8-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 8-K/A

AMENDMENT No. 1

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) October 21, 2011

MISSION COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

California	__333-12892____	77-0559736
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(I.R.S. Employee Identification No.)

3380 South Higuera Street, San Luis Obispo, CA 93401

(Address of principal executive offices)

(Zip code)

(805) 782-5000

(Registrant’s telephone number including area code)

(Former name or former address, if changed since last report) Not applicable

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

        Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

        Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

        Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act(17 CFR 240.14d-2(b))

        Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act(17 CFR 240.13e-4(c))

EXPLANATORY NOTE

This Amendment No. 1 amends the Current Report on Form 8-K of Mission Community Bancorp (the "Company") dated October 21, 2011, reporting under Items 1.01, 2.01, 2.03, 3.02 and 9.01, that reported the completion of two mergers under the Agreement and Plan of Merger dated June 24, 2011, and certain related transactions.  This Amendment provides the financial statements and pro forma financial information referenced in item 9.01(a) and (b).

Item 9.01 Financial Statements and Exhibits

(a) Financial Statements of Business Acquired.

Financial statements of Santa Lucia Bancorp are filed herewith as Exhibits 99.1 and 99.2.

(b) Pro Forma Financial Information

Pro forma financial information reflecting the effect of the Merger is filed herewith as Exhibit 99.3.

(c) Exhibits

Exhibit No.	Description
23.1	Consent of Vavrinek, Trine, Day & Co., LLP
99.1	Audited financial statements for Santa Lucia Bancorp and Subsidiary as of and for the years ended December 31, 2010 and 2009
99.2	Unaudited financial statements for Santa Lucia Bancorp and Subsidiary as of September 30, 2011 and for the three months and nine months then ended
99.3	Unaudited pro forma condensed consolidated financial information as of September 30, 2011, for the nine months then ended, and for the twelve months ended December 31, 2010.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:  January 5, 2012                                                                           MISSION COMMUNITY BANCORP

By: /s/ Mark R. Ruh______________

Mark R. Ruh

Executive Vice President

and Chief Financial Officer

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation in this Current Report on Form 8-K filed with the Securities and Exchange Commission of our report dated March 2, 2011, with respect to the consolidated balance sheets of Santa Lucia Bancorp and Subsidiary as of December 31, 2010 and 2009, the related consolidated statements of earnings, shareholders’ equity, and cash flows for the years then ended December 31, 2010.

/s/  Vavrinek, Trine, Day & Co., LLP

Laguna Hills, California

January 5, 2012

EX-99.1

 Exhibit 99.1

SANTA LUCIA BANCORP AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

WITH

INDEPENDENT AUDITOR’S REPORT

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM1

FINANCIAL STATEMENTS

   Balance Sheets  2

   Statements of Earnings                                                                                                     3

   Statements of Shareholders’ Equity  4

   Statement of Cash Flows  5

   Notes to Financial Statements  6 through 31

      REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Santa Lucia Bancorp and Subsidiary

We have audited the consolidated balance sheets of Santa Lucia Bancorp and Subsidiary (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of earnings, cash flows and shareholders’ equity for the three years ended December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Santa Lucia Bancorp and Subsidiary as of December 31, 2010 and 2009, and the results of its operations and cash flows for the three years ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note R to the financial statements, the Company consented to the issuance of a Written Agreement by its federal regulator on December 23, 2010.  The Agreement places significant requirements on the Company.  Failure to comply with the terms of the Agreement may result in additional enforcement action against the Company.

Laguna Hills, California

March 2, 2011

SANTA LUCIA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

	(in thousands)
ASSETS	2010			2009
(in thousands)
Cash and due from banks	$	4,920		$	6,588
Federal funds sold/EBA Balance at FRB		15,499			2,500
TOTAL CASH AND CASH EQUIVALENTS		20,419			9,088
Securities available for sale		32,542			40,990
Loans, net		176,750			198,099
Premises and equipment, net		7,735			8,223
Deferred income tax assets		273			1,429
Cash surrender value of life insurance		4,566			5,391
Federal Reserve and Federal Home Loan Bank stock, at cost		1,531			1,643
Other Real Estate Owned		2,123			428
Accrued interest and other assets		3,862			4,632
TOTAL ASSETS	$	249,801		$	269,923
LIABILITIES & SHAREHOLDER EQUITY
Deposits
Noninterest-bearing demand	$	68,328		$	69,851
Interest-bearing demand and NOW accounts		13,089			14,215
Money market		41,758			37,396
Savings		28,112			27,478
Time certificates of deposit of $100,000 or more		51,195			52,146
Other time certificates of deposit		31,385			37,637
TOTAL DEPOSITS		233,867			238,723
Long-term borrowings		5,155			6,154
Accrued interest and other liabilities		3,234			2,016
TOTAL LIABILITIES		242,256			246,893
Commitments and contingencies (Note N)		-			-
Shareholders' equity
Preferred Stock - Series A		3,879			3,839
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding: 2,003,131 shares at December 31,
2010 and 1,961,334 shares at December 31, 2009		10,665			10,349
Additional paid-in capital		956			814
(Accumulated Deficit)Retained earnings		(7,613	)		7,698
Accumulated other comprehensive income-net unrealized
(loss)/gain on available-for-sale securities, net of taxes
of $-0- in 2010 and $231 in 2009		(342	)		330
TOTAL SHAREHOLDERS' EQUITY		7,545			23,030
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	249,801		$	269,923
See Accompanying Notes

SANTA LUCIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31, 2010, 2009, and 2008

	(in thousands, except per share data)
	2010			2009			2008
Interest income
Interest and fees on loans	$	11,456		$	12,355		$	12,994
Federal funds sold		14			5			24
Investment securities - taxable		998			1,319			2,052
Investment securities - nontaxable		119			172			206
		12,587			13,851			15,276
Interest expense
Time certificates of deposit of $100,000 or more		893			1,139			1,411
Other deposits		1,266			1,613			1,864
Long-term debt and other borrowings		132			269			602
		2,291			3,021			3,877
Net interest income		10,296			10,830			11,399
Provision for loan losses		15,198			5,460			975
Net interest income after
provision for loan losses		(4,902	)		5,370			10,424
Noninterest income
Service charges and fees		479			517			554
Dividends on cash surrender value of life insurance		236			240			230
Gain on sale of investment securities		588			225			108
Other income		307			254			219
		1,610			1,236			1,111
Noninterest expense
Salaries and employee benefits		5,176			5,359			5,650
Occupancy		647			663			652
Equipment		574			633			669
Professional services		823			638			601
Data processing		483			520			505
Office expenses		420			413			392
Marketing		377			402			428
Regulatory assessments		717			511			168
Directors' fees and expenses		354			351			327
Messenger and courier expenses		91			95			123
OREO Related Expense		589			-			-
Other		404			280			248
		10,655			9,865			9,763
(Losses)/Income  before income taxes		(13,947	)		(3,259	)		1,772
Income tax, expense(benefit)		807			(1,434	)		(633	)
Net (losses)/income	$	(14,754	)	$	(1,825	)	$	1,139
Dividends and Accretion on Preferred Stock	$	240		$	240		$	-
Net (losses)/income Applicable to Common Shareholders	$	(14,994	)	$	(2,065	)	$	1,139
Per share data:
Net (loss)/income per common share - basic	$	(7.49	)	$	(1.05	)	$	0.59
Net (loss)/income per common share - diluted	$	(7.49	)	$	(1.05	)	$	0.58
See Accompanying Notes

SANTA LUCIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Years Ended December 31, 2010, 2009, and 2008

	(in thousands)
													Retained			Accumulated
						Common Stock					Additional		Earnings			Other
	Comprehensive			Preferred Stock		Shares					Paid-in		(Accumulated			Comprehensive
	Income					Outstanding			Amount		Capital		Deficit)			Income
Balance at January 1, 2008							1,924,873		$	9,851	$	358	$	10,783		$	197
Cash dividends - $0.50  per share														(963	)
Exercise of stock options,
including the realization of tax
benefits of $19,000							4,360			43		19		(28	)
Repurchase and retirement of stock							(6,180	)						(147	)
Cumulative - effect adjustment of
change in accounting for split-dollar
life insurance arrangements														(102	)
Preferred Stock - Series A					3,799							151
Stock Option Compensation Expense												149
Comprehensive Income:
Net income	$	1,139												1,139
Change in unrealized gain
on available-for-sale securities,
net of taxes of $256		365															365
Less reclassification adjustment
for gains included in net income,
deferred of tax of $44		(64	)														(64	)
Total Comprehensive Income	$	1,440
Balance at December 31, 2008				$	3,799		1,923,053		$	9,894	$	677	$	10,682		$	498
Dividends Preferrred Stock														(181	)
Cash dividends - $0.25  per share														(481	)
Stock Dividend - 2%							38,281			455				(455	)
Cash in lieu for fractional shares														(2	)
Accretion on Preferred Stock					40									(40	)
Stock Option Compensation Expense												136
Comprehensive Income:
Net loss	$	(1,825	)											(1,825	)
Change in unrealized gain
on available-for-sale securities,
net of taxes of $211		(300	)														(300	)
Less reclassification adjustment
for gains included in net income,
deferred of tax of ($93)		132															132
Refund TARP expenses												1
Total Comprehensive Income	$	(1,993	)
Balance at December 31, 2009				$	3,839		1,961,334		$	10,349	$	814	$	7,698		$	330
Dividend Preferred Stock														(200	)
Stock Dividend - 2%							39,096			294				(294	)
Cash in lieu for fractional shares														(1	)
Accretion on Preferred Stock					40									(40	)
Exercise of Stock Options							2,701			22				(22	)
Stock Option Compensation Expense												142
Comprehensive Income:
Net loss	$	(14,754	)											(14,754	)
Change in unrealized gain
on available-for-sale securities,
net of taxes of $0		(1,260	)														(1,260	)
Less reclassification adjustment
for gains included in net income,
deferred of tax of $0		588															588
Total Comprehensive Income	$	(15,426	)
Balance at December 31, 2010				$	3,879		2,003,131		$	10,665	$	956	$	(7,613	)	$	(342	)
See Accompanying Notes

SANTA LUCIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2010, 2009, and 2008

	(in thousands)
	2010			2009			2008
Cash flows from operating activities:
Net earnings (losses)	$	(14,754	)	$	(1,825	)	$	1,139
Adjustments to reconcile net earnings (losses) to net cash
provided (used) by operating activities:
Depreciation and amortization		540			598			643
Provision for loan losses		15,198			5,460			975
Gain on sale of investment securities		(588	)		(225	)		(108	)
Deferred income taxes		1,660			(337	)		(371	)
Dividends on cash value of life insurance		236			(240	)		(230	)
Other items, net		2,224			(2,414	)		789
Net cash  provided by operating activities		4,516			1,017			2,837
Cash flows from investing activities:
Proceeds from principal reductions and maturities
of investment securities		18,829			16,678			12,617
Proceeds from sale of investment securities		19,810			5,176			5,513
Purchases of investment securities		(30,590	)		(24,427	)		-
(Purchase)/Sale of Federal Reserve Bank and FHLB stock		112			(126	)		-
Net change in loans		3,086			(17,818	)		(20,987	)
Purchases of bank premises and equipment		(52	)		(198	)		(399	)
Proceeds on sale of OREO		1,088			-			-
Proceeds for sale of Life Insurance		589			490			-
Net cash provided(used) in investing activities		12,872			(20,225	)		(3,256	)
Cash flows from financing activities:
Net change in deposits		(4,856	)		26,407			(402	)
Proceeds and tax benefit from exercise of stock options		-			-			34
Proceeds from Issuance of Preferred Stock, Net		-			-			3,950
Stock repurchases		-			-			(147	)
Net (repayments) proceeds from borrowings		(1,000	)		(5,667	)		(1,233	)
Dividends paid on Preferred Stock		(200	)		(181	)		-
Cash dividends paid Common Stock		(1	)		(483	)		(962	)
Net cash (used) provided by financing activities		(6,057	)		20,076			1,240
Increase (Decrease) in cash and cash equivalents		11,331			868			821
Cash and cash equivalents at beginning of year		9,088			8,220			7,399
Cash and cash equivalents at end of year	$	20,419		$	9,088		$	8,220
Supplemental disclosure of cash flow information:
Interest paid	$	2,288		$	3,170		$	3,926
Income taxes paid	$	-		$	265		$	1,130
Cashless exercise of stock options	$	22		$	-		$	28
Transfer of Loans to Other Real Estate Owned	$	3,066		$	892		$	-
See Accompanying Notes

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Santa Lucia Bank (the “Bank”), collectively referred to herein as the “Company.”  All significant intercompany transactions have been eliminated.

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the Unites States of America and prevailing practices within the banking industry.  A summary of the significant accounting policies consistently applied in preparation of the accompanying financial statements follows:

Nature of Operations

The Company has been organized as a single operating segment and maintains four branches in the San Luis Obispo and northern Santa Barbara Counties of California.  The Company’s primary source of revenue is interest income from loans to customers. The Company’s customers are predominantly small and middle-market businesses and individuals.

The Company has no significant business activities other than its investment in the Bank and its investment and related borrowings from the Capital Trust as discussed in Note H. Accordingly, no separate financial information on the Bancorp is provided.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purposes of reporting cash flows, cash and cash equivalents includes cash, noninterest-earning deposits and federal funds sold.  Generally, federal funds are sold for one day periods.

Cash and Due From Banks

Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank.  The Bank was in compliance with the reserve requirements as of December 31, 2010 and 2009.

The Company periodically maintains amounts due from banks that exceed federally insured limits.  The Company has not experienced any losses in such accounts.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Investment Securities

Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

Investments not classified as trading securities nor as held-to-maturity securities are classified as available-for-sale securities and recorded at fair value.  Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders’ equity.  Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method.  Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows; OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.  For equity securities, the entire amount of impairment is recognized through earnings.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.

Allowance for Loan Losses

The determination of the balance in the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount which, in management’s judgment, is adequate to provide for potential credit losses after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience and such other factors as deserve current recognition in estimating credit losses.  The provision for loan losses is charged to expenses.

The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The allowance consists of specific and general reserves.  Specific reserves relate to loans that are individually classified as impaired.  A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are generally considered troubled debt restructurings and classified as impaired.

Commercial and real estate loans are individually evaluated for impairment.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.  For troubled debt restructurings that subsequently default, the Bank determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

Portfolio segments identified by the Bank include construction and land development, commercial real estate, commercial and industrial and consumer loans.  Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and credit scores, debt-to income, collateral type and loan-to-value ratios for consumer loans.

Interest and Fees on Loans

Interest income is accrued daily as earned on all loans. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.  The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability.  When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.  Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible.  Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Premises and Equipment

Land is carried at cost.  Premises and equipment are carried at cost less accumulated depreciation and amortization.  Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and forty years for buildings.  Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Company Owned Life Insurance

Company owned life insurance is recorded at the amount that can be realized under insurance contracts at the date of the statement of financial condition, which is the cash surrender value adjusted for other charges or the amounts due that are probable at settlement.

Other Real Estate Owned

Other real estate owned represents real estate acquired through foreclosure and is carried at the lower of the recorded investment in the property or its fair value.  Prior to foreclosure, the value of the underlying loan is written down to the fair market value of the real estate to be acquired by a charge to the allowance for credit losses, if necessary.  Any subsequent write-downs are charged against operating expenses.  Operating expenses of such properties, net of related income, are included in other expenses.

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock

The Bank is a member of the FHLB and the FRB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts.  FHLB and FRB stock are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income.

Income Taxes

Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements.  A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized.  Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods.

The Company has adopted guidance issued by the Financial Accounting Standards Board that clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Advertising Costs

The Company expenses the costs of advertising in the period incurred.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Comprehensive Income

Changes in unrealized gain or loss on available-for-sale securities net of income taxes is the only component of accumulated other comprehensive income for the Company.

Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note N.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Earnings Per Common Share (“EPS”)

Basic earnings per common share (“EPS”) are based on the weighted average number of common shares outstanding before any dilution from common stock equivalents.  Diluted earnings per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All outstanding stock options were not considered in computing diluted earnings per share for 2010 because they were anti-dilutive.

Stock-Based Compensation

The Company has two stock option plans, which are fully described in Note K. The Company recognizes the cost of employee services received in exchange for awards of stock options or other equity instruments, based on the grant-date fair value of those awards. The cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period.

Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value.

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a Bank’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

See note P for more information and disclosures relating to the Bank’s fair value measurement.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Reclassifications

Certain reclassifications have been made in the 2009 and 2008 financial statements to conform to the presentation used in 2010.  These reclassifications had no impact on the Company’s previously reported financial statements.

Adoption of New Accounting Standards

In June 2009, accounting standards were amended to clarify when a transferor has surrendered control over transferred financial assets and thus is entitled to account for the transfer as a sale.  The amendments establish specific conditions for accounting for the transfer of a financial asset, or a portion of a financial asset, as a sale. This guidance was effective for transfers occurring on or after January 1, 2010 and impacted when a loan participation or SBA loan sale could be accounted for as a sale and the related transferred asset derecognized by the Bank.  Adoption of the standard by the Bank in 2010 did not have a material impact on its balance sheet or statement of operations other than a three month delay in the recognition of the sale and related gain on SBA loan sales due to the existence of recourse provisions commonly found in SBA loan sale agreements.

In July 2010, accounting standards were amended to require significantly more information about the credit quality of the Bank’s loan portfolio.  Although this statement addresses only disclosure and does not seek to change recognition or measurement, the disclosure represents a meaningful change in practice.  New period-end related disclosures are reflected in these financial statements while new activity related disclosures will be effective in 2011.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE B - INVESTMENT SECURITIES

The amortized cost, carrying value and estimated fair values of investment securities available for sale as of December 31, 2010 and December 31, 2009 are as follows:

	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		losses			fair value
December 31, 2010
U.S. government and
agency securities	$	10,212	$	28	$	(198	)	$	10,042
States and political
subdivisions		1,818		9		(28	)		1,799
SBA Cert of Participation		7,793		-		(177	)		7,616
Mortgage-backed securities		13,062		103		(80	)		13,085
	$	32,885	$	140	$	(483	)	$	32,542
December 31, 2009
U.S. government and
agency securities	$	21,825	$	217	$	(9	)	$	22,033
States and political
subdivisions		3,714		95		(5	)		3,804
Mortgage-backed securities		14,891		295		(33	)		15,153
	$	40,430	$	607	$	(47	)	$	40,990

The carrying value of investment securities pledged to secure public funds, borrowings and for other purposes as required or permitted by law amounts to approximately $29.6 million and $12.6 million at December 31, 2010 and 2009, respectively. During 2010 the Bank had proceeds from the sale of $19.8 million in various securities and gross gains of $588 during 2010 compared to $5.1 million in proceeds in 2009 with $225 in gross gains for the period ending 2009.

The amortized cost and estimated fair value of debt securities at December 31, 2010, by contractual maturity, are shown below.  Mortgage-backed securities are classified in accordance with their estimated lives.  Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations.

	Amortized		Estimated
	cost		fair value
Securities available for sale:
Due in one year or less	$	524	$	534
Due after one year through five years		6,945		6,961
Due after five years through ten years		882		867
Due after ten years		24,534		24,180
	$	32,885	$	32,542

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE B - INVESTMENT SECURITIES – Continued

The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over twelve months at December 31, 2010 and 2009 are as follows:

	Less than twelve months					Over twelve months								Total
	Unrealized			Estimated		Unrealized			Estimated		Unrealized				Estimated
	loss			fair value		loss			fair value		loss				fair value
December 31, 2010
U.S. government and
agency securities	$	(198	)	$	7,999	$	-		$	-	$	(198	)		$	7,999
States and political
subdivisions		(28	)		1,020		-			-		(28	)			1,020
SBA Certificates of
Participation		(177	)		7,616		-			-		(177	)			7,616
Mortgage-backed
securities		(81	)		6,863		-			-		(81	)			6,863
	$	(484	)	$	23,498	$	-		$	-	$	(484	)		$	23,498
December 31, 2009
U.S. government and
agency securities	$	(9	)	$	3,995	$	-		$	-	$	(9	)		$	3,995
States and political
subdivisions		-			-		(5	)		291		(5	)			291
Mortgage-backed
securities		(32	)		3,038		(1	)		198		(33	)			3,236
	$	(41	)	$	7,033	$	(6	)	$	489	$	(47	)		$	7,522

At December 31, 2010, the Company has fifteen investment securities where estimated fair market value was 2.02% less than amortized cost.  Unrealized losses on these securities have not been recognized into income because the issuer bonds are of high credit quality (rated AAA), management does not intend to sell and it is not likely that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates.  The fair value is expected to recover as the bonds approach maturity.

NOTE C - LOANS

The Bank’s loan portfolio consists primarily of loans to borrowers within San Luis Obispo and northern Santa Barbara Counties, California.  Although the Bank 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 Bank’s market areas.  As a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in those industries.

Prior to December 31, 2010 the Bank had certain loans pledged under a blanket lien agreement to secure a borrowing arrangement with the Federal Home Loan Bank (FHLB) discussed in Note G. On December 20, 2010, the Bank was advised by the FHLB that due to the Bank’s financial condition, the blanket lien method for loan collateral would no longer be available and the Bank would need to “deliver” collateral. Subsequent to December 31, 2010, the Bank has delivered loan collateral in the amount of approximately $41.8 million with a borrowing capacity of approximately $16.1 million.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE C – LOANS - Continued

The composition of the loan portfolio at December 31, 2010 and 2009 is as follows:

	2010			2009
Real Estate - construction	$	38,143		$	47,458
Real Estate - other		114,332			111,183
Commercial		34,232			41,744
Consumer		1,663			1,783
		188,370			202,168
Deferred loan fees		(621	)		(683	)
Allowance for loan losses		(10,999	)		(3,386	)
	$	176,750		$	198,099

The allowance for loan losses is increased by the provision to income and decreased by net charge-offs.  Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

Transactions in the allowance for loan losses are summarized as follows:

	2010			2009			2008
Balance at beginning of year	$	3,386		$	2,310		$	1,674
Provision charged to expense		15,198			5,460			975
Loans charged off		(7,792	)		(4,386	)		(352	)
Recoveries on loans previously charged off		207			2			13
Balance at end of year	$	10,999		$	3,386		$	2,310

The following is a summary of the investment in impaired loans, the related allowance for loan losses, income recognized and information pertaining to nonaccrual and past due loans as of December 31, 2010, 2009 and 2008:

	2010		2009		2008
Recorded investment in impaired loans	$	25,006	$	10,175	$	1,614
Related allowance for loan losses	$	2,836	$	472	$	394
Average recorded investment in impaired loans	$	25,150	$	4,832	$	1,528
Interest income recognized for cash payments	$	-	$	206	$	-
Total nonaccrual loans	$	23,945	$	6,407	$	1,614
Total loans past-due ninety days or more and still accruing	$	-	$	-	$	-

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE C – LOANS - Continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by impairment method as of December 31, 2010:

	Evaluated for Impairment
Allowance for Loan Losses	Individually		Collectively		Total
Construction and Land Development	$	2,585	$	1,252	$	3,837
Commercial Real Estate		228		2,692		2,920
Commercial and Industrial		23		4,141		4,164
Consumer		-		78		78
	$	2,836	$	8,163	$	10,999
	Evaluated for Impairment
Loans	Individually		Collectively		Total
Construction and Land Development	$	15,537	$	22,606	$	38,143
Commercial Real Estate		6,496		107,836		114,332
Commercial and Industrial		2,873		31,359		34,232
Consumer		100		1,563		1,663
	$	25,006	$	163,364	$	188,370

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans.  This analysis is performed on an ongoing basis as new information is obtained.  The Company uses the following definitions for risk ratings:

Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Impaired – A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions above and smaller, homogeneous loans not assessed on an individual basis.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE C – LOANS - Continued

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of December 31, 2010:

	Pass		Special Mention		Sub-standard		Impaired		Total
December 31, 2010
Real Estate:
Construction and Land Development	$	15,276	$	4,143	$	3,187	$	15,537	$	38,143
1-4 Family Residential		8,216		-		-		1,383		9,599
Multifamily Residential		2,783		-		-		-		2,783
Commercial real Estate and Other		88,731		6,569		1,537		5,113		101,950
Commercial and Industrial		30,200		174		985		2,873		34,232
Consumer and Other		1,541		-		22		100		1,663
	$	146,747	$	10,886	$	5,731	$	25,006	$	188,370

Past due and nonaccrual loans were as follows as of December 31, 2010:

	Still Accruing
	30-89 Days Past Due		Over 90 Days Past Due		Non-Accrual
December 31, 2010
Real Estate:
Construction and Land Development	$	606	$	-		14,912
1-4 Family Residential		-		-		1,383
Multifamily Residential		-		-		-
Commercial real Estate and Other		-		-		5,113
Commercial and Industrial		-		-		2,437
Consumer and Other		-		-		100
	$	606	$	-	$	23,945

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE C – LOANS - Continued

Individually impaired loans were as follows as of December 31, 2010:

	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
December 31, 2010
With no Related Allowance Recorded
Real Estate:
Construction and Land Development	$	13,930	$	11,721	$	-	$	11,540	$	45
1-4 Family Residential		2,269		1,383		-		2,795		-
Multifamily Residential		-		-		-		-		-
Commercial Real Estate and Other		4,704		4,657		-		4,753		-
Commercial and Industrial		3,361		2,465		-		4,041		20
Consumer		100		100		-		25		-
With an Allowance Recorded
Real Estate:
Construction and Land Development		3,816		3,816		2,585		2,897		-
1-4 Family Residential		-		-		-		-		-
Multifamily Residential		-		-		-		-		-
Commercial Real Estate and Other		455		455		228		228		-
Commercial and Industrial		409		409		23		216		-
Consumer		-		-		-		-		-
	$	29,044	$	25,006	$	2,836	$	26,495	$	65

The Bank has allocated $2.8 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010.  The Bank has not committed to lend additional amounts  as of December 31, 2010 to customers with outstanding loans that are classified as troubled debt restructurings.

NOTE D - RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to certain executive officers, directors and the businesses with which they are associated.  All such loans and commitments to lend were made under terms which are consistent with the Bank’s normal lending policies.

The following is an analysis of the activity of all such loans:

	2010			2009
Beginning balance	$	5,081		$	5,197
Credits granted, including renewals		1,171			1,180
Repayments		(3,845	)		(1,296	)
	$	2,407		$	5,081

In regard to related party transactions there are undisbursed loans amount of approximately $565 and $700 at December 31, 2010 and 2009, respectively.

Deposits from related parties held by the Bank at December 31, 2010 and 2009 amounted to $2.2 million and $842 respectively.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE E - PREMISES AND EQUIPMENT

The composition of premises and equipment at December 31 is as follows:

	2010		2009
Premises	$	7,766	$	7,750
Furniture, fixtures and equipment		4,326		4,298
		12,092		12,048
Less accumulated depreciation		6,388		5,856
		5,704		6,192
Land		2,031		2,031
	$	7,735	$	8,223

NOTE F - DEPOSITS

At December 31, 2010, the scheduled maturities of time deposits are as follows:

Due in one year	$	69,710
Due from one to three years		10,547
Due after three years		2,323
	$	82,580

NOTE G - SHORT-TERM BORROWINGS

The Bank has a borrowing arrangement with the Federal Home Loan Bank of San Francisco (FHLB) and the Federal Reserve Bank (FRB).  The Bank currently has two credit lines with the FHLB, one collateralized by certain loans and the other by certain investment securities. The amount of borrowing capacity at December 31, 2010 related to the pledged investment securities was approximately $20.0 million. On December 20, 2010, the Bank was advised by the FHLB that due to the Bank’s financial condition, this blanket lien method for loan collateral would no longer be available and the Bank would need to “deliver” collateral. Subsequent to December 31, 2010, the Bank has delivered loan collateral in the amount of approximately $41.8 million with a borrowing capacity of approximately $19.1 million. The Bank also has a borrowing relationship established with the Federal Reserve Bank that is collateralized by approximately $7.5 million in investment securities. The Bank has no Fed Funds lines with correspondent banks at December 31, 2010.

As of December 31, 2010 the Bank had no borrowings.

NOTE H - LONG-TERM BORROWINGS

During the third quarter of 2003, the Bank issued Subordinated Debentures to nineteen investors including executive officers and members of the Bank’s Board of Directors, in the total sum of $2.0 million (“Debentures”).

The total amount issued to executive officers and directors was $1.1 million.  The Debentures include quarterly payment of interest at prime plus 1.5% and quarterly principal installments of $167 commencing on September 30, 2008 until paid in full on June 30, 2011. In December 2010, the Bank elected to prepay $499 which consisted of the total remaining amounts due to the holder of the notes. At December 31, 2010 there were no balances owing in regard to the Debentures.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE H - LONG-TERM BORROWINGS-continued

On April 28, 2006, the Company issued $5.2 million in junior subordinated debt securities (the “debt securities”) to the Santa Lucia Capital Trust, a statutory trust created under the laws of the State of Delaware.  These debt securities are subordinated to effectively all borrowings of the Company and are due and payable on July 7, 2036.  These debt securities may be redeemed for 105% of the principal balance through July 7, 2011 and at par thereafter.  Interest is payable quarterly beginning July 7, 2006 at 1.48% over the quarterly adjustable 3-month LIBOR. At December 31, 2010 the rate was 1.77%

The Company also purchased a 3% minority interest in Santa Lucia (CA) Capital Trust.  The balance of the equity of The Company Bancorp (CA) Capital Trust is comprised of mandatorily redeemable preferred securities.

Following consultation with the FRB, on August 31, 2010 the Company elected to defer regularly scheduled payments on its outstanding junior subordinated debenture relating to its outstanding $5.2 million trust preferred security (the “Security”) for a period of up to 20 consecutive quarters (the “Deferral Period”).  The terms of the Security and the trust documents allow the Company to defer payments of interest for the Deferral Period without default or penalty.  During the Deferral Period, the Company will continue to recognize interest expense associated with the Security.  Upon the expiration of the Deferral Period, all accrued and unpaid interest will be due and payable.  During the Deferral Period, the Company is prevented from paying cash dividends to shareholders or repurchasing stock.

NOTE I - INCOME TAXES

The asset and liability method is used in accounting for income taxes.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As a result of the increase in the Company‘s reported losses, during the first quarter of 2010 we increased the valuation allowance on deferred tax assets because the benefit of such assets is dependent on future taxable income.  As a result, income tax expense for the year ended December 31, 2010 was $807. As the Company implements plans to return to profitability, future operating earnings, if any, would benefit from significant net operating loss carry-forwards.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE I - INCOME TAXES-Continued

Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:

`	2010			2009		2008
Deferred liabilities:
Tax over book depreciation	$	216		$	300	$	369
Market value adjustment on investment securities		-			231		349
Other		87			129		130
Total deferred tax liabilities		303			660		848
Valuation Allowance		(6,522	)		-		-
Deferred tax assets:
Allowance for loan losses		3,668			1,009		909
Deferred compensation plans		701			699		671
State taxes		1			1		95
Net loss carryforward		1,997			232		28
Other		731			148		119
Total deferred tax assets		7,098			2,089		1,822
Net deferred tax assets	$	273		$	1,429	$	974

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE I - INCOME TAXES-Continued

The provision for income taxes consists of the following:

	2010			2009			2008
Currently payable	$	(580	)	$	(1,097	)	$	1,004
Deferred benefit		1,387			(337	)		(371	)
	$	807		$	(1,434	)	$	633

The principal sources of deferred income taxes and the tax effect of each are as follows:

	2010			2009			2008
Tax over book depreciation	$	(84	)	$	(69	)	$	(56	)
Provision for loan losses		(2,659	)		(100	)		(236	)
State taxes		-			94			96
Net loss carryforward		(1,765	)		(204	)		13
Deferred compensation plans		(2	)		(28	)		(173	)
Valuation Allowance		6,522			-			-
Other		(625	)		(30	)		(15	)
Net deferred taxes	$	1,387		$	(337	)	$	(371	)

As of December 31, 2010, the Bank had federal net operating loss carry forwards available to reduce future taxable income of approximately $4.0 million. The net operating loss carry forwards expire in 2030.

The Bank has net operating loss carryforwards of approximately $8.7 million for state income tax purposes that will expire in 2030 if not previously utilized.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE I - INCOME TAXES-Continued

As a result of the following items, the total tax expense was different from the amount computed by applying the statutory income tax rate to earnings before income taxes:

	2010					2009					2008
Federal "expected" tax	$	(4,742	)	(34.0	)%	$	(1,108	)	(34.0	)%	$	602		34.0	%
State franchise tax, net		(988	)	(7.1	)		(240	)	(7.4	)		122		6.9
Tax exempt income		(108	)	(0.8	)		(119	)	(3.7	)		(128	)	(7.2	)
Valuation Allowance		6,522		46.8			-					-
Other		123		.9			33		1.1			37		2.1
Total expense(benefit)	$	807		5.8	%	$	(1,434	)	(44.0	)%	$	633		35.7	%

The Company is subject to Federal income tax and California franchise tax. Federal income tax returns for the years ended December 31, 2009, 2008 and 2007 are open to audit by the Federal authorities and California returns for the years ended December 31, 2009, 2008, 2007 and 2006 are open to audit by state authorities. The Company is currently under an IRS audit for tax year ending 2009 and 2007 for which the Company does not expect any changes to the tax position.

NOTE J - EMPLOYEE PROFIT SHARING AND DEFERRED COMPENSATION

The Bank sponsors a 401 (k) plan for the benefit of its employees.  In 1994 the Bank also approved the creation of an Employee Stock Ownership Plan for the benefit of its employees.  Contributions to these plans are determined by the Board of Directors. As a result of the large losses incurred in 2010, the Bank made no contribution to the Employee Stock Ownership Plan. The contributions for 2009 and 2008 were $154 and $202, respectively. The Bank contributed $58, $56 and $58 to the 401 (k) plan in 2010, 2009 and 2008, respectively.

The Bank has entered into a deferred compensation agreements with key officers and board members.  Under these agreements, the Bank is obligated to provide, upon retirement, a lifetime benefit for the officers and directors. The annual benefits range from $14 to $45 for key officers and $4 to $6 for directors.  The estimated present value of future benefits to be paid is being accrued over the period from the effective date of the agreements until the expected retirement dates of the participants.  The expense incurred and amount accrued for this plan for the years ended December 31, 2010, 2009, and 2008 totaled $86, $137 and $275, respectively.  The Bank is a beneficiary of life insurance policies that have been purchased as a method of financing the benefits under the agreements.

NOTE K - STOCK OPTIONS

The Company sponsors one compensatory incentive and non-qualified stock option plan which provides certain key employees and the Board of Directors with the option to purchase shares of common stock, and one Equity Based Compensation Plan which provides certain key employees and the Board of Directors with the award of any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Share Unit, Performance Share Award, Dividend Equivalent, or any combination thereof.  In 1999, the Bank adopted a stock option plan (the 2000 plan) under which up to 374,514 shares of the Bank’s common stock may be issued to directors, officers, and key employees.  In 2006, the Company adopted the 2006 Equity Based Compensation Plan (the Plan), which the maximum number of shares of common stock that may be awarded under this Plan shall not exceed 208,000 shares, including 39,743 shares rolled over from the Company’s 2000 Stock Option Plan which expires on August 15, 2015.  Option prices may not be less than 100% of the fair market value of the stock at the date of grant.  Options became exercisable at the rate of 20% per year beginning at various dates and expire not more than ten years from the date of grant.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE K - STOCK OPTIONS - Continued

The Company recognized stock-based compensation costs of $142, $136 and $148 and related tax benefits of $15, $26 and $42 for 2010, 2009 and 2008, respectively.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions:

	2010
Risk-free rates		2.55	%
Expected volatility		20.00	%
Expected dividend yield		1.16	%
Expected term	5.8 yrs
Weighted-average grant
date fair value	$	1.87

There were no options granted in 2009.

A summary of the status of the Company’s fixed stock option plan as of December 31, 2010 and changes during the year then ended is presented below:

						Weighted-
				Weighted-		average
				average		remaining	Aggregate
				exercise		contractual	intrinsic
	Shares			price		term	value
Outstanding at beginning of year		237,794		$	18.68
Granted		59,470			8.92
Exercised		(8,323	)		7.87
Forfeited		(25,878	)		18.60
Expired		(28,881	)		7.87
Outstanding at end of year		234,182		$	16.50	5.3 years	None
Options exercisable		158,765		$	17.98	3.9 years	None

The total intrinsic value of options exercised during the years ended December 31 were approximately $0 in 2010 and 2009 and $93 in 2008.As of December 31, 2010 there was $143 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted average period of 1.8 years.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE L – DIVIDENDS

The Company paid cash dividends of $0.25 per share to all shareholders of record as of March 31, 2009 and declared a 2% stock dividend to all shareholders of record as of September 30, 2009 and March 31, 2010. Per share data in the financial statements have been retroactively adjusted to reflect the 2% stock dividends.

NOTE M - EARNINGS PER SHARE (EPS)

The following is a reconciliation of net earnings (loss) and shares outstanding to the income and number of shares used to compute EPS:

(in thousands, except per share data)	December 31, 2010						December 31, 2009						December 31, 2008
	Income			Shares			Income			Shares			Income		Shares
(dollars in thousands)
Net income (loss)	$	(14,754	)				$	(1,825	)				$	1,139
Less dividends earned on Preferred Stock		(200	)					(200	)
Accreted  discount on Preferred Stock		(40	)					(40	)
Average shares outstanding					2,002,960						1,961,483					1,924,023
Used in Basic EPS		(14,994	)		2,002,960			(2,065	)		1,961,483			1,139		1,924,023
Dilutive effect of outstanding
stock options																48,465
Used in Diluted EPS	$	(14,994	)		2,002,960		$	(2,065	)		1,961,483		$	1,139		1,972,488
	Basic			$	(7.49	)	Basic			$	(1.05	)	Basic		$	0.59
	Diluted			$	(7.49	)	Diluted			$	(1.05	)	Diluted		$	0.58

NOTE N - COMMITMENTS AND CONTINGENCIES

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those commitments.  Commitments to extend credit (such as the unfunded portion on lines of credit and commitments to fund new loans) as of December 31, 2010 and 2009 amounts to approximately $31.6 million and $43.1 million, respectively, of which approximately $1.6 million and $1.3 million are related standby letters of credit, respectively.  The Company uses the same credit policies in these commitments as is done for all of its lending activities.  As such, the credit risk involved in these transactions is essentially the same as that involved in extending loan facilities to customers.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.  The Company evaluates each client's credit worthiness on a case-by-case basis.  The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer.  The majority of the Company's commitments to extend credit and standby letters of credit are secured by real estate.

In the normal course of business, the Company is involved in various forms of litigation.  In the opinion of management, and based on the advise of the Company’s legal counsel, the disposition of all pending litigation will not have a material effect on the Company’s financial position.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE O – PREFERRED STOCK AND RELATED WARRANT

December 19, 2008, the Company entered into a Purchase Agreement with the United States Department of the Treasury (the “Treasury”), pursuant to which the Company agreed to issue and sell 4,000 shares of the Company’s Preferred Stock as Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock) and a Warrant to purchase 37,360 shares of the Company’s Common Stock for an aggregate purchase price of $4 million in cash. In connection with this transaction the Company incurred $50 in costs.

The Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Preferred Stock may be redeemed by the Company after three years. Prior to the end of the three years, the Preferred Stock may be redeemed only with proceeds from the sale of qualifying equity securities of the Company.

The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $16.06 per share. On March 31, 2010 the Board of Directors declared a 2% stock dividend which automatically increased the number of common shares subject to the warrant to 38,869 and reduced the exercise price of the warrant to $15.43.

Neither the Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that Treasury may only transfer or exercise an aggregate of one-half of the Warrant Shares prior to the redemption of 100% of the shares of Preferred Stock .

In the Purchase Agreement, the Company agreed that, until such time as Treasury ceases to own any debt or equity securities of the Company acquired pursuant to the Purchase Agreement, the Company will take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”) as implemented by any guidance or regulation under the EESA that has been issued and is in effect as of the date of the issuance of the Preferred Stock and the Warrant, and has agreed to not adopt any benefit plans with respect to, or which covers, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.

The net proceeds from the issuance of the Preferred Stock and Warrant of $3.95 million were allocated between the Preferred Stock and the Warrant based on their estimated relative fair values.  The resulting discount of $201 on the Preferred Stock will be accreted against retained earnings over the estimated five-year life of the Preferred Stock reducing the reported income available for common shareholders.

Following consultation with the FRB, on August 31, 2010 the Company elected to defer regularly scheduled dividends on the Preferred Stock. As of December 31, 2010, the Company has missed two dividend payments. By deferring the dividends on Series A Senior Preferred Stock for a total of six quarters, whether or not consecutive, the U.S. Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu with the Series A Senior Preferred Stock. These directors would serve on the Company’s Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE P - FAIR VALUE MEASUREMENT

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities: The fair values of securities available for sale are determined by obtaining significant other observable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. (Level 2)

Collateral-Dependent Impaired Loans:  The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the

underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants (Level 3).

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount of fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2010 and 2009:

	Fair Value Measurements as of December 31, 2010 using
	Level 1		Level 2		Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Securities Available for Sale	$	-	$	32,542	$	-	$	32,542
Assets measured at fair value on a non-recurring basis
Collateral-Dependent Impaired
Loans, Net of Specific Reserves	$	-	$	-	$	17,761	$	17,761
Other Real Estate Owned	$	-	$	-	$	2,123	$	2,123
	Fair Value Measurements as of December 31, 2009 using
	Level 1		Level 2		Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Securities Available for Sale	$	-	$	40,990	$	-	$	40,990
Assets measured at fair value on a non-recurring basis
Collateral-Dependent Impaired
Loans, Net of Specific Reserves	$	-	$	-	$	6,407	$	6,407
Other Real Estate Owned	$	-	$	-	$	428	$	428

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE P - FAIR VALUE MEASUREMENT-continued

Collateral-dependent impaired loans had a net carrying value of $17.8 million and $6.4 million at December 31, 2010 and December 31, 2009, respectively. There was no specific reserve associated with these loans in either period.

Other real estate owned had a net carrying amount of $2.1 million, which is made up of the outstanding balance of $2.1 million, net of a valuation allowance of $0 at December 31, 2010 and $428, net of valuation allowance of $0 at December 31, 2009,

NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire

holdings of a particular financial instrument.  Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Additionally, tax consequences related to the realization of the unrealized gains and losses

can have a potential effect on fair value estimates and have not been considered in many of the estimates.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Financial Assets

The carrying amounts of cash, short term investments, due from customers on acceptances and bank acceptances outstanding are considered to approximate fair value.  Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with banks.  The fair values of investment securities, including available for sale, are discussed in Note P.  The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market  prices of similar instruments where available.

Financial Liabilities

The carrying amounts of deposit liabilities payable on demand, commercial paper, and other 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 for debt with similar terms and remaining maturities.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

(in thousands)

NOTE Q - FAIR VALUES OF FINANCIAL INSTRUMENTS-Continued

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 values of these financial instruments are not deemed to be

material.

The estimated fair value of financial instruments at December 31, 2010 and 2009 are summarized as follows: (in thousands)

	December 31, 2010				December 31, 2009
	Carrying		Market		Carrying		Market
	value		value		value		value
Financial Assets:
Cash and cash equivalents	$	20,419	$	20,419	$	9,088	$	9,088
Investment securities		32,542		32,542		40,990		40,990
Loans receivable, net		176,750		175,112		198,099		195,724
Cash surrender value of life insurance		4,566		4,566		5,391		5,391
Federal Reserve Bank and FHLB stock		1,531		1,531		1,643		1,643
OREO plus accrued interest and other assets		4,135		4,135		6,061		6,061
Financial Liabilities:
Time deposits	$	82,580	$	83,242	$	89,783	$	90,088
Other deposits		151,287		151,287		148,940		148,940
Other borrowings		-		-		-		-
Long-term debt		5,155		5,155		6,154		6,154
Accrued interest and other liabilities		3,234		3,234		2,016		2,016

NOTE R - REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in this footnote) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

Regulatory and Enforcement Proceedings

On December 23, 2010, the Company the Bank and the Federal Reserve Bank of San Francisco (“FRBSF”) entered into a Written Agreement (the “Written Agreement”), effective December 23, 2010, addressing, among other items, management, operations, lending, asset quality and increased capital for the Company and the Bank, as appropriate.

 SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE R - REGULATORY MATTERS-Continued

The Written Agreement was the result of a recent examination of the Bank and the Company by the FRBSF that resulted in certain criticisms of the Bank, particularly related to the overall quality of the Bank’s loan portfolio.

Among other things, the Written Agreement requires that:

· The Company serve as a source of strength for the Bank;

· The board of directors of the Bank submit a plan to strengthen board oversight of the management and operations of the Bank;

· The Bank submit to the FRBSF a plan to strengthen credit risk management practices;

· The Bank submit to the FRBSF revised written lending and credit administration policies and procedures;

· The Bank submit to the FRBSF a written program for the effective, ongoing third party review of the Bank’s loan portfolio, and that the board of directors take appropriate steps to ensure that the findings of such reviews are addressed by management;

· The Bank maintain a fully funded Allowance for Loans and Lease Losses (“ALLL”)

· The Company and the Bank submit to the FRBSF an acceptable joint written plan to maintain sufficient capital at the Bank, and notify the FRBSF following any calendar quarter in which the Bank’s capital ratios fall below minimums set forth in such plan, including in such notice steps the Bank or Company intend to take to increase capital ratios;

· The Bank submit to the FRBSF an acceptable written contingency funding plan;

· The Bank submit to the FRBSF a written business plan for 2011 to improve the Bank’s earnings and overall condition;

· The Bank seek regulatory approval for all dividend and other payments to stockholders

· The Company and its nonbank subsidiary not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the FRBSF and the Director;

· The Bank immediately take all necessary steps to correct all violations of laws and regulations cited in the Report of Examination;

· The Company and the Bank submit any new officer or director, or change in any existing officer’s or director’s duties, to the FRBSF for prior approval or non-objection;

· The Company and the Bank seek prior approval or non-objection from the FRBSF before making any indemnification or severance payment to an officer or director;

· The Company and the Bank submit to the FRBSF joint quarterly written progress reports on efforts to comply with the Written Agreement;

The Written Agreement will remain effective and enforceable until stayed, modified, terminated or suspended in writing by the FRBSF. The foregoing description of the Written Agreement is a summary and does not purport to be a complete description of all of its terms, and is qualified in its entirety by reference to a copy of the Written Agreement, attached in an 8-K filing with the Securities and Exchange Commission (the “SEC”) filed on December 29, 2010.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE R - REGULATORY MATTERS-Continued

Compliance Efforts

The Bank is actively engaged in responding to the concerns raised in the Written Agreement and believes that it has already addressed many of the regulatory requirements.

The Bank has acted promptly in regard to the requirements of the Written Agreement, including the following actions:

· The Bank made numerous changes in the executive structure to include a newly appointed Chief Credit Officer (CCO) in July 2010 and Chief Financial Officer in September 2010. In addition, Stanley R. Cherry, Director and former President/CEO has rejoined the Bank as a senior credit administrator and will be working closely with the CCO to manage the day-to-day credit functions.

· The Board has submitted to the regulators a plan to strengthen board oversight with many of the components already in place including new and/or enhanced financial and asset quality reporting. In addition, in August 2010, the Capital and Examination Board Committee was formed to track matters requiring immediate attention that were outlined in the regulatory report of examination and the subsequent Written Agreement, along with weekly reporting of asset quality status and capital initiatives.

· The Bank engaged an independent third party to conduct asset quality reviews on a bi-annual basis. The first engagement in October 2010 included the review of over 73% of the entire loan portfolio.

· Within the timelines required, all program and/or plans have been submitted to the regulators

· The Bank and Company are in compliance with all actions requiring prior regulatory approvals

The Company and Bank will continue their efforts to comply with all provisions of the Written Agreement, and believe they are taking the appropriate steps necessary to comply in a timely fashion.

The California Department of Financial Institutions (“DFI”) completed an examination of the Bank in the fourth quarter of 2010.  Based upon discussion with the DFI following the examination, the Bank’s condition has been further downgraded.  Further, the Bank likely will receive some form of formal enforcement action from the DFI.  While we expect the action from the DFI to be similar in scope to the Written Agreement, it will differ in at least one important respect.  While the Written Agreement requires the Bank to submit a capital plan to the FRBSF, the agreement does not specify a particular level of capital the Company or Bank must maintain.  The DFI has indicated that its action will include specific minimum capital ratios that the Bank must meet for both the tier 1 leverage and total risk based capital ratios.  At this time, the Bank has not been advised of the minimum capital ratios sought by the DFI.  However, those ratios are expected to be in excess of the Bank’s current capital ratios.

While the Company and Bank are moving diligently to comply with the Written Agreement and to respond to the criticisms of the FRBSF and DFI, there can be no assurance that full compliance will be achieved with either the Written Agreement or any formal action sought by the DFI.  As a result, the Company and the Bank could become subject to further regulatory restrictions or penalties.  Full satisfaction of the Written Agreement and the action to be sought by the DFI will depend in part on raising a significant amount of additional capital.  The Company’s ability to raise capital will depend on market conditions, which are outside the Company’s control, and also on the Bank’s financial performance and condition.  Should the Bank’s asset quality continue to erode and require significant additional provision for loan losses, resulting in additional future net operating losses at the Bank, the Company’s ability to raise capital may be impaired. In addition, further operating losses would cause the Bank’s capital levels to decline further, requiring the raising of more capital.

SANTA LUCIA BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

December 31, 2010, 2009, and 2008

NOTE R - REGULATORY MATTERS-Continued

The following table also sets forth the Bank’s actual capital amounts and ratios (dollar amounts in thousands):

											To be well capitalized
						For capital					under prompt corrective
	Actual					adequacy purposes					action provisions
	Amount					Amount					Amount
	(thousands)		Ratio			(thousands)		Ratio			(thousands)		Ratio
As of December 31, 2010
Bank
Total Capital (to Risk-Weighted Assets)	$	14,975		8.2	%	$	14,680		8.0	%	$	18,350		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	12,573		6.9	%	$	7,340		4.0	%	$	11,010		6.0	%
Tier 1 Capital (to Average Assets)	$	12,573		4.8	%	$	10,588		4.0	%	$	13,235		5.0	%
As of December 31, 2009
Bank
Total Capital (to Risk-Weighted Assets)	$	29,223		13.2	%	$	17,740		8.0	%	$	22,175		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	26,276		11.9	%	$	8,870		4.0	%	$	13,305		6.0	%
Tier 1 Capital (to Average Assets)	$	26,276		9.7	%	$	10,821		4.0	%	$	13,526		5.0	%

The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the Bank’s undivided profits or the Bank’s net income for its last three fiscal years less the amount of any distribution made by the Bank to shareholders during the same period.

With certain exceptions the Company may not pay a dividend to its shareholders unless its retained earnings equal at least the amount of the proposed dividend.

NOTE S – HOLDING COMPANY

On April 3, 2006 the Company acquired all the outstanding shares of the Bank by issuing 1,909,837 shares of common stock in exchange for the surrender of all outstanding shares of the Bank’s common stock.  There was no cash involved in this transaction. The acquisition was accounted for like a pooling of interest and the consolidated financial statements contained herein have been restated to give full effect to this transaction. The Company has no significant business activities other than its investment in the Bank and its investment and related borrowings from Santa Lucia (CA) Capital Trust as discussed in Note H.  Accordingly, no separate financial information on the Company is provided.

EX-99.2

Exhibit 99.2

UNAUDITED FINANCIAL STATEMENTS FOR SANTA LUCIA BANCORP AND SUBSIDIARY

Santa Lucia Bancorp
Consolidated Balance Sheets
(dollars in thousands)
Assets	30-Sep-11			31-Dec-10
	(unaudited)
Cash and due from banks	$	11,851		$	4,920
Interest bearing  deposits		37,900			15,499
Total cash and cash equivalents		49,751			20,419
Securities available for sale		21,700			32,542
Loans, net		141,976			176,750
Premises and equipment, net		7,389			7,735
Deferred income tax asset		-			273
Cash surrender value of life insurance		4,678			4,566
Federal Reserve Bank and
Federal Home Loan Bank stock, at cost		1,419			1,531
Other Real Estate Owned		3,416			2,123
Accrued interest and other assets		2,110			3,862
Total Assets	$	232,439		$	249,801
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	71,969		$	68,328
Interest-bearing demand and NOW accounts		13,592			13,089
Money market		42,747			41,758
Savings		28,239			28,112
Time certificates of deposit of $100,000 or more		35,915			51,195
Other time certificates		25,503			31,385
Total Deposits		217,965			233,867
Short-term borrowings		-			-
Long-term debt		5,155			5,155
Accrued interest and other liabilities		2,113			3,234
Total Liabilities		225,233			242,256
Commitments and contingencies		-			-
Shareholders' equity
Preferred Stock - Series A		3,909			3,879
Common stock - no par value; authorized 20,000,000 shares;
Issued and outstanding, 2,003,131 shares at
September 30, 2011 and at December 31, 2010		10,665			10,665
Additional Paid-in Capital		1,131			956
Retained earnings (Accumulated Deficit)		(8,809	)		(7,613	)
Accumulated other comprehensive income-net unrealized
gains/(losses) on available-for-sale securities, net of taxes		310			(342	)
Total shareholders' equity		7,206			7,545
Total liabilities and shareholders' equity	$	232,439		$	249,801
The accompanying notes are an integral part of these financial statements

Santa Lucia Bancorp
Consolidated Statements of Income
(in thousands except per share data)
	For the three month period ending		For the nine month period ending
	30-Sep-11	30-Sep-10	30-Sep-11	30-Sep-10
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Interest Income
Interest and fees on loans	$2,213	$2,808	$7,038	$8,732
Federal funds sold/EIB	23	1	50	4
Investment securities	151	245	549	865
	2,387	3,054	7,637	9,601
Interest expense
Interest-bearing demand deposits	3	7	9	28
Money Market	56	138	177	471
Savings	7	18	24	52
Time certificates of deposit	181	360	655	1,197
Short-term borrowings	-	-	-	-
Long-term debt	22	35	69	102
	269	558	934	1,850
Net interest income	2,118	2,496	6,703	7,751
Provision for credit losses	-	4,700	530	13,448
Net interest income after
provision for loan losses	2,118	(2,204)	6,173	(5,697)
Noninterest income
Service charges and fees	76	117	257	358
Gain on sale of investment securities	-	-	105	215
Other income	26	111	189	340
	102	228	551	913
Noninterest expense
Salaries and employee benefits	1,084	1,231	3,537	3,887
Occupancy	186	164	496	483
Equipment	142	145	411	430
Professional services	409	212	1,153	544
Data processing	117	119	368	362
Office related expenses	94	107	313	315
Marketing	50	106	183	280
Regulatory assessments	30	306	493	533
Directors' fees and expenses	7	93	100	269
Other real estate owned expenses	40	77	86	575
Other	164	81	326	291
	2,323	2,641	7,466	7,969
(Loss) before income taxes	(103)	(4,617)	(742)	(12,753)
Income tax expense	1	-	274	807
Net (Loss)	$(104)	$(4,617)	$(1,016)	$(13,560)
Dividends and Accretion on Preferred Stock	$60	$60	$180	$180
Net (Loss) Applicable to Common Shareholders	$(164)	$(4,677)	$(1,196)	$(13,740)
Per Share Data
Net (loss) - basic	$(0.08)	$(2.33)	$(0.60)	$(6.86)
Net (loss) - diluted	$(0.08)	$(2.33)	$(0.60)	$(6.86)
The accompanying notes are an integral part of these financial statements

Santa Lucia Bancorp
Consolidated Statements of Cash Flows
(dollars in thousands)
	(For the nine month period ended)
	30-Sep-11			30-Sep-10
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net (loss)	$	(1,016	)	$	(13,560	)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization		491			411
Provision for loan losses		530			13,448
Write down on other real estate owned		187			321
Stock-based compensation expense		175			106
Loss on sale of other real estate owned		107			-
Gain on sale of investment securities		(105	)		(215	)
Other items, net		1,342			560
Net cash  provided by operating activities		1,711			1,071
Cash flows from investing activities:
Proceeds from principal reductions and maturities
of investment securities		3,671			16,873
Proceeds from sale of investment securities		7,156			2,793
Proceeds from sale of other real estate owned		1,293			-
Purchases of investment securities		-			(11,686	)
Redemption of FHLB/FRB stock		107			-
Net change in loans		31,471			(2,490	)
Purchases of bank premises and equipment		(25	)		(49	)
Net cash provided (used) by investing activities		43,673			5,441
Cash flows from financing activities:
Net change in deposits		(15,902	)		8,377
Net change in borrowings		-			(501	)
Dividends paid on Preferred Stock		(150	)		(150	)
Cash dividends paid		-			(1	)
Net cash (used) provided by financing activities		(16,052	)		7,725
Net increase in cash and cash equivalents		29,332			14,237
Cash and cash equivalents at beginning of year		20,419			9,088
Cash and cash equivalents at end of period	$	49,751		$	23,325
Supplemental disclosure of cash flow information:
Interest paid	$	620		$	1,850
Income taxes paid	$	-		$	45
Transfer of loans to Other Real Estate Owned	$	2,773		$	1,765
The accompanying notes are an integral part of these financial statements

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Note 1 Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements of Santa Lucia Bancorp (the “Company”) and its subsidiary Santa Lucia Bank (the ”Bank”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC).  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.  Nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.  These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2010 Annual Report as filed on Form 10K, as amended.

In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim consolidated financial statements and the results of its operations for the interim period ended September 30, 2011, have been included.  The results of operations for interim periods are not necessarily indicative of the results for a full year. Certain reclassifications were made to prior year’s presentations to conform to the current year. These reclassifications had no material impact on the Company’s previously reported financial statements.

Note 2 Loans and Related Allowance for Loan Losses:

A summary of loans as of September 30, 2011 and December 31, 2010 is as follows:

	(dollars in thousands)						As % Gross Loans
	30-Sep-11			31-Dec-10			30-Sep-11			31-Dec-10
Real estate - construction	$	23,726		$	38,143			15.6	%		20.2	%
Real estate - other		100,904			114,332			66.4	%		60.7	%
Commercial		25,939			34,232			17.1	%		18.2	%
Consumer		1,390			1,663			0.9	%		0.9	%
Gross Loans		151,959			188,370			100.0	%		100.0	%
Deferred loan fees		(510	)		(621	)
Allowance for loan losses		(9,473	)		(10,999	)
Net Loans	$	141,976		$	176,750

The Bank’s loan portfolio consists primarily of loans to borrowers within the San Luis Obispo and northern Santa Barbara Counties, California.  Although the Bank 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 Bank’s market areas.  As a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in those industries.  When real estate is taken as collateral, advances are generally limited to a certain percentage of the appraised value of the collateral at the time the loan is made, depending on the type of loan, the underlying property and other factors.

The following table shows the changes in the allowance for loan losses during the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(dollars in thousands)						(dollars in thousands)
Allowance, beginning of period	$	9,364		$	7,729		$	10,999		$	3,386
Provision for loan loss		-			4,700			530			13,448
Recoveries on Loans Charged Off		272			23			1,220			77
Loans Charged Off		163			2,737			3,276			7,196
Allowance, End of Period	$	9,473		$	9,715		$	9,473		$	9,715
Ratios:
Net loan charge-offs (recoveries) to average loans		-0.07	%		1.35	%		1.20	%		3.52	%
Allowance for loan losses to end of period loans		6.24	%		4.95	%		6.24	%		4.95	%
Net loan charge-offs (recoveries) to allowance
for loan losses		-1.15	%		27.94	%		21.70	%		73.28	%
Net loan charge-offs (recoveries) to provision
charged to operating expense		n/a			57.74	%		387.92	%		52.94	%

Note 3 Investment Securities:

The amortized cost, carrying value and estimated fair values of investment securities available for sale as of September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		losses			fair value
	(dollars in thousands)
Securities Available for Sale:
U.S. government and
agency securities	$	5,888	$	68	$	-		$	5,956
States and political
subdivisions		1,514		47		-			1,561
SBA Cert of Participation		7,314		206		-			7,520
Mortgage-backed securities		6,674		10		(21	)		6,663
	$	21,390	$	331	$	(21	)	$	21,700
	December 31, 2010
	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		losses			fair value
Securities Available for Sale:
U.S. government and
agency securities	$	10,212	$	28	$	(198	)	$	10,042
States and political
subdivisions		1,818		9		(28	)		1,799
SBA Cert of Participation		7,793		-		(177	)		7,616
Mortgage-backed securities		13,062		103		(80	)		13,085
	$	32,885	$	140	$	(483	)	$	32,542

The carrying value of investment securities pledged to secure public funds, borrowings and for other purposes as required or permitted by law amounts to approximately $11.4 million at September 30, 2011 and $29.6 million at December 31, 2010.  During 2010 the Company had proceeds from the sale of approximately $19.8 million securities and gross gains of $588 thousand.  The Company had proceeds from the sale of approximately $7.2 million securities and gross gains of $105 thousand during the second quarter of 2011 and for the year to date 2011.

EX-99.3

Exhibit 99.3

PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION - UNAUDITED

On October 21, 2011 the two mergers contemplated under an Agreement and Plan of Merger dated June 24, 2011 by and among Mission Community Bancorp (the “Company”), Carpenter Fund Manager GP, LLC as General Partner of Carpenter Community BancFund L.P. and Carpenter Community BancFund-A, L.P. (the “Funds”) Mission Community Bank (“MC Bank”), Santa Lucia Bancorp (“SL Bancorp”) and Santa Lucia Bank Company (“SL Bank) (the “Merger Agreement”) were consummated. The Funds are the controlling shareholder of the Company.  A copy of the Merger Agreement was filed as an exhibit to the Company’s 8-K filed on June 27, 2011.

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, and as a condition 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.   Immediately following the Merger, Santa Lucia Bank, the wholly-owned subsidiary of SL Bancorp, was merged with and into MC Bank, the wholly-owned subsidiary of the Company, with MC Bank being the surviving bank (the “Bank Merger”).  Certain assets and liabilities, consisting primarily of approximately $8.3 million in non-performing loans and the assumption (and subsequent redemption) of SL Bancorp’s TARP preferred stock, were retained by CCI One and not contributed to the Company.  In connection with the Bank Merger, the Company assumed the payment obligations of SL Bancorp’s trust preferred securities.

The following unaudited pro forma combined condensed consolidated financial information has been prepared using the acquisition accounting method, giving effect to the aforementioned mergers. The unaudited pro forma condensed consolidated statement of financial condition combines the historical financial information of MC Bancorp and SL Bancorp as of September 30, 2011, and assumes that the merger was completed on that date.

The unaudited pro forma condensed consolidated statements of operations for the twelve month period ended December 31, 2010 and the nine month period ended September 30, 2011 give effect to the acquisition as if the transaction had been completed on January 1, 2010.

The unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined on the dates described above, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. The unaudited pro forma condensed consolidated financial information also does not consider any potential impacts of current market conditions on revenues and expense efficiencies, among other factors.

The pro forma financial information includes estimated adjustments to record assets and liabilities of SL Bank at their fair values and represents MC Bancorp’s pro forma estimates based on available information. The pro forma adjustments included herein are subject to change depending on changes in interest rates and the fair value of the components of assets and liabilities, as additional information becomes available and additional analyses are performed. The final allocation of the purchase price will be determined after completion of thorough analyses to determine the fair value of SL Bank’s tangible and identifiable intangible assets and liabilities as of the dates the acquisition. Increases or decreases in the estimated fair values of the net assets as compared with the information shown in the unaudited pro forma combined condensed consolidated financial information may change other assets and liabilities and may impact MC Bancorp’s statement of income due to adjustments in yield and/or amortization of the adjusted assets or liabilities. The final adjustments may be

materially different from the unaudited pro forma adjustments presented herein.

MC Bancorp anticipates that the SL Bank acquisition will provide financial benefits that include reduced operating expenses. The unaudited pro forma condensed consolidated financial information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not necessarily reflect the exact benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during these periods.

The unaudited pro forma combined condensed consolidated financial information has been derived from and should be read in conjunction with the respective periods’ historical consolidated financial statements and the related notes of MC Bancorp. The historical consolidated financial statements of MC Bancorp are filed with the SEC in its Annual Report on Form 10-K for the year ended December 31, 2010 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. The historical consolidated financial statements of Santa Lucia Bancorp, parent of Santa Lucia Bank, its wholly owned subsidiary, are included as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K.

The unaudited pro forma combined shareholders' equity and net income are qualified by the statements set forth under this caption and should not be considered indicative of the market value of MC Bancorp common stock or the actual or future results of operations of MC Bancorp for any period. Actual results may be materially different from the pro forma information presented.

Pro Forma Condensed Consolidated Statement of Financial Condition

As of September 30, 2011

Unaudited

(In thousands of dollars)

			Pro Forma Adjustments - Note D					Pro Forma   SL Bank with SL Bancorp Trust Preferred Securities (Contributed to MC Bancorp)		Pro Forma Adjustments - Note D
ASSETS	SL Bancorp Consolidated as Reported 9/30/11		Assets Assumed & Liabilities Retired by SL Bancorp		Fair Value and Other Transaction Adjustments				MC Bancorp Consolidated as Reported 9/30/2011	Preferred Stock Issuance		Pro Forma MC Bancorp Consolidated
Cash and due from banks	$11,851		$(843)	a.,b.	$-			$11,008	$15,894	$10,000	u.	$36,902
Interest Bearing Deposits	37,900		-		-			37,900	302	-		38,202
Securities/Investments	21,700		-		-			21,700	90,159	-		111,859
Loans held for sale	-		-		-			-	9,951	-		9,951
Loans & Leases	151,449		(10,653)	c.	(16,400)	j.		124,396	109,275	-		233,671
Less: allowance for loan loss	(9,473)		2,364	d.	7,109	k.		-	(3,164)	-		(3,164)
Premises and equipment, net	7,389		-		5,680	l.		13,069	3,047	-		16,116
Goodwill	-		-		-			-	-			-
Core deposit intangible	-		-		2,648	n.		2,648	-	-		2,648
Other real estate owned	3,416		-		(331)	o.		3,085	1,889	-		4,974
Other assets	8,207		-		-			8,207	7,294	-		15,501
Total Assets	$232,439		$(9,132)		$(1,294)			$222,013	$234,647	$10,000		$466,660
LIABILITIES & SHAREHOLDER EQUITY
Deposits:
Noninterest-bearing deposits	$71,969		$-		$-			$71,969	$33,733	$-		$105,702
Interest-bearing deposits	145,996		-		-			145,996	157,813	-		303,809
Total Deposits	217,965		-		-			217,965	191,546	-		409,511
Trust preferred securities	5,155		-		(2,775)	p.		2,380	3,093	-		5,473
Accrued interest payable and other liabilities	2,113		(1,819)	a., e., f.	-			294	1,951	-		2,245
Total Liabilities	225,233		(1,819)		(2,775)			220,639	196,590	-		417,229
Preferred stock	3,909		(3,909)	g.	-			-	6,152	8,063	u.	14,215
Common stock	10,665		-		(10,665)	q.		-	46,387	-		46,387
Additional paid-in capital	1,131	{	4,000	g., h.	(5,131)	g., h., r.	}	1,374	432	-		1,806
					1,374	m2.
Common stock warrants	-		-		-			-		1,937	u.	1,937
Retained earnings(deficit)	(8,809)	{	(91)	h.	16,213	s.	}	-	(16,101)	-		(16,101)
			976	e., f., i.
			(8,289)	m1.
Accumulated other comprehensive income(loss)	310		-		(310)	t.		-	1,187	-		1,187
Total shareholders' equity	7,206		(7,313)		1,481			1,374	38,057	10,000		49,431
Total liabilities and shareholders' equity	$232,439		$(9,132)		$(1,294)			$222,013	$234,647	$10,000		$466,660
The accompanying notes are an integral part of these pro forma financial statements

Pro Forma Condensed Consolidated Statement of Operations

For the twelve month period ended December 31, 2010

Unaudited

(In thousands of dollars except share and per share data)

	Historical
	MC Bancorp			SL Bancorp			Pro Forma Transaction Adjustments - Note D				Pro Forma MC Bancorp Consolidated
Interest Income
Interest and fees on loans	$	7,538		$	11,456		$	767		aa.	$	19,761
Interest on investment securities		1,297			1,117			-				2,414
Other interest income		47			14			-				61
Total Interest Income		8,882			12,587			767				22,236
Interest Expense
Interest on Money Market, NOW and Savings deposits		483			658			-				1,141
Interest on time deposits		1,192			1,524			-				2,716
Other interest expense		316			109			145		bb.		570
Total Interest Expense		1,991			2,291			145				4,427
Net Interest Income		6,891			10,296			622				17,809
Provision for loan losses		5,800			15,198			-				20,998
Net Interest Income after provision												-
for loan losses		1,091			(4,902	)		622				(3,189	)
Non Interest Income
Service charges and fees		354			479			-				833
Gain on sale of loans		430			-			-				430
Loan servicing fees, net of amortization		135			-			-				135
Grants and awards		600			-			-				600
Gain(losses) sale of OREO, net		(486	)		39			-				(447	)
Securities gains (losses), net		497			588			-				1,085
Other non interest income		182			504			-				686
Total Non Interest Income		1,712			1,610			-				3,322
Non Interest Expense
Salaries and employee benefits		4,035			5,176			-				9,211
Occupancy		1,270			1,219			436		cc.		2,925
Other non interest expense		4,181			4,260			331		dd.		8,772
Total Non Interest Expense		9,486			10,655			767				20,908
Income(loss) before taxes		(6,683	)		(13,947	)		(145	)			(20,775	)
Income tax expense(benefit)		-			807			(807	)	ee.		-
Net (Loss) / Income	$	(6,683	)	$	(14,754	)	$	662			$	(20,775	)
Dividends and accretion on preferred stock	$	71		$	240		$	954		ff.	$	1,265
Net (Losses)/Income Applicable to Common Shareholders	$	(6,754	)	$	(14,994	)	$	(292	)		$	(22,040	)
Per share data:
Net (loss) - Basic	$	(1.54	)								$	(5.02	)
Weighted average common shares outstanding -basic		4,388,691			-			-				4,388,691

Pro Forma Condensed Consolidated Statement of Operations

For the nine month period ended September 30, 2011

Unaudited

(In thousands of dollars except share and per share data)

	Historical
	MC Bancorp			SL Bancorp			Pro Forma Transaction Adjustments - Note D				Pro Forma MC Bancorp Consolidated
Interest Income
Interest and fees on loans	$	5,271		$	7,038		$	575		aa.	$	12,884
Interest on investment securities		1,350			546			-				1,896
Other interest income		22			53			-				75
Total Interest Income		6,643			7,637			575				14,855
Interest Expense
Interest on Money Market, NOW and Savings deposits		304			210			-				514
Interest on time deposits		693			655			-				1,348
Other interest expense		81			69			109		bb.		259
Total Interest Expense		1,078			934			109				2,121
Net Interest Income		5,565			6,703			466				12,734
Provision for loan losses		300			530			-				830
Net Interest Income after provision
for loan losses		5,265			6,173			466				11,904
Non Interest Income
Service charges and fees		312			257			-				569
Gain on sale or other disposition of loans		427			-			-				427
Loan servicing fees, net of amortization		97			-			-				97
Gain(losses) sale of OREO, net		(71	)		(107	)		-				(178	)
Securities gains (losses), net		4			105			-				109
Other non interest income		260			296							556
Total Non Interest Income		1,029			551			-				1,580
Non Interest Expense
Salaries and employee benefits		4,364			3,537			-				7,901
Occupancy		1,339			907			327		cc.		2,573
Other non interest expense		3,275			3,022			248		dd.		6,545
Total Non Interest Expense		8,978			7,466			575				17,019
Income(loss) before taxes		(2,684	)		(742	)		(109	)			(3,535	)
Income tax expense(benefit)		6			274			(274	)	ee.		6
Net (Loss) / Income	$	(2,690	)	$	(1,016	)	$	165			$	(3,541	)
Net Income(Loss) Applicable to Preferred Stock	$	144		$	180		$	715		ff.	$	1,039
Net (Losses)/Income Applicable to Common Shareholders	$	(2,834	)	$	(1,196	)	$	(550	)		$	(4,580	)
Per share data:
Net (loss) - Basic	$	(0.40	)								$	(0.65	)
Weighted average common shares outstanding -basic		7,094,274										7,094,274
The accompanying notes are an integral part of these pro forma financial statements

NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION - UNAUDITED

Note A—Basis of Presentation

        On October 21, 2011 the two mergers contemplated under an Agreement and Plan of Merger dated June 24, 2011 by and among Mission Community Bancorp (the “Company”), Carpenter Fund Manager GP, LLC as General Partner of Carpenter Community BancFund L.P. and Carpenter Community BancFund-A, L.P. (the “Funds”) Mission Community Bank (“MC Bank”), Santa Lucia Bancorp (“SL Bancorp”) and Santa Lucia Bank Company (“SL Bank) (the “Merger Agreement”) were consummated. The Funds are the controlling shareholder of the Company.  A copy of the Merger Agreement was filed as an exhibit to the Company’s 8-K filed on June 27, 2011.

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, and as a condition 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.   Immediately following the Merger, Santa Lucia Bank, the wholly-owned subsidiary of SL Bancorp, was merged with and into MC Bank, the wholly-owned subsidiary of the Company, with MC Bank being the surviving bank (the “Bank Merger”).  Certain assets and liabilities, consisting primarily of approximately $8.3 million in non-performing loans and the assumption (and subsequent redemption) of SL Bancorp’s TARP preferred stock, were retained by CCI One and not contributed to the Company. In connection with the Bank Merger, the Company assumed the payment obligations of SL Bancorp’s trust preferred securities.

The unaudited pro forma combined condensed consolidated financial information and explanatory notes show, under the acquisition accounting method, the impact on the historical financial condition and results of operations of the Company resulting from the contribution by the Fund of certain SL Bancorp assets and liabilities. Under the acquisition accounting method, the assets and liabilities of SL Bancorp that were contributed to the Company are recorded at their respective fair values as of the date the transaction is consummated. The unaudited pro forma condensed consolidated statement of financial condition combines the historical financial information of MC Bancorp and SL Bancorp as of September 30, 2011, and assumes that the acquisition was completed on that date. The unaudited pro forma condensed consolidated statements of operations for the twelve month period ended December 31, 2010 and the nine month period ended September 30, 2011 give effect to the acquisition as if the transaction had been completed on January 1, 2010.

Since the transaction is recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for credit losses is carried over to MC Bancorp's balance sheet. In addition, certain anticipated nonrecurring costs associated with the acquisition such as potential severance, professional fees, legal fees and conversion-related expenditures are not reflected in the pro forma statements of operations.

While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for credit losses and the allowance for credit losses, for purposes of the unaudited pro forma combined condensed consolidated statement of operations for the nine months ended September 30, 2011 and the year ended December 31, 2010, MC Bancorp assumed no adjustments to the historical amount of SL Bank’s provision for credit losses. If such adjustments were estimated, there could be a reduction, which could be significant, to the historical amounts of SL Bank’s provision for credit losses presented.

Deferred tax entries that would be associated with certain transaction items are not reflected in the pro forma as the result of a full valuation allowance maintained by the Company against net deferred tax assets.

Note B—Merger and Acquisition Integration Costs

In connection with the acquisition, a plan to integrate MC Bancorp's and SL Bank’s operations has been developed. The implementation of this plan will occur over the next several months, and will include actions regarding personnel, benefit plans, premises and equipment, and service contracts to take advantage of redundancies. Certain decisions arising from this plan may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, and selling or otherwise disposing of certain premises and furniture and equipment. MC Bancorp also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature of the cost and the timing of these integration actions.

Note C—Estimated Annual Cost Savings

MC Bancorp expects to realize cost savings following the SL Bank acquisition. These cost savings are not reflected in the pro forma financial information and there can be no assurance they will be achieved in the amount or manner currently contemplated.

Note D—Pro Forma Adjustments –

Balance Sheet

The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

a.	$	(500	)	Compensation plan termination payout by SLBank
b.		(343	)	SLBancorp Transaction expenses post 9-30-11 through closing date
	$	(843	)	Net effect to cash as of the closing date
c.	$	(10,653	)	Carrying balance of loans distributed to SL Bancorp.
d.	$	2,364		Fair Value adjustment on loans distributed to SL Bancorp
e.	$	(1,119	)	Termination of compensation plans effected prior to closing
f.	$	(200	)	Reversal of accrued dividend for TARP
g.	$	(3,909	)	Repurchase of TARP preferred stock by SL Bancorp
h.	$	(91	)	Repurchase of TARP preferred stock by SL Bancorp
i.	$	343		SLBancorp Transaction expenses post 9-30-11 through closing date
j.	$	(16,400	)	Fair value discount on loans
k.	$	7,109		Reversal of SL Bank loan loss allowance; shown after loan distribution to SL Bancorp
l.	Fair value of bank owned property:
	Carrying Value			Fair Value	Write Up
	$	2,031		$4,010	$1,979	Land
		4,999		8,764	3,765	Buildings
		462		398	(64)	FF&E
	$	7,492		$13,172	$5,680

Note D—Pro Forma Adjustments – Balance Sheet, continued

m.	Goodwill / Bargain Purchase Gain:
	$	700			Consideration paid to SL Bancorp common shareholders
		2,800			Consideration paid to SL Bancorp TARP preferred shareholder
	$	3,500		A	Total consideration paid by SL Bancorp
	$	7,206			SL Bancorp Shareholders' Equity at September 30, 2011
					Adjustments to shareholders' equity:
		1,119			Termination of compensation plans effected prior to closing
		(343	)		Direct expenses of merger transaction
		200			Reversal of accrued dividends on TARP
		976			Total SLBancorp post 9-30-11 merger transactions through closing date
		(16,400	)		Fair value discount on loans
		(331	)		Fair value discount on OREO
		7,109			Reversal of loan loss reserve after loan distribution
		5,680			Increase in value of bank premises
		2,775			Fair value discount on trust preferred securities
		2,648			Core deposit intangible (footnote n.)
		1,481			Total fair value adjustments
	$	9,663		B	Estimated fair value of SLB net assets on acquisition date
	$	10,653			Carrying balance of loans distributed to SL Bancorp
		(2,364	)		Fair value discount on loans distributed to SL Bancorp
m1.	$	8,289		C	Fair value of net loans retained by SL Bancorp
m2.	$	1,374		D	Net contribution of the Funds to Mission Community Bancorp [D = B - C]
	$	6,163		E	Preliminary bargain purchase gain recognized by SL Bancorp [E = B - A]
n.	Core deposit intangible:
	Amount				Percent			CDI
	$	71,969				0.40	%	$	288	Non-interest bearing deposits
		13,592				3.00	%		408	Interest bearing trans accts
		70,986				2.75	%		1,952	MMDAs + Savings
		61,418				0.00	%		-	Time deposits
	$	217,965						$	2,648	Total CDI
o.	$	(331	)		Fair value discount on OREO
p.	$	(2,775	)		Fair value adjustment to Santa Lucia Captial Trust obligation
q.	$	(10,665	)		Reversal of SLBancorp common stock and surplus
r.	$	(1,131	)		Reversal of SL Bancorp Additional Paid-In Capital
s.	$	16,213			Reversal of remaining SLBancorp retained deficit
t.	$	(310	)		Reverse SL Bancorp other comprehensive income
u.	$	10,000			Non-cumulative preferred stock issued (non-controlling investment)
		(1,937	)		Fair value of warrants associated with non-cumulative preferred stock issuance
	$	8,063			Fair value of preferred stock issue
					On October 21, 2011, Mission Asset Management, Inc. (a wholly owned subsidiary of the Company)
					issued 10,000 shares of preferred stock, designated as "Series A Non-Cumulative Perpetual
					Preferred Stock" combined with approximately 2.2 million warrants for Company common stock.
					The proceeds were allocated among the warrants and the preferred stock (as a non-controlling interest).
					The preferred stock carries a 10% dividend. The warrants are exercisable at $4.54 per share
					and will expire on October 21, 2021.

Note D—Pro Forma Adjustments, continued

Income Statement

        The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

aa.	Accretion of fair value adjustment on loans based on a weighted average life of 6 years. The Company has excluded from the pro forma adjustment the estimated portion of the fair value adjustment for loans that will be accounted for pursuant to ASC 310-30, Accounting for Loans Acquired with Deteriorated Credit Quality:
		Annual		9 mos.
		$	767	$	575
bb.	Accretion of discount on Trust Preferred Security over remaining life of 24.75 years:
		Annual		9 mos.
		$	145	$	109
cc.	Additional depreciation expense associated with premises acquired over an estimated life of 25 years:
		Annual		9 mos.
		$	436	$	327
dd.	Amorization of core deposit intangible based on 8 year estimated life:
		Annual		9 mos.
		$	331	$	248
ee.	Reversal of SL Bancorp tax expense:
		Annual		9 mos.
		$	(807	$	(274	)
ff.	Dividends and accretion on preferred stock:
		Annual		9 mos.
		$	1,000	$	750		Dividend on $10 million new preferred securities
		$	194	$	145		Accretion of fair value of warrants over estimated life of 10 years
		$	(240	$	(180	)	Reversal of SL Bancorp preferred dividends
		$	954	$	715