092			4.2	%		10,711			5.2	%		(1,384	)		-0.7	%		5,348			2.7	%		2,889			1.5	%
Loans		2,991			2.6	%		(1,516	)		-1.3	%		(2,474	)		-2.1	%		(2,638	)		-2.1	%		(3,033	)		-2.4	%
Deposits		9,266			5.1	%		7,622			4.4	%		1,418			0.8	%		7,619			4.6	%		4,495			2.8	%
Borrowings		-			-			-			-			(349	)		-100.0	%		(4,121	)		-92.2	%		328			7.9	%
Shareholders' Equity		(471	)		-1.2	%		105			0.3	%		(720	)		-1.8	%		1,891			5.1	%		(562	)		-1.5	%

Loans

The following table shows the composition of our loans by type of loan (including loans held for sale):

Loan Composition
(Dollars in thousands)
	September 30, 2011					December 31, 2010					September 30, 2010
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	10,817		9.1	%	$	8,972		7.4	%	$	8,752		7.1	%
Commercial real estate - owner-occupied		29,866		25.0	%		35,135		29.2	%		34,683		28.2	%
Commercial real estate - non-owner-occupied		35,454		29.7	%		32,240		26.8	%		33,358		27.2	%
Residential real estate		15,962		13.4	%		16,641		13.9	%		17,364		14.1	%
All other real estate loans		2,923		2.4	%		2,989		2.5	%		3,003		2.5	%
Commercial and industrial loans		16,641		14.0	%		17,701		14.7	%		19,728		16.1	%
Agricultural loans		3,531		3.0	%		1,022		0.9	%		403		0.3	%
Municipal loans		2,397		2.0	%		2,987		2.5	%		2,991		2.4	%
Leases, net of unearned income		708		0.6	%		1,047		0.9	%		1,110		0.9	%
Consumer loans		927		0.8	%		1,491		1.2	%		1,471		1.2	%
Total loans	$	119,226		100.0	%	$	120,225		100.0	%	$	122,863		100.0	%

The table shows a net decrease in loans outstanding over the past twelve months—primarily in real estate and commercial loans, partially offset by increases in construction and agricultural loans.  Of the total real estate and construction loans as of September 30, 2011, 73% are commercial real estate loans, and 43% of those are owner-occupied properties.

Asset Quality

Non-accrual loans (including loans held for sale) totaled $7.2 million at September 30, 2011, as compared to $12.0 million at December 31, 2010 and $8.9 million at September 30, 2010.

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 financial difficulties 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, 2011, December 31, 2010 and September 30, 2010:

Non-Performing Assets*
(in thousands)	September 30			December 31			September 30
	2011			2010			2010
Loans in nonaccrual status:
Nonaccrual loans held for investment	$	2,472		$	1,993		$	3,952
Nonaccrual loans held for sale**		4,731			10,011			4,968
Loans past due 90 days or more and accruing		-			-			-
Restructured loans in accruing status		-			8			108
Total nonperforming loans		7,203			12,012			9,028
Foreclosed real estate		1,489			2,572			1,915
Total nonperforming assets	$	8,692		$	14,584		$	10,943
Real estate held for possible future branch office		400			565			565
Total nonperforming loans and other real estate owned	$	9,092		$	15,149		$	11,508
Allowance for loan and lease losses allocated to impaired loans	$	112		$	9		$	114
Allowance for loan and lease losses allocated to loans held for sale**		-			-			-
Allowance for loan and lease losses allocated to all other loans		3,052			3,189			3,459
Total allowance for loan and lease losses	$	3,164		$	3,198		$	3,573
Asset quality ratios:
Non-performing assets to total assets		3.70	%		6.70	%		5.16	%
Excluding loans held for sale**		1.76	%		2.26	%		3.03	%
Non-performing loans to total loans		6.04	%		9.99	%		7.35	%
Excluding loans held for sale**		2.26	%		1.90	%		3.77	%
Allowance for loan and lease losses to total loans		2.65	%		2.66	%		2.91	%
Excluding loans held for sale**		2.90	%		3.04	%		3.32	%
Allowance for loan and lease losses to total non-performing loans		44	%		27	%		40	%
Excluding non-performing loans held for sale**		128	%		160	%		88	%
*  Table combines bank and non-bank subsidiaries
** Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank. Loans held for sale are carried at fair value.

For comparison, ratios in the table above are presented both with and without loans held for sale.  Although declining, the level of non-performing loans continues to be high by historical standards, due to the significant downturn in the economy and reduction in real estate collateral values over the past three years.  The $7.2 million of non-performing loans as of September 30, 2011, includes $837 thousand of SBA-guaranteed loans, which are supported by $666 thousand of SBA loan guarantees.  The remaining $6.4 million of non-performing loans are loans which management has determined to be impaired.  A determination of impairment is one of expected payment nonperformance, 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 in excess of amounts already charged off is estimated to be $112 thousand, and has been provided in the allowance for loan and lease losses.

Nonperforming assets (which are comprised of nonperforming loans and foreclosed real estate) at September 30, 2011 were $8.7 million, a decrease of $5.9 million from the $14.6 million balance at December 31, 2010.  Foreclosed real estate represents real property taken by the Bank

Page 30

from the borrower either through foreclosure or through a deed in lieu of foreclosure, and is carried at the lesser of cost or fair market value, less estimated selling costs.

The following table provides a summary of the change in the balance of other real estate owned for the nine months ended September 30, 2011:

Other Real Estate Owned
(dollars in thousands)	Nine Months Ended
	September 30, 2011
Balance of foreclosed real estate at beginning of year	$	2,572
Real estate held for possible future branch office		565
Total other real estate owned at beginning of year	$	3,137
Foreclosures during the period		1,286
Additional investments in other real estate		111
Sales of other real estate		(2,574	)
Writedowns on other real estate, net of gains on sale		(71	)
Balance of other real estate owned at end of period	$	1,889

Potential Problem Loans

At September 30, 2011, the Bank had approximately $9.8 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 borrower to comply with the repayment terms of the loan.  The $9.8 million of potential problem loans includes $334 thousand of SBA-guaranteed loans, which are supported by $260 thousand of SBA loan guarantees, and $6.4 million of the potential problem loans 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 rating system, appears to be manageable as of September 30, 2011, 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.

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Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) at September 30, 2011 totaled $3.2 million, a decrease of $34 thousand from December 31, 2010.  The ratio of ALLL to total loans at September 30, 2011, was 2.65%, as compared with 2.66% at December 31, 2010, and 2.91% at September 30, 2010.  At September 30, 2011 and 2010, the ratio of ALLL to total non-performing loans was 44% and 40%, respectively.

The following table provides an analysis of the changes in the ALLL for the three- and nine-month periods ended September 30, 2011 and 2010:

Allowance for Loan and Lease Losses
(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Balance at beginning of period	$	3,182		$	3,731		$	3,198		$	5,537
Provision for loan losses		300			350			300			5,800
Loans charged off		(360	)		(516	)		(460	)		(7,804	)
Recoveries of previous charge-offs		42			8			126			40
Net (charge-offs) recoveries		(318	)		(508	)		(334	)		(7,764	)
Balance at end of period	$	3,164		$	3,573		$	3,164		$	3,573
Allowance for loan losses as a percentage of:
Period end loans, including loan held for sale		2.65	%		2.91	%		2.65	%		2.91	%
Period end loans, excluding loans held for sale*		2.90	%		3.32	%		2.90	%		3.32	%
Total non-performing loans, including loans held for sale		44	%		40	%		44	%		40	%
Non-performing loans, excluding loans held for sale*		128	%		90	%		128	%		90	%
As a percentage of average loans (annualized):
Net charge-offs (recoveries)		1.07	%		1.61	%		0.38	%		7.94	%
Provision for loan losses		1.01	%		1.11	%		0.34	%		5.93	%
Total loans, including loans held for sale	$	119,226		$	122,863		$	119,226		$	122,863
Loans excluding loans held for sale		109,275			107,716			109,275			107,716
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank. Loans held for sale are carried at fair value.

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 collectability of loans in the portfolio.

Based on its quarterly review, management believes that the allowance for loan losses at September 30, 2011, 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.

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In addition, management has established a reserve for undisbursed loan commitments.  As of September 30, 2011 and December 31, 2010, this reserve totaled $285 thousand, and is included in other liabilities in the consolidated balance sheet.

Investments

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 (27%), fixed-rate mortgage-backed securities (29%), floating-rate mortgage-backed securities (35%), fixed-rate tax-exempt municipal securities (3%), and other fixed-rate securities (6%).  the Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages.  The weighted average life of the portfolio is 2.7 years, with a projected duration of 2.5 years.

Deposits

Deposits are the primary source of funding for lending and investing needs.  Total deposits were $191.5 million as of September 30, 2011, as compared with $173.2 million at December 31, 2010, and $165.6 million at September 30, 2010.

The Bank generally prices interest-bearing deposits at or above the median rate by classification based on periodic interest rate surveys in the local market.  Deposit rates are then adjusted, using a deposit pricing model, to balance the cost of funds, funding needs and other 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 2011 and 2010.

The Bank participates 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.  The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of more than 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, 2011, the Bank had issued $41.1 million of certificates of deposit to local customers through the CDARS program, as compared with $37.5 million as of September 30, 2010.

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Borrowings

In addition to the Company’s junior subordinated debt securities, the Bank has a secured borrowing facility through the Federal Home Loan Bank of San Francisco (“FHLB”).  As of September 30, 2011 and December 31, 2010, the Bank had no outstanding borrowings from the FHLB.

Other borrowings as of December 31, 2010 consisted of $349 thousand in proceeds from the sale of SBA-guaranteed loans that have been sold but are subject to a 90-day premium refund obligation.  The 90-day premium refund obligation period elapsed during the first quarter of 2011 and the transaction was then recorded as a sale, with the loans and the secured borrowings removed from the balance sheet and the resulting gain on sale recorded in the consolidated statement of operations.  In February 2011, the SBA eliminated the refund obligation period, so the Bank is not required to defer gain recognition for SBA loan sales after February 15, 2011.

Capital

Total shareholders’ equity has increased $805 thousand, or 2%, over the past twelve months.  The increase was due to the issuance of 748,672 shares of common stock in the second half of 2010, for net proceeds of $3.5 million.  The Company’s net losses over the past twelve months offset a substantial portion of the increase in capital from the stock issuance.

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, 2011, December 31, 2010, and September 30, 2010:

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, 2011:
Total Capital (to Risk-Weighted Assets)	$	25,479		20.28	%	$	12,565		10.0	%	$	10,052		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	23,885		19.01	%	$	7,539		6.0	%	$	5,026		4.0	%
Tier 1 Capital (to Average Assets)	$	23,885		11.07	%	$	10,793		5.0	%	$	8,634		4.0	%
As of December 31, 2010:
Total Capital (to Risk-Weighted Assets)	$	21,649		17.20	%	$	12,587		10.0	%	$	10,069		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,054		15.93	%	$	7,552		6.0	%	$	5,035		4.0	%
Tier 1 Capital (to Average Assets)	$	20,054		10.18	%	$	9,852		5.0	%	$	7,881		4.0	%
As of September 30, 2010:
Total Capital (to Risk-Weighted Assets)	$	20,998		16.75	%	$	12,538		10.0	%	$	10,031		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	19,405		15.48	%	$	7,523		6.0	%	$	5,015		4.0	%
Tier 1 Capital (to Average Assets)	$	19,405		10.21	%	$	9,500		5.0	%	$	7,600		4.0	%

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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 Company had $15.9 million in cash and cash equivalents on September 30, 2011, as compared with $10.8 million as of December 31, 2010, and $19.3 million on September 30, 2010.

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.  As of September 30, 2011, the Company’s loans-to-deposits ratio was 62%, as compared with 69% as of December 31, 2010, and 74% on September 30, 2010.  This ratio has been declining over the past several quarters, as demand for quality credits has been weak through the economic downturn, while deposits have grown during this period. A low loan-to-deposit ratio indicates that the Bank has liquidity in place to meet potential needs for loan funding or deposit withdrawals.  The Bank’s sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 50% as of September 30, 2011, as compared with 47% as of December 31, 2010, and 40% as of September 30, 2010.

One of the 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, 2011, the Bank had no outstanding borrowings from the FHLB.  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, 2011, up to $50.2 million could be borrowed from the FHLB if needed.  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 has adequate loans and securities to pledge as collateral should it need additional liquidity that cannot be funded by deposits.

The Bank also has the ability to access the Federal Reserve Board’s “Discount Window” for additional secured borrowing should the need arise.

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 sheets.

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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
	2011		2010		2010
Commitments to Extend Credit	$	20,547	$	19,832	$	20,864
Standby Letters of Credit		461		901		901
	$	21,008	$	20,733	$	21,765

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, 2011, and December 31, 2010, this reserve totaled $285 thousand and $105 thousand, respectively, and is included in other liabilities in the consolidated balance sheets.

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 investment 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 levels in order to maintain an appropriate equity to assets ratio.  Management believes that the impact of inflation on financial results depends on the Company’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance.  Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.

San Luis Obispo and Santa Barbara Counties continue to have unemployment rates (9.3% and 8.6%, respectively, as of September 2011), that are significantly below the California statewide seasonally-adjusted rate of 11.9%, although San Luis Obispo remains slightly above the nationwide seasonally-adjusted rate of 9.1%.  San Luis Obispo County’s rate is down from a high of 10.6% early in 2010, while Santa Barbara County’s rate peaked at 10.1%.  As unemployment increased during the “Great Recession,” real estate values declined significantly and, after several years of strong appreciation, residential and commercial sale activity—and especially construction activity—slowed dramatically.  There can be no assurance that the local economy will rebound quickly or that real estate values will return to pre-2006 levels in the near term.  As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.

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Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits 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 the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011.  Based on the evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.    (Reserved)

Item 5.    Other Information

None.

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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	Certificate of Amendment to Articles of Incorporation (Y)
3.4	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 CapitaHl Trust I (E)
4.10	Certificate of Determination for Series D Preferred Stock (R)
4.11	Form of Common Stock Purchase Warrant (Z)
4.12	Form of Warrant Agreement for warrants issued pursuant to subscription rights (AA)
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	Intentionally omitted
10.13	Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J)
Exhibit #
10.14	Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J)
10.15	Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K)
10.16	Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M)
10.17	Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N)
10.18	Lease Agreement – 1670 South Broadway, Santa Maria (O)
10.19	Mission Community Bancorp 2008 Stock Incentive Plan (P)
10.20	Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q)
10.21	Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q)
10.22	Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q)
10.23	Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which includes the Securities Purchase Agreement—Standard Terms attached thereto, with respect to the issuance and sale of the Series D Preferred Stock (R)
10.24	Side Letter Agreement dated January 9, 2009 amending the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R)
10.25	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R)
10.26	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R)
10.27	Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (U)
10.28	Form of Warrant to be issued in connection with the Securities Purchase Agreement (U)
10.29	Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (V)
10.30	Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (W)
10.31	Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (X)
10.32	Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (Y)
10.33	Agreement and Plan of Merger dated as of June 24, 2011 by and among Carpenter Fund Manager GP, LLC; Mission Community Bancorp; Mission Community Bank; Santa Lucia Bancorp and Santa Lucia Bank (BB)
10.34	2011 Equity Incentive Plan (CC)
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
101	Interactive Data Files
(A) Included in the Company’s Form 8-K filed on December 18, 2000, and incorporated by reference herein. (B) Included in the Company’s Form 10-KSB filed on April 2, 2001, and incorporated by reference herein. (C) Included in the Company’s Form 10-QSB filed August 12, 2002, and incorporated by reference herein. (D) Included in the Company’s Form 10-QSB filed on November 12, 2002, and incorporated by reference herein. (E) Included in the Company’s Form 8-K filed on October 21, 2003, and incorporated by reference herein. (F) Included in the Company’s Form 10-QSB filed on August 10, 2004, and incorporated by reference herein. (G) Included in the Company’s Form 8-K filed on January 19, 2005, and incorporated by reference herein. (H) Intentionally omitted (I) Included in the Company’s Form 10-QSB filed on August 14, 2006, and incorporated by reference herein. (J) Included in the Company’s Form 8-K filed on June 13, 2007, and incorporated by reference herein. (K) Included in the Form SB-2 Registration Statement of the Company filed on June 13, 2007, and incorporated by reference herein. (L) Included in Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement of the Company filed on July 24, 2007, and incorporated by reference herein. (M) Included in the Company’s Form 8-K filed on August 14, 2007, and incorporated by reference herein. (N) Included in the Company’s Form 8-K filed on October 23, 2007, and incorporated by reference herein. (O) Included in the Company’s Form 10-KSB filed on March 28, 2008, and incorporated by reference herein. (P) Included in the Company’s Form 10-Q filed on May 15, 2008, and incorporated by reference herein. (Q)Included in the Company’s Form 8-K filed on December 30, 2008, and incorporated by reference herein. (R)Included in the Company’s Form 8-K filed on January 14, 2009, and incorporated by reference herein. (S)Included in the Company’s Form 10-Q filed on August 14, 2009, and incorporated by reference herein. (T)Included in the Company’s Form 10-K filed on March 16, 2009, and incorporated by reference herein. (U)Included in the Company’s From 8-K filed on December 24, 2009, and incorporated by reference herein. (V)Included in the Company’s Form 8-K filed on March 22, 2010, and incorporated by reference herein. (W)Included in the Company’s Form 8-K filed on March 26, 2010, and incorporated by reference herein. (X)Included in the Company’s Form 8-K filed on June 1, 2010, and incorporated by reference herein. (Y)Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein. (Z)Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010, and incorporated by reference herein. (AA)Included in Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on October 1, 2010, and incorporated by reference herein. (BB)Included in the Company’s Form 8-K filed on June 27, 2011, and incorporated by reference herein. (CC)Included in the Company’s Form 8-K filed on September 30, 2011, and incorporated by reference herein.

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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/ James W. Lokey

JAMES W. LOKEY

Chairman and Chief Executive Officer

Dated:  November 10, 2011

By:  /s/ Mark R. Ruh

MARK R. RUH

Executive Vice President and Chief Financial Officer

Dated:  November 10, 2011

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