SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

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

For the Fiscal Year ended December 31, 2010

OR

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

Commission file number 333-12892

MISSION COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

California	77-0559736
State or other jurisdiction of incorporation or organization	I.R.S. Employer Identification No.
3380 S. Higuera St., San Luis Obispo, California 93401	(805) 782-5000
(Address of principal executive offices)	Issuer’s telephone number

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes.þ No

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.   o

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

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

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.

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

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

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

Yes  oNo  þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $4,366,100.

As of March 25, 2011, the Registrant had 7,094,274 shares of Common Stock outstanding.

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Documents Incorporated by Reference:  Portions of the definitive proxy statement for the 2011 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to SEC regulation 14A are incorporated by reference in Part III, Items 10-14.

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Forward Looking Statements

This Annual Report on Form 10-K/A includes forward-looking information, which is subject to the “safe harbor” created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995.  When the Company uses or incorporates by reference in this Annual Report on Form 10-K the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report on Form 10-K/A.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  Such risks and uncertainties include, but are not limited to, the following factors: (i) general economic conditions, whether national or regional, that could affect the demand for loans and other banking services or lead to increased loan losses; (ii) competitive factors, including increased competition with community, regional and national financial institutions that may lead to pricing pressures on rates the Bank charges on loans and pays on deposits or reduce the value of real estate collateral securing the Bank's loans; (iii) loss of customers of greatest value to the Bank or other losses; (iv) increasing or decreasing interest rate environments that could lead to decreased net interest margin and increased volatility of rate sensitive loans and deposits; (v) changing business conditions in the banking industry; (vi) changes in the regulatory environment or new legislation; (vii) changes in technology or required investments in technology; (viii) credit quality deterioration which could cause an increase in the provision for loan losses; (ix) dividend restrictions; (x) continued tensions in Iraq and elsewhere in the Middle East; and (xi) increased regulation of the securities markets, whether pursuant to the Sarbanes-Oxley Act of 2002 or otherwise.

Investors and other readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date of the statement.

The Company undertakes no obligation to revise any forward-looking statement to reflect later events or circumstances.

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Table of Contents

Mission Community Bancorp

Form 10-K/A

December 31, 2010

Part I
Item 1.	Description of Business	7
Item 1A.	Risk Factors	24
Item 2.	Properties	31
Item 3.	Legal Proceedings	32
Item 4.	Reserved	32
Part II
Item 5.	Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 8.	Financial Statements	62
	Reports of Independent Registered Public Accounting Firms on the Consolidated Financial Statements
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Changes of Shareholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	64
Item 9A.	Controls and Procedures	64
Item 9B.	Other Information	66
Part III
Item 10.	Directors, Executive Officers, and Corporate Governance	67
Item 11.	Executive Compensation	67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	67
Item 13.	Certain Relationships and Related Transactions, and Director Independence	67
Item 14.	Principal Accounting Fees and Services	67
Item 15.	Exhibits	68
	Signatures	71

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EXPLANATORY NOTE

This Amendment No. 1 hereby amends our Annual Report on Form 10-K (“Form 10-K/A”) for the year ended December 31, 2010  which was originally filed with the Securities and Exchange Commission on March 31, 2011 (the “Original 10-K”).  This amendment is being filed mainly to include restated consolidated financial statements as described in Note U, Restatement, of the Notes to the Consolidated Financial Statements.   The consolidated financial statements are being restated to correct accounting errors as follows:

1. Adoption of certain provisions of Accounting Standards Codification (“ASC”) 815 – “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815”) (formerly EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”).  ASC 815 became effective January 1, 2009.  The anti-dilution features in certain outstanding warrants (“Warrants”) of the Company require these Warrants to be accounted for as liabilities and measured at fair value.  The restated consolidated financial statements reflect the reclassification of the Warrants from shareholders’ equity to warrant liability and record changes in the fair value of the warrant liability in the consolidated statements of operations.

2. The Company’s Series A Non-Voting Convertible Redeemable Preferred Stock (“Series A Preferred Stock”) and its Series C Non-Voting Convertible Redeemable Preferred Stock (“Series C Preferred Stock”) received improper accounting treatment related to beneficial conversion features in these preferred securities which were triggered by the issuance by the Company of its securities in a private placement in the second quarter of 2010 at a price below the conversion price set forth in the Certificates of Determination for the Series A and C Preferred Stock. This beneficial conversion impacts the Company’s loss per common share.

Further, the Company’s Series A Preferred Stock, Series B Non-Voting Preferred Stock (“Series B Preferred Stock”) and its Series C Preferred Stock received improper accounting treatment since these preferred shares contain redemption provisions that are outside the control of the Company. As a result, these preferred shares have been removed from stockholders’ equity and are now presented as mezzanine financing at their liquidation value.

The tables below outline the changes to the balance sheet, equity and net loss for the period noted (see Note U, Restatement, of the Notes to the Consolidated Financial Statements for further details):

	December 31, 2010
	(As previously reported)		(Restated)
Warrant Liability, previously classified as equity	$	-	$	5,029,000
Total Liabilities	$	178,657,427	$	183,686,427
Mezzanine Financing:
Redeemable Preferred Stock (Series A, B and C), previously classified as equity	$	-	$	1,205,000

	December 31, 2010
	See Note U
	Stockholders' Equity			Net Loss
Balance as of December 31, 2010, as previously reported	$	39,143,488		$	(6,683,947	)
Cumulative effect of reclassification of redeemable preferred stock, Series A, B and C		(1,205,000	)		-
Fair value of warrants issued in 2010		(8,602,100	)		-
Change in fair value of warrant liability in 2010		3,573,100			3,573,100
Adjusted Balance at December 31, 2010	$	32,909,488		$	(3,110,847	)

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The table below outlines the changes to the calculation for loss per share for the period noted (see Note U, Restatement, of the Notes to the Consolidated Financial Statements for further details):

	Loss Per Share
	December 31, 2010
	(As previously reported)			(Restated) See Note U
Average common shares outstanding during the year (used for basic EPS)		4,388,691			4,388,691
Dilutive effect of outstanding stock options		-			-
Average common shares used for diluted EPS		4,388,691			4,388,691
Net loss	$	(6,683,947	)	$	(3,110,847	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		(153,902	)		-
Non-convertible preferred (Series B)		(31,550	)		-
Accretion of discount resulting from beneficial conversion feature on preferred (Series A and C)		-			882,000
Dividends on Non-convertible TARP preferred (Series D)		255,800			255,800
Total income (loss) allocated to preferred stock		70,348			1,137,800
Net loss allocated to common stock	$	(6,754,295	)	$	(4,248,647	)
Basic loss per common share	$	(1.54	)	$	(0.97	)

The following sections of this Form 10-K/A have been amended to reflect the restatement:

Part I – Item 1 – Description of Business

Part II – Item 5–Market  for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Part II – Item 6 – Selected Financial Data

Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Result of Operations

Part II – Item 8 – Financial Statements and Notes to the Consolidated Financial Statements

Part II – Item 9A – Controls and Procedures

For the convenience of the reader, this Form 10-K/A sets forth the Company’s Original 10-K in its entirety, as amended by, and to reflect the restatement, as described above.  Except as discussed above, the Company has not modified or updated disclosures presented in this Amendment.  Accordingly, this Amendment does not reflect events occurring after the Original 10-K or modify or update those disclosures affected by subsequent events, except as specifically referenced herein. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Filing.

This Form 10-K/A has been signed as of a current date and all certifications of the Company’s Chief Executive Officer/Principal Executive Officer and Chief Financial Officer/Principal Financial Officer and Principal Financial Officer are given as of a current date.  Accordingly, this Form 10-K/A should be read in conjunction with the Company’s filings with the Securities and Exchange Commission subsequent to the filing of the Original 10-K, including any amendments to those filings.

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PART I

Item 1.    Description of Business

Business Development

The Company

Mission Community Bancorp (“Bancorp”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in San Luis Obispo, California.  It was incorporated on September 22, 2000 and acquired all the outstanding shares of Mission Community Bank in a one bank holding company organization effective December 15, 2000.

Bancorp’s principal activity is the ownership of all of the outstanding common stock of Mission Community Bank and any other subsidiaries we may acquire or establish.  Bancorp formed a wholly-owned subsidiary, Mission Community Capital Trust I, in 2003 solely to facilitate the issuance of trust preferred securities.  In May 2010, Bancorp formed its only other direct subsidiary, Mission Asset Management, Inc., in order to purchase certain of the non-performing assets of Mission Community Bank, which assets were purchased in June 2010.

As of December 31, 2010 Bancorp and its consolidated subsidiaries (“the Company”) had approximately $218 million in total assets and $33 million in shareholders’ equity.

The Company’s address is 3380 South Higuera Street, San Luis Obispo, California 9340, and its telephone number is (805) 782-5000.

Bancorp’s principal source of income is dividends from Mission Community Bank although supplemental sources of income may be explored in the future.  Its expenditures, including (but not limited to) the payment of dividends to shareholders, if and when declared by the Board of Directors, the cost of servicing debt, legal fees, audit fees and shareholders costs will generally be paid from dividends paid to us by Mission Community Bank.  Due to recent losses by Mission Community Bank, it is not currently anticipated that Mission Community Bank will be able to pay dividends to Mission Community Bancorp in the near future.  See “Part II--Item 5—Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Dividends.”

At the present time, we have no plans to engage in any activities other than acting as a bank holding company for Mission Community Bank and Mission Asset Management, Inc., although in the future, we may consider engaging in other activities which are permissible for a bank holding company, including the acquisition of other banks, provided that engaging in such activities is deemed by the Board of Directors to be in the best interest of Mission Community Bancorp and its shareholders.

Mission Community Bancorp neither owns nor leases any material property, but instead uses the premises, equipment and furniture of Mission Community Bank.

Each of Mission Community Bancorp, and our subsidiary, Mission Community Bank, has been certified by the U.S. Department of the Treasury as a Community Development Financial Institution with a commitment to providing financial services to low and moderate-income communities.  Although we intend to continue our commitment to providing financial services to low and moderate-income communities, we anticipate that each of Mission Community Bancorp and Mission Community Bank will soon lose their status as CDFI’s due to a change in control in the second quarter of 2010 pursuant to which the ownership by our principal shareholder in the Bancorp’s common stock increased from 24.7% of our common stock to more than 75% of our common stock.  Because our principal shareholder is not itself a CDFI, each of Mission Community Bancorp and Mission Community Bank no longer meet the regulatory criteria to retain their respective CDFI status since in order to maintain such status, any bank holding company which owns more than 25% of the voting shares or otherwise controls through a majority of directors of a company a bank with CDFI status must itself be a CDFI.  Accordingly, we believe that each of Mission Community Bancorp and Mission Community Bank will lose their respective CDFI status in the near future, and, in any event, we do not believe we will any longer be able to take advantage of the benefits of being a CDFI, such as applying for grants and awards under applicable CDFI programs.

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Further, pursuant to the terms of our Series A and Series C common stock, which shares were issued to the Community Development Financial Institutions Fund of the U.S. Department of the Treasury in conjunction with funding relating to our CDFI status, the Community Development Financial Institutions Fund has the right to cause us to redeem all of the Series A and Series C common stock in the event we lose our CDFI status.  If upon the loss of our CDFI status, the Community Development Financial Institutions Fund should exercise its right to cause us to redeem our Series A and Series C preferred stock, we would be required to redeem this stock for an aggregate of approximately $1.0 million. To date we have not been contacted or notified by the CDFI Fund regarding our status as a CDFI or their intent to redeem our Series A or Series C Preferred Stock.

Mission Community Bank

The Bank, a wholly-owned subsidiary of Bancorp, is a California state-chartered bank headquartered in San Luis Obispo, California.  It is also a member of the Federal Reserve System.  Its deposits are insured by the FDIC up to the applicable limits of the law.  Mission Community Bank opened for business on December 18, 1997, and currently operates four full service locations in the cities of San Luis Obispo, Paso Robles and Arroyo Grande in San Luis Obispo County and in Santa Maria in northern Santa Barbara County in the Central Coast of California.  We also operate a Business Banking Center in San Luis Obispo which is primarily engaged in originating and servicing SBA-guaranteed loans.  Our administrative offices are also located in San Luis Obispo.

We opened our branch in the city of Paso Robles in 1998, our branch in Arroyo Grande in 2002, and our branch in Santa Maria in December 2008.  The Business Banking Center opened in 2006.

The Bank is a community bank engaged in the general commercial banking business in the Central Coast of California.  It offers a variety of deposit and loan products to individuals and small businesses and a specialization in community development financial services and SBA loans.  Through its community development activities, the Bank seeks to provide financial support and services by promoting community development and economic vitality.

At December 31, 2010, the Bank, on a stand-alone basis, had approximately $199.4 million in assets, $105.1 million in loans, $178.0 million in deposits, and $19.5 million in stockholders’ equity.

Our primary market area is San Luis Obispo County and northern Santa Barbara County.  Secondary market areas include cities and unincorporated areas in the neighboring counties of Kern, Kings and Fresno.  We service these secondary market areas through direct contact by calling officers who travel into the neighboring counties.  Any physical expansion into this secondary market area would most likely come from acquisitions or through the establishment of loan production offices although we have no immediate plans for acquisitions or the establishment of loan production offices.

The Bank is also certified by the State of California Department of Insurance to accept deposits or investments under the California Organized Investment Network (the “COIN”).  The COIN program provides California tax credits and/or CRA credit to individuals, corporations, or partnerships that invest at below market rates for specified terms.  In addition, the Bank has obtained preferred lender status with the Small Business Administration which generally allows it to approve and fund SBA loans without the necessity of having the loan approved in advance by the SBA.

Mission Community Development Corporation (“MCDC”)

Mission Community Development Corporation, a community development corporation which was incorporated in August 1997, is a wholly-owned subsidiary of the Bank.  MCDC is a “for-profit” Community Development Corporation (“CDC”), which provides financing for small businesses and low- to moderate-income area development and/or affordable housing projects.  Its purpose is to benefit small business and low- to moderate-income areas/residents.  The board of directors of MCDC consists of the members of the Board of Directors of the Bank.

At December 31, 2010, MCDC had no loans and $156,000 in shareholder’s equity.  MCDC provides loan accounting services for a very small pool of community development micro loans which have been funded by a group of banks through the Economic Vitality Corporation, as well as management of an emergency assistance loan pool created after the San Simeon earthquake of December 2003.  MCDC also manages a loan pool for the San Luis Obispo County Housing Trust Fund to assist in providing affordable housing within the county.  Loans serviced by MCDC as of December 31, 2010, totaled approximately $3,452,000.

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Mission Asset Management, Inc. (“MAM”)

Mission Asset Management, Inc., a wholly-owned subsidiary of Bancorp, was established in June 2010 to facilitate the orderly sale or resolution of the Bank’s foreclosed real estate and certain lower-quality loans.  To that end, in 2010 the Bank reclassified $22.4 million of lower-quality loans (including $10.3 million of nonaccrual loans) to “held for sale,” writing down the value of those loans to $16.9 million through charge-offs to the allowance for loan and lease losses.  Those loans, along with $1.0 million of other real estate, were sold from the Bank to MAM at the aggregate purchase price of $17.9 million.

Mission Community Services Corporation (“MCSC”)

Bancorp and the Bank have an affiliate relationship with, but no ownership of, MCSC, which was incorporated in August 1997 and which was established in September 2003 as a “not-for-profit” public charitable corporation under Internal Revenue Code Section 501(c)(3).  The accounts of MCSC are not included in the Company’s consolidated financial statements or elsewhere in this Form 10-K/A.  MCSC’s primary focus is to provide technical assistance and training services to the community, including small business, minority and low-income entrepreneurs.  The Board of Directors of MCSC includes representatives from the Company, together with members representing the low-income and business community.  Over the five-year period ended December 31, 2010, Bancorp has provided $205 thousand in cash contributions and $90 thousand in in-kind (non-cash) contributions to MCSC.

In 2006, MCSC was awarded a five-year, $750,000 grant from the U.S. Small Business Administration to fund one of 99 Women’s Business Centers nationwide.  MCSC is also “COIN”-certified as a CDFI.  See also Note M to the Consolidated Financial Statements for additional information regarding MCSC.

The “Mission” Group

Bancorp, the Bank and its subsidiary MCDC, MAM and MCSC form an organizational structure intended to provide traditional community bank financial services and to foster economic revitalization and community development to its target market.

Business of Issuer

Principal Products, Services, and Markets

Other than holding the shares of the Bank, Bancorp conducts no significant activities. Bancorp is authorized with the prior approval of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), its principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking.

The Bank offers checking and savings accounts, money market accounts and time certificates of deposits; offers commercial, agribusiness, government guaranteed, real estate, automobile and other installment and term loans and leases; issues drafts, sells travelers’ checks and provides other customary banking services. Although the Bank does not operate a trust department or provide international services, it makes trust services or international services available through correspondent institutions.

The areas in which the Company has directed virtually all of its lending activities are commercial loans (including government-guaranteed, agricultural and municipal loans), real estate loans, construction loans, consumer loans and lease financing  As of December 31, 2010, these five categories accounted for approximately 18.2%, 72.3%, 7.4%, 1.2%, and 0.9% respectively, of the Company’s gross loan portfolio.  As of that date, $95.9 million, or 79.8%, of the Company’s loans consisted of real estate loans, for single family residences or for commercial development, and interim construction loans.  This represents a $13.6 million decrease in real estate and construction loans from the prior year’s combined total of $109.5 million.  In percentage terms, real estate and construction loans decreased from 80.3% to 79.8% of the loan portfolio.  Under the regulatory definition of commercial real estate—which excludes owner-occupied properties—the Company’s commercial real estate concentration is reduced to $44.9 million, or 37.4% of gross loans.  See Loan Concentrations in Management’s Discussion and Analysis under Item 7 of Part II of this report.

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As of December 31, 2010, the Bank had 4,629 deposit accounts, including 2,940 demand accounts (both non-interest-bearing and interest-bearing, including NOW and money market deposit accounts) totaling $69.9 million; 987 savings accounts with balances totaling $22.1 million; and 702 time certificates of deposit totaling $80.3 million.

The principal sources of the Bank’s revenues are interest and fees on loans, interest on investments including federal funds sold and deposits in other banks, gain on loan sales, service charges on deposit accounts and, occasionally, gain on securities sales, grants and awards and changes in fair value of warrant liability.  For the year ended December 31, 2010, these sources comprised 62.7%, 3.0%, 2.5%, 3.5%, 4.2%, and 25.2%, respectively, of the Bank’s total operating income.

Distribution Methods of the Products and Services

The Bank’s primary service area consists of San Luis Obispo county and northern Santa Barbara county, which lie centrally within the State of California along the Pacific Ocean.  Secondary market areas include cities and unincorporated areas in the neighboring counties, including Monterey, Kern, Kings, and Fresno, with expansion in 2011 into Ventura and south Santa Barbara Counties.

The Bank operates out of four full service offices (in the cities of San Luis Obispo, Paso Robles, Arroyo Grande and Santa Maria) plus an administrative and loan production facility, which is located in the city of San Luis Obispo, with afifth full-service office in the Company’s headquarters building is currently scheduled to open in April 2011.  In the first quarter of 2011, the Bank opened a loan production office for food and agribusiness lending in Oxnard, California.  The Bank provides some financial services through direct contact by calling officers who travel into the neighboring counties.

The Bank’s operating policy since its inception has emphasized community development through small business, commercial and retail banking.  Most of the Bank’s customers are retail customers, farmers and small to medium-sized businesses and their owners.  The Bank also emphasizes loans and financial services to low- to moderate-income communities within its target market area.  Most of the Bank’s deposits are attracted by relationship banking, local activities, and advertising.

The business plan of the Bank emphasizes providing highly specialized financial services in a professional and personalized manner to individuals and businesses in its service area.  Its key strengths are customer service and an experienced management team familiar with the community through the Bank’s involvement in various community lending and development projects.

Since 2007, the Bank has extended its use of Internet technology as a distribution tool to improve its customer service by making available a “remote capture” deposit product, as well as enhanced Internet Banking, electronic Bill-Pay and ACH origination.  Today the Bank continues to expand its technology-based products, with “virtual lockbox,” “positive pay” and online image statements for both consumer and business customers expected to be made available in 2011.

During 2006 the Bank began to capitalize on its status as one of only four banks in its primary service area participating in the Certificate of Deposit Account Registry Service (“CDARS”) program.  This program permits the Bank’s customers to place all of their certificates of deposit at the Bank and have those deposits fully-insured by the FDIC.  The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of more than 3,000 banks with other network banks (in increments of less than the $250 thousand FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet.  While the Bank continues to focus its extension of CDARS to client relationships in its local market area who are seeking additional FDIC insurance coverage, its participation in the CDARS program also permits it to bid on additional certificates of deposit through banks across the country to meet additional funding needs.  These “One-Way Buy” CDARS deposits would be considered to be brokered deposits.  When the Bank has excess funds, the CDARS program enables the Bank to place those funds in CD’s with CDARS network banks (known as the “One-Way Sell” program), which generally results in a higher yield than if those funds were invested in Federal Funds.

Status of and Publicly Announced New Products or Services

In an effort to reach out to the community to share sound money management practices and habits to the target market of low-income and under-banked individuals, the Bank has formed a Financial Education team of bank employees.  A series of training workshops covering the fundamentals of banking and financial services have been developed in English and Spanish.  The Bank expects to increase its focus on profitable financial services for the un-banked and under-banked customers in its market area, but does not expect these services will be a material percentage of its deposit activities.

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In 2010 the Bank received a $600 thousand BEA award, based on lending activity in 2009.  This grant was recognized in non-interest income.  Previous grants and awards that have been included in non-interest income are as follows:

2001	$	537,750
2002		182,936
2003		180,900
2004		1,332,756
2006		100,188
2007		359,480
2009		80,948
2010		600,000
Total 2001 through 2010	$	3,374,958

Competition

The banking and financial services business in the Bank’s market area is highly competitive.  The increasingly competitive environment is a result primarily of changes in regulation, and changes in technology and product delivery systems.  The Bank emphasizes to its customers the advantages of dealing with a locally owned and community development oriented institution. Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns in addition to expanded products like trust services, international banking, discount brokerage and insurance services that the Bank does not offer.  As a service to its customers, the Bank has made arrangements with other financial service providers to extend such services to its customers where possible.  For borrowers requiring loans in excess of the Bank’s legal lending limits, the Bank makes use of loan participations with its correspondent banks and with other independent banks, retaining the portion of such loans that is within its legal lending limits.  Commercial banks compete with savings and loan associations, credit unions, other financial institutions, securities brokerage firms, and other entities for funds.  For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits.

The Bank utilizes technology to improve its competitive advantages by use of ATMs, Internet Banking, ACH origination, electronic bill pay, email, remote deposit capture and credit card and merchant card relationships.

In addition, in order to compete effectively, the Bank has created a sales and service culture that combines the experience of its senior officers with the commitment to service and a focus on the individual needs of its customers that is found at the best community banks.  The Bank also relies on local advertising programs, direct personal contact by its officers, directors, employees and shareholders and specialized services such as courier pick-up and remote deposit capture.  The Bank believes it provides a level of service and decision-making responsiveness not generally offered by larger institutions.

The Bank’s primary service area consists of the county of San Luis Obispo and parts of Santa Barbara County and now Ventura County.    As in most major U.S. cities, large banks compete in our service area.  However, rather than these large financial institutions, community banks are more prominent in our market.  As such, we believe our primary competitors for individuals and small and medium-sized business customers are the community banks, which can provide the service and responsiveness attractive to this customer base.

Within San Luis Obispo county and northern Santa Barbara county, and based on data from the FDIC as of June 30, 2010, there were 19 banks with 105 branches with aggregate deposits of $6.7 billion.  The Bank’s deposits represent a 2.4% share of this market.  Of the 19 banks, nine were community banks (banks with less than $1 billion in assets), with seven of these banks headquartered in San Luis Obispo county and three headquartered in Santa Barbara county.  There were also six credit unions operating in San Luis Obispo and northern Santa Barbara Counties.  Three of those credit unions are headquartered in the Bank’s target market area.

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Dependence on One or a Few Major Customers

The Bank is limited, due to legal lending limits, in the size of loans it can make to any one individual borrower (in the aggregate).  It has in its portfolio approximately 500 loans to approximately 385 loan customers.  As of December 31, 2010, the Bank’s legal lending limit to a single borrower, and such borrower’s related parties, was approximately $5.7 million on a secured basis, and was $3.4 million for unsecured loans, based on regulatory capital plus reserves of approximately $22.7 million.

The Bank has a higher than average dependence (as measured by peer group analysis) on larger deposit balances (deposits of $100,000 or more) with a total of 429 deposit accounts holding $122.2 million in deposits as of December 31, 2010.  Included in those totals are 11 customers with deposits of $1 million or more totaling $52.8 million, with one local customer relationship representing approximately 20% of the Bank’s total deposits as of December 31, 2010.  Management works with large depositors to “ladder out” certificate of deposit maturities in order to both minimize liquidity risk for the Bank and provide a better return for the customer on their deposited funds.  These large deposit balances have been reasonably stable during the past several years and are consistent with the Bank’s deposit/funding strategy.  Also included in the totals above are 18 non-interest-bearing transaction accounts, of which $15.7 million exceeds the normal FDIC insurance limit, but which have been subject to unlimited FDIC insurance coverage under the Transaction Account Guarantee Program (“TAGP”) through December 31, 2010.On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which, in part, extends full deposit insurance coverage for noninterest bearing deposit transaction accounts beginning December 31, 2010 for an additional two year period.  The Bank has a contingency funding plan in place to address any potential loss of these large deposits.

The Bank’s business does not appear to be seasonal.

Recent Developments

Enacted as part of the Small Business Jobs Act of 2010, the Treasury Department recently announced the creation of a Small Business Lending Fund (“SBLF”), which is intended to encourage lending to small businesses by providing Tier 1 capital—up to 5% of risk-weighted assets—to qualified community banks with less than $10 billion in assets.  Eligible community banks that have issued preferred stock to the Treasury Department through the TARP CPP, such as the Company, may refinance their TARP preferred stock with a new issuance through SBLF.  Dividends on SBLF preferred stock may be either lower or higher than the rate currently paid on TARP preferred, depending on whether certain lending targets are, or aren’t, met.   The Company has submitted an application with the Treasury Department for the issuance of preferred stock under the SBLF program.  It is not yet known whether the Company’s application will be accepted by the Treasury and the Company’s primary regulators.

Effect of Government Policies and Regulations

Banking is a business that depends on rate differentials.  In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank’s portfolio comprise the major portion of the Bank’s earnings.  These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Bank are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.

The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board.  The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in U.S. Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits.  The nature and impact of any future changes in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions.  Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies.  For example, the Bank’s ability to originate and sell SBA loans would be severely impacted if federal appropriations for the SBA lending program were curtailed or eliminated.

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Supervision and Regulation

Both federal and state laws extensively regulate banks and bank holding companies.  This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders of the Company.  The following is a summary of particular statutes and regulations affecting the Company and the Bank.  This summary is qualified in its entirety by the statutes and regulations.  No assurance can be given that such statutes or regulations will not change in the future.

Regulation of Mission Community Bancorp—General

Mission Community Bancorp is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is regulated by the Federal Reserve Board.  The Company is required to file periodic reports with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act.  The Federal Reserve Board may conduct examinations of the Company and its subsidiaries, which includes the Bank.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring substantially all the assets of any bank or bank holding company or ownership or control of any voting shares of any bank or bank holding company, if, after the acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of the bank or bank holding company.  The principal exceptions to these prohibitions involve non-bank activities identified by statute, by Federal Reserve regulation, or by Federal Reserve order as activities so closely related to the business of banking or of managing or controlling banks as to be a proper incident thereto, including securities brokerage services, investment advisory services, fiduciary services, and management advisory and data processing services, among others. A bank holding company that also qualifies as and elects to become a “financial holding company” may engage in a broader range of activities that are financial in nature (and complementary to such activities), specifically non-bank activities identified by the Gramm-Leach-Bliley Act of 1999 or by Federal Reserve and Treasury regulation as financial in nature or incidental to a financial activity. Activities that are defined as financial in nature include securities underwriting, dealing, and market making, sponsoring mutual funds and investment companies, engaging in insurance underwriting and agency activities, and making merchant banking investments in non-financial companies. To become and remain a financial holding company, a bank holding company and its subsidiary banks must be well capitalized, well managed, and, except in limited circumstances, have at least a satisfactory rating under the Community Reinvestment Act.  The Company has no current intention of becoming a financial holding company, but may do so at some point in the future if deemed appropriate in view of opportunities or circumstances at the time.

The Company and the Bank are deemed to be affiliates of each other within the meaning set forth in the Federal Reserve Act and are subject to Sections 23A and 23B of the Federal Reserve Act. The Federal Reserve Board has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.  This means, for example, that there are limitations on loans by the Bank to affiliates, and that all affiliate transactions must satisfy certain limitations and otherwise be on terms and conditions at least as favorable to the Bank as would be available for non-affiliates. In addition, we must comply with the Federal Reserve Act and Regulation O issued by the Federal Reserve Board, which require that loans and extensions of credit to our executive officers, directors and principal shareholders, or any company controlled by any such persons, shall, among other conditions, be made on substantially the same terms and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders.

Regulations and policies of the Federal Reserve Board require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks.  It is the Federal Reserve Board’s policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting a subsidiary bank.  Under certain conditions, the Federal Reserve Board may conclude that certain actions of a bank holding company, such as a payment of a cash dividend, would constitute an unsafe and unsound banking practice.

The Federal Reserve Board also has the authority to regulate bank holding companies’ debt, including the authority to impose interest rate ceilings and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require a bank holding company to file written notice and obtain its approval prior to purchasing or redeeming its equity securities, unless certain conditions are met.

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The securities of the Company are also subject to the requirements of the Securities Act, and matters related thereto are regulated by the Securities and Exchange Commission.  Certain issuances may also be subject to the California’s corporate securities law as administered by the California Commissioner of Corporations.  The Company is subject to the public reporting requirements of the Securities and Exchange Act of 1934, as amended, generally applicable to publicly held companies, under Section 15(d) of the Exchange Act.  Companies which file a registration statement under the Securities Act are required under Section 15(d) of the Exchange Act for at least a 12-month period after the effectiveness of such registration statement to file periodic quarterly and annual reports under the Securities Act.  If and when the Company has more than 500 shareholders of record, it will be required to register its securities with the Securities and Exchange Commission under Section 12(g) of the Exchange Act at which time its filing of periodic reports, as well as certain other reporting obligations, will become mandatory.

Regulation of Mission Community Bank—General

As a California state-chartered bank, the Bank is subject to regulation, supervision and examination by the California Department of Financial Institutions.  It is also a member of the Federal Reserve System and, as such, is subject to applicable provisions of the Federal Reserve Act and the related regulations promulgated by the Board of Governors of the Federal Reserve System.  In addition, the deposits of the Bank are currently insured by the Federal Deposit Insurance Corporation (“FDIC”) to a maximum of $250,000 per depositor, and potentially higher limits with respect to certain retirement accounts.  Beginning December 5, 2008, the Bank elected to participate in the FDIC’s Transaction Account Guarantee Program (“TAGP”), which provides, through December 31, 2012, an unlimited guarantee of funds in noninterest-bearing transaction accounts (including NOW accounts restricted during the guarantee period to interest rates of 0.25% or less).  For deposit insurance protection, the Bank pays a quarterly assessment, and occasional mandated special assessments, to the FDIC and is subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters.  The regulations of those agencies will govern most aspects of the Bank’s business, including the making of periodic reports by the Bank, and the Bank’s activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits, the issuance of securities and numerous other areas.

The earnings and growth of the Bank is largely dependent on its ability to maintain a favorable differential or “spread” between the yield on its interest-earning assets and the rate paid on its deposits and other interest-bearing liabilities.  As a result, the Bank’s performance is influenced by general economic condi­tions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies, particularly the Federal Reserve Board.  The Federal Reserve Board implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rate applicable to borrowings by banks which are members of the Federal Reserve System.  The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged and paid on loans and deposits.  The nature and impact of any future changes in monetary policies cannot be predicted.

Capital Adequacy Requirements

The Company and the Bank are subject to the regulations of the Federal Reserve Board governing capital adequacy.  Those regulations incorporate both risk-based and leverage capital requirements.  Under existing regulations, the capital requirements for a bank holding company whose consolidated assets are less than $500 million, like the Company, are deemed to be the same as that of its subsidiary bank.  The Federal Reserve Board has established risk-based and leverage capital guidelines for the banks it regulates, which set total capital requirements and define capital in terms of “core capital elements,” or Tier 1 capital, and “supplemental capital elements,” or Tier 2 capital.  Tier 1 capital is generally defined as the sum of the core capital elements less goodwill and certain intangibles.  The following items are defined as core capital elements: (i) common stockholders’ equity; (ii) qualifying non-cumulative perpetual preferred stock and related surplus; and (iii) minority interests in the equity accounts of consolidated subsidiaries.  Supplementary capital elements include: (i) allowance for loan and lease losses (but not more than 1.25% of an institution’s risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and (iv) term subordinated debt and intermediate-term preferred stock and related surplus.  The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.

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In March 2005, the Federal Reserve Board adopted a final rule allowing bank holding companies to continue to include trust preferred securities in their Tier 1 capital. The amount that can be included is limited to 25 percent of core capital elements, net of goodwill less any associated deferred tax liability.  In addition, since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act, the Company will be able to continue to include its existing trust preferred securities in Tier 1 capital to the extent permitted by FRB guidelines.  See “Dodd-Frank Wall Street Reform and Consumer Protection Act” below.

The Bank is required to maintain a minimum ratio of qualifying total capital to total risk-weighted assets of 8.0% (“Total Risk-Based Capital Ratio”), at least one-half of which must be in the form of Tier 1 capital (“Tier 1 Risk-Based Capital Ratio”).  Risk-based capital ratios are calculated to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items.  Under the risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with very low credit risk, such as certain U. S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.  As of December 31, 2010 and December 31, 2009, the Bank’s Total Risk-Based Capital Ratio was 17.2% and 14.2%, respectively, and its Tier 1 Risk-Based Capital Ratio was 15.9% and 12.9%, respectively.

The risk-based capital standards also take into account concentrations of credit and the risks of “non-traditional” activities (those that have not customarily been part of the banking business). The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards, and authorize the regulators to review an institution’s management of such risks in assessing an institution’s capital adequacy.

Additionally, the regulatory statements of policy on risk-based capital include exposure to interest rate risk as a factor that the regulators will consider in evaluating a bank’s capital adequacy, although interest rate risk does not impact the calculation of a bank’s risk-based capital ratios.  Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from adverse movements in interest rates.  While interest risk is inherent in a bank’s role as financial intermediary, it introduces volatility to bank earnings and to the economic value of the bank or bank holding company.

Banks are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines.  Banks that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets (“Leverage Capital Ratio”) of at least 3%.  All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%.  Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans, and federal regulators may set higher capital requirements when a bank’s particular circumstances warrant.   The Bank’s Leverage Capital Ratio was 10.2% as of December 31, 2010 and 9.6% at December 31, 2009.  See also Note P to the Consolidated Financial Statements for additional information regarding regulatory capital.

Prompt Corrective Action Provisions

Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios.  The federal banking agencies have by regulation defined the following five capital categories: “well capitalized” (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Capital Ratio of 5%); “adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Capital Ratio of 4%) (or 3% if the institution receives the highest rating from its primary regulator); “undercapitalized” (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Capital Ratio of less than 4%) (or 3% if the institution receives the highest rating from its primary regulator); “significantly undercapitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Capital Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than 2%).  A bank may be treated as though it were in the next lower capital category if, after notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as “critically undercapitalized” unless its actual capital ratio warrants such treatment.

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At each successively lower capital category, an insured bank is subject to increased restrictions on its operations.  For example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions if to do so would make the bank “undercapitalized.”  Asset growth and branching restrictions apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any).  “Significantly undercapitalized” banks are subject to broad regulatory authority, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing compensation to senior executive officers without regulatory approval.  Even more severe restrictions apply to critically undercapitalized banks.  Most importantly, except under limited circumstances, not later than 90 days after an insured bank becomes critically undercapitalized, the appropriate federal banking agency is required to appoint a conservator or receiver for the bank.

In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.  Enforcement actions may include the issuance of cease and desist orders, termination of insurance of deposits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties.

Safety and Soundness Standards

The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository institutions.  Those guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure.  In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired.  If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute enforcement proceedings if an acceptable compliance plan is not submitted.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a landmark financial reform bill that significantly changes the current bank regulatory structure and affects the lending, investment, trading and operating activities of financial institutions and their holding companies. Among other things, the Dodd-Frank Act dramatically impacts the rules governing the provision of consumer financial products and services. The new law includes, among other things, the following:

· The Dodd-Frank Act establishes a new Financial Stability Oversight Counsel to monitor systemic financial risks.  The Board of Governors of the Federal Reserve are given extensive new authorities to impose strict controls on large bank holding companies with total consolidated assets equal to or in excess of $50 billion and systemically significant non-bank financial companies to limit the risk they might pose for the economy and to other large interconnected companies.  The Dodd-Frank Act also grants to the Treasury Department, FDIC and the FRB broad new powers to seize, close and wind-down “too big to fail” financial institutions (including non-bank institutions) in an orderly fashion.

· The Dodd-Frank Act also establishes a new independent Federal regulatory body for consumer protection within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the “Bureau”), which will assume responsibility for most consumer protection laws. It will also be in charge of setting appropriate consumer banking fees and caps.  The Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators.

· The Dodd-Frank Act restricts the amount of trust preferred securities (“TPS”) that may be considered Tier 1 Capital.  For depository institution holding companies below $15 billion in total assets, TPS issued before May 19, 2010 will be grandfathered, so their status as Tier 1 capital does not change. However going forward, TPS will be disallowed as Tier 1 capital. Since the Company had less than $15 billion in assets, under the Dodd-Frank Act, the Company will be able to continue to include its existing TPS in Tier 1 capital to the extent permitted by FRB guidelines.

· The Dodd-Frank Act effects changes in the FDIC assessment base with stricter oversight. A new council of regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must keep on hand. The minimum reserve ratio is to be increased from 1.15 percent to 1.35 percent; however, financial institutions with assets of less than $10 billion like the Bank are to be exempt from the cost of the increase. FDIC insurance coverage is made permanent at the $250,000 level retroactive to January 1, 2008 and unlimited FDIC insurance is provided for non-interest-bearing demand deposits, which coverage will continue until December 31, 2012.

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· Under the Dodd-Frank Act, the Comptroller of the Currency’s ability to preempt state consumer protection laws was made more difficult by raising the applicable preemption standards and state attorneys general are granted greater authority to enforce state consumer protection laws against national banks and their operating subsidiaries.

· The Dodd-Frank Act adopts the so-called “Volcker rule,” which, subject to certain exceptions, prohibits any banking entity from engaging in proprietary trading, or sponsoring or investing in a hedge fund or private equity fund.

The Company is currently evaluating the potential impact the Dodd-Frank Act will have on its business, financial condition, results of operations and prospects and expects that some provisions of the Dodd-Frank Act may have adverse effects on the Company, such as the cost of complying with the numerous new regulations and reporting requirements mandated by the Dodd-Frank Act. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company and the financial services industry more generally. Provisions in the legislation that affect deposit insurance assessments, and payment of interest on demand deposits could increase the costs associated with deposits.

The Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program

In response to unprecedented market turmoil and the financial crises affecting the overall banking system and financial markets in the United States, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008.  On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill”) was enacted, which among other things augmented certain provisions of the EESA.  Under the EESA, the Treasury Department was given the authority, among other authorizations, to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions in the Troubled Asset Relief Program (the “TARP”).  The purpose of the TARP was to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  

Pursuant to the EESA, the Treasury Department allocated $250 billion to the TARP Capital Purchase Program (see description below).

The TARP Capital Purchase Program (“CPP) was developed to purchase $250 billion in senior preferred stock from qualifying financial institutions, and was designed to strengthen the capital and liquidity positions of viable institutions and to encourage banks and thrifts to increase lending to creditworthy borrowers.  The amount of the Treasury Department’s preferred stock a particular qualifying financial institution could be approved to issue would be not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.

The general terms of the TARP CPP include:

· Dividends on the Treasury Department’s preferred stock at a rate of five percent for the first five years and nine percent thereafter;

· Common stock dividends cannot be increased for three years while the Treasury Department is an investor unless preferred stock is redeemed or consent from the Treasury is received;

· The Treasury Department must consent to any buyback of other stock (common or other preferred);

· The Treasury Department’s preferred stock will have the right to elect two directors if dividends have not been paid for six periods;

· The Treasury Department receives warrants equal to 15 percent of the Treasury Department’s total investment in the participating institution (provided, however, that the Company was not required to issue any warrants due to its status as a Community Development Financial Institution); and

· The participating institution’s executives must agree to certain compensation restrictions, and restrictions on the amount of executive compensation that is tax deductible.

The Company elected to participate in the TARP CPP and in January 2009 issued $5.1 million worth of preferred stock to the Treasury Department pursuant to this program.

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The EESA also established a Temporary Liquidity Guarantee Program (“TLGP”) that gave the FDIC the ability to provide a guarantee for newly-issued senior unsecured debt and non-interest bearing transaction deposit accounts at eligible insured institutions. The Company is currently participating in the transaction account guarantee program. This program was initially scheduled to continue through December 31, 2010, but the Dodd-Frank Act has extended full deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2012, and all financial institutions are required to participate in this extended guarantee program. For non-interest bearing transaction deposit accounts, a 10 basis point annual FDIC insurance premium surcharge was applied to deposit amounts in excess of $250,000 through December 31, 2009, and a risk-based surcharge of between 15 and 25 basis points was applied beginning January 1, 2010.

Deposit Insurance

 The Bank’s deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. In October 2010, the FDIC adopted a revised restoration plan to ensure that the DIF’s designated reserve ratio (“DRR”) reaches 1.35% of insured deposits by September 30, 2020, the deadline mandated by the Dodd-Frank Act.  However, financial institutions like the Bank with assets of less than $10 billion are required to be exempt from the cost of this increase, and the FDIC plans further rulemaking in 2011 regarding the method that will be used to reach the requisite 1.35% minimum reserve ratio while offsetting the effect of required increases on such smaller institutions.  In addition, because of lower expected losses over the next five years and the additional time provided by Dodd-Frank to meet the minimum DRR, the FDIC eliminated the uniform 3 basis point increase in assessment rates that was previously scheduled to go into effect on January 1, 2011.  Furthermore, the restoration plan proposed an increase in the DRR to 2% of estimated insured deposits as a long-term goal for the fund.  The FDIC also proposed future assessment rate reductions in lieu of dividends, when the DRR reaches 1.5% or greater.

Furthermore, the FDIC redefined its deposit insurance premium from an institution’s total domestic deposits to an institution’s total assets less tangible equity, effective in the second quarter of 2011.  The changes to the assessment base necessitated changes to assessment rates, which will become effective April 1, 2011.  While revised assessment rates will be lower than current rates, the assessment base will be larger, and the expectation is that approximately the same amount of assessment revenue will be collected by the FDIC as under the current structure.

To help address liquidity issues created by potential timing differences between the collection of premiums and charges against the DIF, in November 2009 the FDIC adopted a final rule to require insured institutions to prepay, on December 31, 2009, their estimated quarterly risk-based deposit insurance assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.

In addition to DIF assessments, banks must pay quarterly assessments in an amount which fluctuates but is currently 1.02 basis points of insured deposits, towards the retirement of the Financing Corporation bonds issued in the 1980’s to assist in the recovery of the savings and loan industry. These assessments will continue until the Financing Corporation bonds mature in 2019.

The enactment of the EESA (discussed above) temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective on October 3, 2008. The Dodd-Frank Act made permanent the increase to $250,000 in the deposit insurance limit.  As of December 31, 2010, the Bank had approximately $15.7 million in non-interest bearing accounts exceeding $250,000.

Community Reinvestment Act

The Bank is subject to certain requirements and reporting obligations involving Community Reinvestment Act activities.  The Community Reinvestment Act generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. The Community Reinvestment Act further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations.  In measuring a bank’s compliance with its Community Reinvestment Act obligations, the regulators utilize a performance-based evaluation system which bases Community Reinvestment Act ratings on the bank’s actual lending service and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements.  In connection with its assessment of Community Reinvestment Act performance, the agencies assign a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.”  The Bank received an “outstanding” rating in its last completed Community Reinvestment Act examination in 2010.

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Privacy and Data Security

The Gramm-Leach-Bliley Act, also known as the “Financial Modernization Act”, which became effective in 2000, imposed new requirements on financial institutions with respect to consumer privacy.  The statute generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure.  Financial institutions are further required to disclose their privacy policies to consumers annually.  Financial institutions, however, are required to comply with state law if it is more protective of consumer privacy than the Gramm-Leach-Bliley Act.  The statute also directed federal regulators, including the Federal Reserve and the FDIC, to prescribe standards for the security of consumer information.  Bancorp and the Bank are subject to such standards, as well as standards for notifying consumers in the event of a security breach.

Other Consumer Protection Laws and Regulations

Activities of all insured banks are subject to a variety of statutes and regulations designed to protect consumers, such as the Fair Credit Reporting Act, Equal Credit Opportunity Act, and Truth-in-Lending Act.  Interest and other charges collected or contracted for by the Bank are also subject to state usury laws and certain other federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws and regulations applicable to credit transactions.  Together, these laws and regulations include provisions that:

· govern disclosures of credit terms to consumer borrowers;

· require financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

· prohibit discrimination on the basis of race, creed, or other prohibited factors in extending credit;

· govern the use and provision of information to credit reporting agencies; and

· govern the manner in which consumer debts may be collected by collection agencies.

The Bank’s deposit operations are also subject to laws and regulations that:

· impose a duty to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of financial records; and

· govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

In November 2009, the Board of Governors of the Federal Reserve System promulgated a rule entitled “Electronic Fund Transfers”, with an effective date of January 19, 2010 and a mandatory compliance date of July 1, 2010.  The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee for paying automated teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions.  The opt-in provision establishes requirements for clear disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions.  The rule does not apply to other types of transactions, such as check, automated clearinghouse (ACH) and recurring debit card transactions.  Since none of the Company’s service charges on deposits are in the form of overdraft fees on ATM or point-of-sale transactions, compliance with this rule did not have an adverse impact on our non-interest income.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 regulates the interstate activities of banks and bank holding companies and establishes a framework for nationwide interstate banking and branching.  Since 1995, adequately capitalized and managed bank holding companies have been permitted to acquire banks located in any state, subject to two exceptions: first, any state may still prohibit bank holding companies from acquiring a bank which is less than five years old; and second, no interstate acquisition can be consummated by a bank holding company if the acquirer would control more than 10% of the deposits held by insured depository institutions nationwide or 30% percent or more of the deposits held by insured depository institutions in any state in which the target bank has branches.

In 1995 California enacted legislation to implement important provisions of the Riegle-Neal Act discussed above and to repeal California’s previous interstate banking laws, which were largely preempted by the Riegle-Neal Act.

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A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch if that state has enacted legislation to expressly permit all out-of-state banks to establish branches in that state.  However, California law expressly prohibits an out-of-state bank which does not already have a California branch office from (i) purchasing a branch office of a California bank (as opposed to purchasing the entire bank) and thereby establishing a California branch office or (ii) establishing a de novo branch in California.

The changes effected by the Riegle-Neal Act and California laws have increased competition in the environment in which the Bank operates to the extent that out-of-state financial institutions may directly or indirectly enter the Bank’s market areas.  It appears that the Riegle-Neal Act has contributed to the accelerated consolidation of the banking industry, with many large out-of-state banks having entered the California market as a result of this legislation.

Financial Modernization Act

Effective March 11, 2000, the Gramm-Leach-Bliley Financial Modernization Act enabled full affiliations to occur between banks and securities firms, insurance companies and other financial service providers.  This legislation permits bank holding companies to become “financial holding companies” and thereby acquire securities firms and insurance companies and engage in other activities that are financial in nature.  A bank holding company may become a financial holding company if each of its subsidiary banks is “well capitalized” and “well managed” under applicable definitions, and has at least a satisfactory rating under the CRA by filing a declaration that the bank holding company wishes to become a financial holding company.

The Financial Modernization Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking.  A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating.  Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of financial subsidiaries.  In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory or better.

USA Patriot Act of 2001

The impact of the USA Patriot Act of 2001 (the “Patriot Act”) on financial institutions of all kinds has been significant and wide ranging.  The Patriot Act substantially enhanced existing anti-money laundering and financial transparency laws, and required appropriate regulatory authorities to adopt rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.  Under the Patriot Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers.

The Patriot Act also requires all financial institutions to establish anti-money-laundering programs.  To fulfill the anti-money laundering requirements of the Patriot Act, the Bank intensified its due diligence procedures concerning the opening of new accounts and implemented new systems and procedures (including a risk management process) to identify suspicious activity.  Any such suspicious activity is reported to the Financial Crimes Enforcement Network.

Sarbanes-Oxley Act of 2002

As a public company, the Company is subject to the Sarbanes-Oxley Act of 2002, which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing.  The Sarbanes-Oxley Act’s principal legislation and the derivative regulation and rule making promulgated by the Securities and Exchange Commission includes:

· the creation of an independent accounting oversight board;

· auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients;

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· additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements;

· a requirement that companies establish and maintain a system of internal control over financial reporting and that a company’s management provide an annual report regarding its assessment of the effectiveness of such internal control over financial reporting to the company’s independent accountants;

· a requirement that the company’s independent accountants provide an attestation report with respect to management’s assessment of the effectiveness of the company’s internal control over financial reporting (the recently enacted Dodd-Frank Act exempts smaller reporting companies like Mission Community Bancorp from this requirement);

· the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

· an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the company’s independent auditors;

· the requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;

· the requirement that companies disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC) and if not, why not;

· expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods;

· a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions;

· disclosure of a code of ethics and the requirement of filing of a Form 8-K for a change or waiver of such code;

· mandatory disclosure by analysts of potential conflicts of interest; and

· a range of enhanced penalties for fraud and other violations.

Commercial Real Estate Lending and Concentrations

In December 2006, the federal bank regulatory agencies released Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (“the Guidance”).  The Guidance, which was issued in response to the agencies’ concern that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market, reinforces existing regulations and guidelines for real estate lending and loan portfolio management.

Highlights of the Guidance include the following:

· The agencies have observed that CRE concentrations have been rising over the past several years with small to mid-size institutions showing the most significant increase in CRE concentrations over the last decade.  However, some institutions’ risk management practices are not evolving with their increasing CRE concentrations, and therefore, the Guidance reminds institutions that strong risk management practices and appropriate levels of capital are important elements of a sound CRE lending program.

· The Guidance applies to national banks and state chartered banks and is also broadly applicable to bank holding companies.  For purposes of the Guidance, CRE loans include loans for land development and construction, other land loans and loans secured by multifamily and nonfarm nonresidential properties.  The definition also extends to loans to real estate investment trusts and unsecured loans to developers if their performance is closely linked to the performance of the general CRE market.

· The agencies recognize that banks serve a vital role in their communities by supplying credit for business and real estate development.  Therefore, the Guidance is not intended to limit banks’ CRE lending.  Instead, the Guidance encourages institutions to identify and monitor credit concentrations, establish internal concentration limits, and report all concentrations to management and the board of directors on a periodic basis.

· The agencies recognized that different types of CRE lending present different levels of risk, and therefore, institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions.  However, the CRE portfolio should not be divided into multiple sections simply to avoid the appearance of risk concentration.

· Institutions should address the following key elements in establishing a risk management framework for identifying, monitoring, and controlling CRE risk: (1) board of directors and management oversight; (2) portfolio management; (3) management information systems; (4) market analysis; (5) credit underwriting standards; (6) portfolio stress testing and sensitivity analysis; and (7) credit review function.

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· As part of the ongoing supervisory monitoring processes, the agencies will use certain criteria to identify institutions that are potentially exposed to significant CRE concentration risk.  An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds specified supervisory criteria may be identified for further supervisory analysis.

The Company believes that the Guidance is applicable to it, as it has a concentration in CRE loans, although that concentration has been reduced in recent years.  The Company and its board of directors have discussed the Guidance and believe that Mission Community Bank’s underwriting policy, management information systems, independent credit administration process and monthly monitoring of real estate loan concentrations adequately address the Guidance. See Loan Concentrations in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 6 of Part II of this report.

Allowance for Loan and Lease Losses

In December 2006, the federal bank regulatory agencies released Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”), which revised and replaced the banking agencies’ 1993 policy statement on the ALLL.  The revised statement was issued to ensure consistency with generally accepted accounting principles (GAAP) and more recent supervisory guidance.  The revised statement also extended the applicability of the policy to credit unions.  Additionally, the agencies issued 16 FAQs to assist institutions in complying with both GAAP and ALLL supervisory guidance.

Highlights of the revised statement include the following:

· The revised statement emphasizes that the ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports and that an assessment of the appropriateness of the ALLL is critical to an institution’s safety and soundness.

· Each institution has a responsibility to develop, maintain, and document a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL.  An institution must maintain an ALLL that is sufficient to cover estimated credit losses on individual impaired loans as well as estimated credit losses inherent in the remainder of the portfolio.

· The revised statement updated the previous guidance on the following issues regarding ALLL: (1) responsibilities of the board of directors, management, and bank examiners; (2) factors to be considered in the estimation of ALLL; and (3) objectives and elements of an effective loan review system.

The Company believes that its ALLL methodology is comprehensive, systematic, and that it is consistently applied across the Company.  The Company also believes its management information systems, independent credit administration process, policies and procedures adequately address the supervisory guidance.

Transactions Between Affiliates

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act.  The FRB has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.  Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate.  Affiliates of a bank include, among other entities, companies that are under common control with the bank.  In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

· to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and

· to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.

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In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

· a loan or extension of credit to an affiliate;

· a purchase of, or an investment in, securities issued by an affiliate;

· a purchase of assets from an affiliate, with some exceptions;

· the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and

· the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

In addition, under Regulation W:

· a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

· covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

· with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the FRB decides to treat these subsidiaries as affiliates. The Bank, under inter-company arrangements, charges Bancorp and MAM for management, staff, and/or services.  For 2010, the Bank charged Bancorp a total of $180,000 for services performed on its behalf by Bank employees.

Employees

As of December 31, 2010 the Company had a total of 64 employees (63 full-time equivalent employees).  Two of those employees are employed by Bancorp, two by MAM and 60 by the Bank.  MCDC has no salaried employees.

Reports to Security Holders.

Annual Report

An annual report to security holders including audited financial statements is sent each year by the Company.

Certain reports are filed by the Company with the Securities Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   The SEC maintains an Internet site (www.sec.gov/edgar.shtml) that contains reports and other information statements that the Company files electronically via the SEC’s EDGAR system, and which may be viewed on the site.  The public may also request public documents by calling the SEC at 202-551-8090.

Reports filed with the SEC by the Company may also be viewed via the Company’s Internet site (www.missioncommunitybank.com) on the “About Us / Investor Information” page.

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Item 1A.  Risk Factors

In addition to other information contained in this Report, the following risks may affect the Company.  If any of these risks occur, the Company’s business, financial condition and operations results could be adversely affected

The Company’s business has been and may continue to be adversely affected by volatile conditions in the financial markets and deteriorating economic conditions generally.

From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U. S. was greatly reduced.   The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or to require government intervention to avoid failure.

As a result of these financial and economic crises, many lending institutions, including the Company, have experienced declines in the performance of their loans.  Total nonperforming loans, including troubled debt restructurings, increased to $12.0 million as of December 31, 2010, from $6.7 million as of December 31, 2009, and $4.5 million as of December 31, 2008.  This represents 10.32%, 4.93%, and 2.93%, respectively, of total loans.  Total nonperforming loans, net of SBA guarantees, were $10.2 million as of December 31, 2010, as compared with $5.6 million as of December 31, 2009, and $3.1 million as of December 31, 2008.

Although economic conditions have begun to improve in California and nationally, certain sectors, such as real estate, remain weak and unemployment remains high.  The state government, most local governments, and many businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets.  In addition, the values of the real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline.  Continued negative market developments also may continue to adversely affect consumer confidence levels and payment patterns, which could cause delinquencies and default rates to continue at high levels.

If business and economic conditions do not improve generally or in the principal markets in which we do business, the prolonged economic weakness could have one or more of the following adverse effects on our business:

· a decrease in the demand for loans or other products and services we offer;

· a decrease in the value of our loans or other assets secured by residential or commercial real estate;

· a decrease in deposit balances due to overall reductions in the accounts of customers;

· an impairment of our investment securities; and

· an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us, which in turn could result in a higher level of nonperforming assets, net charge-offs and provision for loan and lease losses, which would reduce our earnings.

Significant reliance on loans secured by real estate may increase the Bank’s vulnerability to the current downturn in the California real estate market and other variables impacting the value of real estate

A substantial portion of the Bank’s assets consist of real estate-secured loans (including construction loans) which are generally secured by real estate in the Central Coast of California.  At December 31, 2010, approximately $96 million or 80% of the Bank’s loans were real estate and construction loans, as compared to December 31, 2009, when approximately $109 million or 80% of its loans were real estate and construction loans. A prolonged and deepening of the current real estate contraction in the Central Coast of California could increase the level of non-performing assets and adversely affect results of operations. From 2008 through 2010, the real estate market in the Central Coast of California deteriorated significantly, as evidenced by declining prices, reduced transaction volume, decreased rents and increased foreclosure rates, and this deterioration resulted in an increase in the level of the Company’s nonperforming loans, particularly commercial real estate loans.  The Company had nonperforming commercial real estate and construction loans of $8.1 million and $2.6 million, respectively, as of December 31 2010, compared to $2.7 million and $2.0 million respectively, as of December 31, 2009.  If this real estate trend in the Company’s market areas continues to decline, the result could be reduced income, increased expenses, and less cash available for lending and other activities, which could have a material impact on the Company’s financial condition and results of operations.

In addition, banking regulators are now giving commercial real estate loans greater scrutiny, due to risks relating to the cyclical nature of the real estate market and related risks for lenders with high concentrations of such loans.  The regulators have required banks with higher levels of commercial real estate loans to implement enhanced underwriting, internal controls, risk management policies and portfolio stress testing, which has resulted in higher allowances for possible loan losses.  Expectations for higher capital levels have also materialized.

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Our provision for loan losses and net loan charge-offs have increased significantly and we may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations

For the year ended December 31, 2010, we recorded a provision for loan losses of $5.8 million after net loan charge-offs of $8.1 million, compared to $5.1 million and $3.5 million, respectively, for the same periods in 2009.  We have experienced elevated levels of loan delinquencies and credit losses.  At December 31, 2010, our total non-performing assets, including foreclosed real estate, had increased to $15.1 million compared to $8.4 million at December 31, 2009.   Although the large provisions for loan losses in the year ended December 31, 2010 were made for the purpose of restoring our allowance for loan and lease losses to an appropriate level following a write-down of certain loans classified as “held-for-sale” to their fair values; the levels of loan delinquencies and credit losses were also contributing factors.  If current weak economic conditions continue, particularly in the construction and real estate markets, we expect that we would continue to experience higher than normal delinquencies and credit losses, and if the recession is prolonged, we could experience significantly higher delinquencies and credit losses.  As a result, we may be required to make further increases in our provision for loan losses and to charge off additional loans in the future, which could materially adversely affect our financial condition and results of operations.

Our allowance for loan and lease losses may not be adequate to cover actual losses.

A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans.  The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.  Unexpected losses may arise from a wide variety or specific or systematic factors, many of which are beyond our ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for loan and lease losses to provide for loan defaults and non-performance.  The allowance is funded from a provision for loan losses which is a charge to our statement of operations.  Our allowance for loan and lease losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our business, financial condition, results of operations and cash flows.  The allowance for loan and lease losses reflects our estimate of the probable losses in our loan portfolio at the relevant balance sheet date.  Our allowance for loan and lease losses is based on historical experience, as well as an evaluation of known risks in the current portfolio, composition and growth of the loan portfolio and economic factors.  The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions.  The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans.  The level of uncertainty concerning current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the sufficiency and adequacy of the allowance for loan and lease losses.

While we believe that our allowance for loan and lease losses is adequate to cover current losses, we cannot assure you that we will not increase the allowance for loan and lease losses further or that our regulators will not require us to increase this allowance in future periods.  Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

Our use of appraisals in deciding whether to make a loan on, or secured by, real property does not ensure the value of the real property collateral

In considering whether to make a loan secured by real property, we require a recent appraisal of the property.  However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisal.  If the appraisal does not reflect the amount adequate to cover the indebtedness in the event of sale or foreclosure, the loan may not be granted.In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease.  As a result of any of these factors, there may be less security than anticipated at the time the loan was originally made. If there is less security and a default occurs, we may not recover the outstanding balance of the loan.

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All of our lending involves underwriting risks, especially in a competitive lending market

At December 31, 2010, commercial real estate loans (excluding residential and farmland) and construction loans represented 63% of the Company’s total loan portfolio.  Real estate lending involves risk associated with the potential decline in the value of underlying real estate collateral and the cash flow from income producing properties.  Declines in real estate values and cash flows can be caused by a number of factors, including adversity in general economic conditions, rising interest rates, changes in tax and other governmental and other policies affecting real estate holdings, environmental conditions, governmental and other use restrictions, development of competitive properties and increasing vacancy rates.  The Company’s dependence on commercial real estate loans increases the risk of loss both in the Company’s loan portfolio and with respect to any other real estate owned when real estate values decline.  The Company seeks to reduce risk of loss through underwriting and monitoring procedures.

If a significant number of customers fail to perform under their loans, the Company’s business, profitability, and financial condition would be adversely affected

As a lender, the largest risk is the possibility that a significant number of client borrowers will fail to pay their loans when due.  If borrower defaults cause losses in excess of the allowance for loan and lease losses, it could have an adverse effect on the Bank’s business, profitability, and financial condition.  A regular evaluation process designed to determine the adequacy of the allowance for loan and lease losses is in place.  Although this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses are dependent to a great extent upon experience and judgment.  Although management believes that the allowance for loan and lease losses is at a level adequate to absorb any inherent losses in the loan portfolio, there is no assurance that there will not be further increases to the allowance for loan and lease losses or that the regulators will not require an increase to this allowance.

The Bank’s earnings are subject to interest rate risks, especially if rates continue to decline

Traditionally, the major portion of the Bank’s net income comes from the interest rate spread, which is the difference between the interest rates paid on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received on interest-earning assets, such as loans extended to clients and securities held in the investment portfolio.  Interest rates are highly sensitive to many factors beyond our control, such as inflation, recession, global economic disruptions, and unemployment.  Fluctuations in interest rates affect the demand of customers for products and services.  The Bank is subject to interest rate risk to the degree that interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis from interest-earning assets.  Given the current volume and mix of interest-bearing liabilities and interest earning assets, the interest rate spread can be expected to decrease when market interest rates are rising, and to increase when market interest rates are declining, i.e., the Bank is slightly “liability sensitive.”  Although management believes our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse impact on the interest rate spread.  Any material decline in the interest rate spread would have a material adverse effect on the Bank’s business and profitability.

The Bank has specific risks associated with Small Business Administration Loans

The Bank originated $4.9 million and $8.5 million in SBA loans in 2010 and 2009, respectively, of which $4.8 million and $5.8 million, respectively, was funded.  The Bank intends to increase its SBA loan origination in the future.  The Bank recognized $430,000 and $379,000, respectively, in 2010 and 2009 in gains recognized on secondary market sales of SBA loans.  The Bank has regularly sold the guaranteed portions of these loans in the secondary market in previous years.  We can provide no assurance that Mission Community Bank will be able to continue originating these loans, or that a secondary market will exist for, or that it will continue to realize premiums upon the sale of the SBA loans.  The federal government presently guarantees from 50% to 90% of the principal amount of each qualifying SBA loan, with most loans receiving a guarantee of at least 75%.  We can provide no assurance that the federal government will maintain the SBA program, or if it does, that such guaranteed portion will remain at its current funding level.  Furthermore, it is possible that the Bank could lose its preferred lender status which, subject to certain limitations, allows it to approve and fund SBA loans without the necessity of having the loan approved in advance by the SBA.  It is also possible that the federal government could reduce the amount of loans that it guarantees.  We believe that the SBA loan portfolio does not involve more than a normal risk of collectability.

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In addition, we are dependent on the expertise of the personnel in our SBA loan department in order to originate and service SBA loans.  If we are unable to retain qualified employees in our SBA Department in the future our income from the origination, sale and servicing of SBA loans could be substantially reduced.  Further, in 2006, as rates on SBA loans climbed, a significant portion of SBA borrowers prepaid their loans, substantially reducing the servicing income we receive on these loans.  If there are similar increases in interest rates in the future, our income from servicing of SBA loans could be substantially reduced.

If we are not successful in carrying out the new aspects of our business plan our profitability will be adversely affected

We have implemented a strategy to grow our general commercial banking activities and have implemented new initiatives in this regard, including increased emphasis on our business banking, agribusiness lending and business development activities, and we anticipate a branch expansion at our new South Higuera facility in San Luis Obispo.  If we are not successful in implementing any or all of these new aspects of our business plan, this would have a negative impact on our earnings.

Due to the possible loss of our status as a Community Development Financial Institution, we may lose our ability to obtain grants and awards as a CDFI like those we have received in the past.

Although our primary focus is as a community bank engaged in the general commercial banking business, we also engage in community development activities and a portion of our community development business has historically been augmented by our status as a Community Development Financial Institution (“CDFI”).  CDFI status increases the potential for receiving grants and awards that, in turn, enable a financial institution to increase the level of community development financial services that it provides to the communities.  Since 2001, we have received an aggregate of $3.4 million in grants made possible due to our status as a CDFI.

As a result of the change in control which occurred in the second quarter of 2010, pursuant to which our principal shareholder increased its percentage ownership in Mission Community Bancorp from 24.7% to more than 75%, the top tier holding company for Mission Community Bancorp does not meet the criteria under the defining Act for a CDFI and, therefore, each of Mission Community Bancorp and Mission Community Bank may lose its status as a Community Development Financial Institution.  In addition to losing the benefits of CDFI status, including the ability to attract awards and grants, if Mission Community Bancorp loses its CDFI status, it may be required to redeem its Series A and Series C preferred stock that were issued to the Community Development Financial Institutions Fund.  The funds required to redeem this preferred stock would be approximately $1.0 million.

Maintaining or increasing the Bank’s market share depends on the introduction and market acceptance of new products and services

Our success depends, in part, upon our ability to adapt our products and services to evolving industry standards and consumer demand.  There is increasing pressure on financial services companies to provide products and services at lower prices.  In addition, the widespread adoption of new technologies, including Internet-based services, could require us to make substantial expenditures to modify or adapt our existing products or services.  A failure to achieve market acceptance of any new products we introduce, or a failure to introduce products that the market may demand, could have an adverse effect on our business, profitability, or growth prospects.

The Bank faces substantial competition in its primary market area

We conduct our banking operations primarily in San Luis Obispo County and northern Santa Barbara County in the Central Coast of California.  Increased competition in our market may result in reduced loans and deposits.  Ultimately, we may not be able to compete successfully against current and future competitors.  Many competitors offer the same banking services that we offer in our service area.  These competitors include national banks, regional banks and other community banks.  We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries.  Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers.  Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services.

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Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods.  For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits.  Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks.  The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.  The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

In addition, with recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC.  Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured.  Decreases in deposits may adversely affect the Company’s funding costs and net income.

If the Bank fails to retain its key employees, its growth and profitability could be adversely affected

Our future success depends in large part upon the continuing contributions of our key management personnel.  If we lose the services of one or more key employees within a short period of time, we could be adversely affected.  Competition for such employees among financial institutions in California is intense.  Due to the lack of an experienced candidate pool in the San Luis Obispo area for the types of personnel we need to operate the Bank, we may be unable to quickly recruit new candidates to fill the positions of key personnel which we are unable to retain.  Qualified employees demand competitive salaries which we may not be able to offer.  Also, the Company is a recipient of capital funding through the Treasury’s Troubled Asset Relief Program (“TARP”), and the American Recovery and Reinvestment Act of 2009 places significant constraints on executive compensation paid by recipients of TARP funds.  Any inability to attract and retain additional key personnel in the future could adversely affect us.  We can provide no assurance that we will be able to retain any of our key officers and employees or attract and retain qualified personnel in the future.  However, we have entered into employment agreements with James Lokey, the Company’s Chief Executive Officer, which continues through June 30, 2013, with Anita Robinson, the Company’s President and the Chief Executive Officer of the Bank and MAM, which continues until December 31, 2012, and with Brooks W. Wise, Executive Vice President of the Company and President of the Bank, which continues until April 1, 2011.

The Company may be unable to manage future growth

We may encounter problems in managing our future planned growth.  In December 2008 we opened an additional “de novo” branch in Santa Maria, California.  We may open other branches and loan production offices in the future, including a planned full-service branch at 3380 S. Higuera Street in San Luis Obispo that is expected to open in April 2011.  In addition, we intend to investigate opportunities to acquire other financial institutions that would complement our existing business, as such opportunities may arise.  No assurance can be provided, however, that we will be able to identify additional locations to open additional branches or to identify a suitable acquisition target or consummate any such acquisition.  Further, our ability to manage growth will depend primarily on our ability to attract and retain qualified personnel, monitor operations, maintain earnings and control costs.  Any failure by us to accomplish these goals could result in interruptions in our business plans and could also adversely affect current operations.

The Bank’s larger funding sources could strain the Bank’s liquidity resources if a substantial amount is withdrawn in a short period of time

The Bank has a mix of deposits which includes 11 customers with deposits of $1 million or more totaling $52.8 million, approximately $32.4 million of which has been placed into the CDARS program.  If a substantial number of these large deposit customers choose to withdraw their funds when they mature, or if the Bank’s borrowing facility through the Federal Home Loan Bank of San Francisco (“FHLB”) were reduced, and the Bank is unable to develop alternate funding sources, the Bank may have difficulty funding loans or meeting deposit withdrawal requirements.

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Recently enacted legislation and the Company’s participation in the TARP Capital Purchase Program may increase costs and limit the Company’s ability to pursue business opportunities.

The Emergency Economic Stabilization Act of 2008 (the “EESA”), as augmented by the American Recovery and Reinvestment Act of 2009, commonly referred to as the “Stimulus Bill”, was intended to stabilize and provide liquidity to the U.S. financial markets.  Though EESA, the Stimulus Bill and other emergency measures had the desired effect of providing liquidity and stabilizing the financial markets, it is impossible to predict what longer-term impacts this legislation, the related regulations and other governmental programs will have on such markets.  A continuation or worsening of current financial market conditions could adversely affect the Company’s business, financial condition and results of operations.  The programs established or to be established under the EESA and TARP have resulted in increased regulation of TARP Capital Purchase Program participants like the Company and may result in increased regulation of the industry in general.  Specifically, so long as shares of the Company’s Series D Preferred Stock issued as part of the TARP Capital Purchase Program remain outstanding, the Company man not declare or pay any dividends on its common stock, or repurchase or redeem any of its common stock, unless all accrued and unpaid dividends on the Series D Preferred Stock are fully paid.  In addition, the Company must comply with the U.S. Treasury’s standards for executive compensation, and severance payments to our senior executive officers.  Compliance with such regulations may increase the Company’s costs and limit its ability to pursue business opportunities.

The Company’s participation in the TARP Capital Purchase Program may adversely affect the value of the Company’s common stock and the rights of the Company’s common shareholders.

The terms of the preferred stock the Company issued under the Treasury’s Capital Purchase Program could reduce investment returns to the Company’s common shareholders by restricting dividends, diluting existing shareholders’ ownership interests, and restricting capital management practices. Without the prior consent of the Treasury, the Company is prohibited from increasing the Company’s common stock dividends for the first three years while the Treasury holds the preferred stock, which stock was acquired by the U.S. Treasury in January 2009.

Also, the preferred stock requires quarterly dividends to be paid at the rate of 5% per annum for the first five years and 9% per annum thereafter until the stock is redeemed by the Company. The payments of these dividends will decrease the excess cash the Company otherwise has available to pay dividends on the Company’s common stock and other series of preferred stock and to use for general corporate purposes, including working capital.

Finally, the Company is prohibited from paying dividends on its common stock and other series of preferred stock unless the Company has fully paid all required dividends on the preferred stock issued to the Treasury.  If for any reason the Company is unable to pay all required dividends on the TARP preferred stock, then the Company would be precluded from paying dividends on its common stock and other series of preferred stock.

The Company’s expenses have increased as a result of increases in FDIC insurance premiums.

Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the deposit insurance reserve ratio to 1.35% of insured deposits at any time that the reserve ratio falls below 1.35%. Recent bank failures coupled with deteriorating economic conditions have significantly reduced the Deposit Insurance Fund’s reserve balance, which has been in a negative position since the end of 2009, and the FDIC currently has until September 30, 2020 to bring the reserve ratio back to the statutory minimum.  As noted above under “Regulation and Supervision—Deposit Insurance,” the FDIC has implemented a restoration plan that adopts a new assessment base and establishes new assessment rates starting with the second quarter of 2011.  The FDIC also imposed a special assessment in 2009 and required most depository institutions to prepay three years of FDIC insurance premiums at the end of 2009.  The prepayments were designed to help address the liquidity issues created by potential timing differences between the collection of premiums and charges against the DIF, but it is generally expected that assessment rates will remain relatively high in the near term due to the significant cost of bank failures and the relatively large number of troubled banks. Although we do not anticipate any increases in the Bank’s assessment rates in the near future, and in fact believe that our assessments may go down in the near term, should there be any further significant premium increases or special assessments in the future, this could have a material adverse effect on our financial condition and results of operations.

- 29 -

If the Bank cannot attract deposits, the Company’s growth may be inhibited.

The Bank’s ability to increase its assets in the long-term depends in large part on its ability to attract additional deposits at competitive rates.  The Bank intends to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers.  We cannot provide assurance that these efforts will be successful.  Any inability to attract additional deposits at competitive rates could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to the Company’s business.  An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity.  Access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general.  Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us.  Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole, such as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients.   We do not yet know what interest rates other institutions may offer.  Our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.

We may be exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to those properties.  We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.  The costs associated with investigation or remediation activities could be substantial.  In addition, if we are the owner or former owner of a contaminated site, we may be subject to contamination emanating from the property.  If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

If the Company’s information systems were to experience a system failure or a breach in its network security, the Company’s business and reputation could suffer.

The Company relies heavily on communications and information systems to conduct its business. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.  The Company’s operations are dependent upon its ability to protect its computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event.  In addition, the Company must be able to protect its computer systems and network infrastructure against physical damage, security breaches and service disruption caused by the Internet or other users.  Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the Company’s computer systems and network infrastructure.  The Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems and will continue to implement security technology and monitor and update operational procedures to prevent such damage.  However, if such failures, interruptions or security breaches were to occur, they could result in damage to the Company’s reputation, a loss of customer business, increased regulatory scrutiny, or possible exposure to financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.

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The Company’s business may be adversely affected by the highly regulated environment in which it operates

Our operations are subject to extensive governmental supervision, regulation and control and recent legislation has substantially affected the banking business.  It cannot presently be predicted whether or in what form any pending or future legislation may be adopted or the extent to which the banking industry and our operations would be affected. Some of the legislative and regulatory changes may benefit us.  However, other changes could increase our costs of doing business or reduce our ability to compete in certain markets.

Item 2.      Properties

The Company occupies a property owned by the Bank at 581 Higuera Street, San Luis Obispo, California, where the Bank’s Downtown San Luis Obispo branch office is located.  For its administration offices, the Bank had been leasing, until December 2009, approximately 2,950 square feet at 569 Higuera St. in San Luis Obispo at a cost of $6,328 per month.  The leases expire on June 30, 2011.  A reserve has been set aside to either buy out the remainder of the lease or to apply to remaining lease payments.  Management has been negotiating with the landlord on the termination of these leases.  The administration office was located next to the Bank’s main branch office.

In October 2007, the Bank executed a 15-year build-to-suit triple-net lease for a full-service branch and administrative office at South Higuera Street and Prado Road (3380 S. Higuera Street) in San Luis Obispo, California.  The Bank moved its Administrative and Business Banking Center employees into this new facility in December 2009.  It is anticipated that Bank will open a full-service branch at this location in April 2011.  Currently the lease provides for lease payments of $39,139 per month.  The lease provides for two five-year renewal options.

The Bank also leases a branch office at 1226 Park Street, Paso Robles, California, at a cost of $6,085 per month.  The lease expires on July 31, 2013.

The Bank’s branch office at 154 West Branch Street, Arroyo Grande, California, is leased at a cost of $3,605 per month.  The lease expired in December 2010 and was renewed for a two-year period.

In March 2008, the Bank entered into a 5-year lease for an office building at 1670 South Broadway in Santa Maria, California, where the Bank opened a full-service branch office in December 2008.  The current rental cost is $9,028 per month.  The lease provides for two 5-year renewal options.  An option to purchase the property for a specified amount during the last two months of 2010 was not exercised.

The Bank’s Business Banking Center facility at 3440 and 3480 S. Higuera Street, San Luis Obispo, was leased for a five-year period at a cost of $6,925 per month.  The lease expired on December 31, 2009 and the Bank vacated the premises, moving the Business Banking Center’s operations to the new main office at 3380 S. Higuera Street.

In March 2011, the Bank entered into a three-year lease for an office suite in Oxnard, California, at an initial rate of $3,081 per month.  This space will be occupied by the Bank’s new Food and Agribusiness loan production office.

During 2005, the Bank purchased a parcel located near the intersection of 6th and Spring Streets in Paso Robles, where the Bank was planning to build a new branch office to replace the existing leased branch office in Paso Robles.  An adjacent parcel was purchased in 2006.  The property is carried as other real estate owned in the consolidated balance sheet.   Management and the Board of Directors are evaluating the future plan for this site, which is either to sell or plan for a future branch office.

For the years ended December 31, 2010 and 2009, the Bank’s total occupancy costs were approximately $1,270,000 and $1,002,000, respectively.  In the opinion of management, the premises are adequate for the Bank’s purposes and the Bank has sufficient insurance to cover its interest in the premises.  Note E to the Consolidated Financial Statements contains additional information about properties.

Bancorp is restricted by the bank holding company regulations in its power to hold real estate property for investment.  The Company does not currently invest in real estate, other than for purposes of operations and mortgage interests in real estate securing loans made by the Bank in the ordinary course of business, and has no plans to do so in the future.

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Item 3.      Legal Proceedings

The Company is, from time to time, subject to various pending and threatened legal actions which arise out of the normal course of its business.  After taking into consideration information furnished by counsel to the Company as to the current status of these claims or proceedings to which the Bank is a party, Management is of the opinion that the ultimate aggregate liability represented by these claims, if any, will not have a material adverse affect on the financial condition or results of operations of the Company.

There are no material proceedings adverse to the Company to which any director, officer, affiliate of the Company or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder is a party, and none of the above persons has a material interest adverse to the Company.

Item 4.      Reserved

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PART II

Item 5.      Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock is not listed on any exchange or market though it has traded infrequently in the over-the-counter market under the symbol “MISS.”  Howe Barnes, Wedbush Morgan Securities, and Hudson Securities, Inc. make a market in the Company’s Common Stock.  Certain information concerning the Common Stock is reported on the Nasdaq OTC Bulletin Board (www.otcbb.com).

The information in the following table indicates the daily high and low bid prices of the Company’s Common Stock for each quarterly period during the last two years based upon information provided by the OTC Bulletin Board. These prices do not include retail mark-ups, mark-downs or commission.

		Bid Prices
		Low		High
2009	1st Quarter		6.00		10.05
	2nd Quarter		7.30		9.00
	3rd Quarter		7.30		7.45
	4th Quarter		5.50		7.45
2010	1st Quarter		3.60		5.05
	2nd Quarter		3.95		5.00
	3rd Quarter		3.00		5.00
	4th Quarter		3.00		4.45

Holders

As of March 11, 2011, there were 319 holders of record of Bancorp’s Common Stock.

Dividends

The Company’s shareholders are entitled to receive dividends, when and as declared by its Board of Directors, out of funds legally available for dividends, subject to the restrictions set forth in the California General Corporation Law (the “Corporation Law”).  The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution.  It also provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (i) the corporation’s assets equal at least 1.25 times its liabilities, and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation’s interest expenses for such fiscal years, then the corporation’s current assets must equal at least 1.25 times its current liabilities.

The availability of operating funds for Mission Community Bancorp and its ability to pay a cash dividend depends largely on the ability the Bank and Mission Asset Management, Inc. to pay a cash dividend to Bancorp.  The payment of cash dividends by Mission Asset Management, Inc. is subject to the provisions of the California General Corporation Law as set forth above.  The payment of cash dividends by the Bank is subject to certain restrictions.  In general, dividends may not be paid from any of the Bank’s capital or surplus.  Dividends must be paid out of available net profits, after deduction of all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes.  Additionally, a California state bank is prohibited from declaring a dividend on its shares of common stock until its surplus fund equals its common capital, or, if its surplus fund does not equal its common capital, until at least one-tenth of the bank’s net profits, for the preceding half year in the case of quarterly or semi-annual dividends, or the preceding full year in the case of an annual dividend, are transferred to its surplus fund each time dividends are declared.  Regulatory approval is required if the total of all dividends declared by a bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock.

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 Further, the bank regulatory agencies have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction.  Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay.

Furthermore, bank regulators also have authority to prohibit the payment of dividends by a bank when it determines such payment to be an unsafe and unsound banking practice.  Due to the Company’s and the Bank’s net losses from 2008 through 2010, the Company’s and the Bank’s regulators have required that the Company and the Bank obtain approval in advance prior to the payment of any dividends, even though each remains well capitalized.

Quarterly dividends totaling $255,800 were paid on the Company’s Series D (TARP) preferred stock in 2010 and Series D dividends totaling $217,430 were paid in 2009.  No dividends were declared or paid on the Company’s common or Series A through C preferred stock in 2009 or 2010.

Whether or not stock or cash dividends will be paid in the future by the Company and/or the Bank will be determined by the Board of Directors after consideration of various factors including, but not limited to, profitability, regulatory capital ratios, and financial condition.  Additionally, certain provisions of the preferred stock issuances restrict the ability of the Company to pay cash dividends on common stock unless the required dividends on the preferred stock are also paid.

The Company has issued and outstanding $3,093,000 of junior subordinated debt securities due October 2033.  The indenture pursuant to which these debt securities were issued provides that the Company must make interest payments on the debentures before any dividends can be paid on its capital stock and, in the event of the Company’s bankruptcy, dissolution or liquidation, the holder of the debt securities must be paid in full before any distributions may be made to the holders of our capital stock.  In addition, the Company has the right to defer interest payments on the junior subordinated debt securities for up to five years, during which time no dividends may be paid to holders of the Company’s capital stock.

On January 9, 2009, in exchange for aggregate consideration of $5,116,000, Mission Community Bancorp issued to the Treasury Department a total of 5,116 shares of a new Series D Preferred Stock having a liquidation preference of $1,000 per share.  This transaction was a part of the TARP Capital Purchase Program.  The Series D Preferred pays cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter.  Until January 1, 2012, the consent of the Treasury Department will be required for the Company to issue dividends on the Company’s common stock.  Further, if the Company should miss six quarterly dividend payments due on the Series D Preferred Stock, whether or not consecutive, the holders of the Series D Preferred Stock (currently the U.S. Treasury) would have the right to elect two directors to the Company’s Board of Directors.  The Company has applied for an additional issuance of preferred stock as part of the U.S. Treasury’s recently created Small Business Lending Fund program.  The Company’s application is currently pending and subject to receipt of all required regulatory approvals.  See “Item 1—description of Business—Recent Developments.”

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Equity Compensation Plans

The following table shows, as of December 31, 2010, each category of equity compensation along with i) the number of securities to be issued upon the exercise of outstanding options, warrants and rights, ii) the weighted-average exercise price of the outstanding options, warrants and rights, and iii) the remaining number of securities available for future issuance under the plans, excluding stock options currently outstanding.

Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of additional securities available for future grant under the plan
Equity compensation plans approved by security holders		183,432	$	10.39		60,408
Equity compensation plans not approved by security holders		-		-		-
Total		183,432	$	10.39		60,408

See Note J to the consolidated financial statements for a discussion of the Company’s Stock Option Plans.

Report of Offering of Securities and Use of Proceeds Therefrom

In an unregistered sale of equity securities, Bancorp sold on April 27, 2010, to Carpenter Community BankFund, L.P., Carpenter Community BanFund-A, L.P. and Carpenter Community BankFund-CA, L.P. (collectively, the “Investment Funds”) 2,000,000 shares of its authorized but unissued common stock and warrants to purchase 2,000,000 shares of its common stock at an exercise price of $5.00 per share in an initial closing pursuant to a Securities Purchase Agreement dated December 22, 2009, as amended, (“the Securities Purchase Agreement”) by and between Bancorp and Carpenter Fund Manager GP, LLC (“the Manager”) on behalf of and as general partner of the Investment Funds.  The securities were purchased for an aggregate purchase price of $10 million or $5.00 per unit of one share of common stock and one warrant.

On June 15, 2010 Bancorp sold an additional 3,000,000 shares of its authorized but unissued common stock and five-year warrants to purchase 3,000,000 shares of its common stock to the Investment Funds at an exercise price of $5.00 per share pursuant to the Securities Purchase Agreement at a price of $5.00 per unit of one share of common stock and one warrant or an aggregate purchase price of $15 million.

There were no underwriting discounts or commissions paid with respect to the sales pursuant to the Securities Purchase Agreement.  Each of those sales above was made pursuant to an exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated pursuant thereto, as a privately negotiated transaction not involving a public offering.

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The accompanying annual financial statements have been restated to report the following Warrants as derivative liabilities measured at estimated fair value, calculated using a Monte Carlo Simulation:

Warrant Issuance Dates	Number of Warrants at Issuance		Exercise Price		Warrant Expiration Date	Fair Value of Warrants at Issue Date		Change in Fair Value of Warrants in 2010			Fair Value of Warrants at December 31, 2010
April 27, 2010		2,000,000	$	5.00	April 27, 2015	$	3,422,000	$	(1,457,200	)	$	1,964,800
June 15, 2010		3,000,000	$	5.00	June 15, 2015		5,180,100		(2,115,900	)		3,064,200
					Total Fair Value	$	8,602,100	$	(3,573,100	)	$	5,029,000

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

Prior to April 27, 2010, the Manager was the largest shareholder of the Company, beneficially owning 333,334 shares of the common stock of the Company or 24.7% of the issued and outstanding shares.  Immediately following the sales of securities pursuant to the Securities Purchase Agreement, the Manager was the beneficial owner of 5,333,334 shares of the common stock of the Company (not including warrants) or 84.0% of the issued and outstanding shares.

The Securities Purchase Agreement provided that the Company would conduct a Rights Offering (“the Rights Offering”) to its existing shareholders, pursuant to which each shareholder would be offered the right to purchase additional shares of common stock, paired with a warrant, at a price of $5.00 per unit of common stock and warrant.  Bancorp filed a registration statement with the Securities and Exchange Commission for the offer and sale of the rights, shares of common stock and common stock purchase warrants, on August 31, 2010.  The Rights Offering commenced on October 8, 2010, and closed on December 15, 2010.  Rights to purchase an aggregate of 748,672 shares of common stock and five-year warrants to purchase an additional 748,672 shares of common stock were exercised in the Rights Offering for gross proceeds to Bancorp of $3,743,360.  The proceeds from the Rights Offering were used to provide additional working capital for Bancorp.  Following the closing of the Rights Offering, the Manager is the beneficial owner of 75.2% of the issued and outstanding common shares.

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Item 6.       Selected Financial Data

The following is selected consolidated financial data with respect to the Company’s consolidated financial statements for the three years ended December 31, 2010, 2009 and 2008. The information presented has been derived from the audited consolidated financial statements included in Item 7 of Part II of this Form 10-K/A.  This information should be read in conjunction with such consolidated financial statements and the notes thereto.

	Year Ended December 31,
In thousands, except share and per share data	2010			2009			2008
	(Restated)
	See Note U
Interest income	$	8,882		$	10,283		$	11,073
Interest expense		1,991			3,877			4,830
Net interest income		6,891			6,406			6,243
Provision for loan losses		5,800			5,056			4,245
Non-interest income		5,285			833			346
Non-interest expense		9,487			8,275			7,121
Loss before income taxes		(3,111	)		(6,092	)		(4,777	)
Income tax expense (benefit)		-			835			(929	)
Net loss	$	(3,111	)	$	(6,927	)	$	(3,848	)
Net loss allocable to common stock	$	(4,249	)	$	(6,557	)	$	(3,465	)
Balance Sheet Data at End of Year
Assets	$	217,801		$	193,105		$	215,490
Earning assets		206,015			183,548			199,880
Total loans		120,225			136,410			153,311
Deposits		173,240			163,770			144,804
Total shareholders' equity		32,909			18,638			20,517
Preferred equity		5,068			6,227			1,686
Common equity		27,841			12,411			18,831
Number of common shares outstanding		7,094,274			1,345,602			1,345,602
Average Balance Sheet Data
Assets	$	204,864		$	217,268		$	190,792
Earning assets		193,067			207,865			181,232
Loans		128,666			148,636			142,342
Deposits		164,956			159,866			130,841
Shareholders' equity		26,718			24,791			18,451
Per Common Share Data
Basic loss per share	$	(0.97	)	$	(4.87	)	$	(3.18	)
Diluted loss per share		(0.97	)		(4.87	)		(3.18	)
Average number of common shares outstanding - basic		4,388,691			1,345,602			1,090,569
Average number of common shares outstanding - diluted		4,388,691			1,345,602			1,090,569
Book value per common share	$	3.92		$	9.22		$	13.99
Cash dividends declared		-			-			-
Performance Ratios
Return (loss) on average assets		(1.52	)%		(3.19	)%		(2.02	)%
Return (loss) on average shareholders' equity		(11.64	)%		(27.94	)%		(20.86	)%
Average equity to average assets		13.04	%		11.41	%		9.67	%
Efficiency ratio		81.23	%		118.35	%		108.07	%
Leverage ratio		16.54	%		10.06	%		10.31	%
Net interest margin		3.64	%		3.15	%		3.53	%
Non-interest revenue to total revenue		43.41	%		11.51	%		5.25	%
Asset Quality
Non-performing assets	$	15,141		$	8,363		$	4,580
Allowance for loan losses		3,198			5,537			3,942
Net charge-offs		8,139			3,461			1,453
Non-performing assets to total assets		6.95	%		4.33	%		2.13	%
Allowance for loan losses to loans		2.66	%		4.06	%		2.57	%
Net charge-offs to average loans		6.33	%		2.33	%		1.02	%

 

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Item 7.      Management’s Discussion and Analysis

Restatement of Previously Issued Condensed Consolidated Financial Statements

In this Amendment No. 1 we have restated our previously issued management’s discussion and analysis of financial condition and result of operations, consolidated financial statements and related disclosures for the year ended December 31, 2010 for the following:

1. Adoption of certain provisions of Accounting Standards Codification (“ASC”) 815 – “Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASC 815”) (formerly EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”).  ASC 815 became effective January 1, 2009.  The anti-dilution features in certain outstanding warrants (“Warrants”) issued in 2010 of the Company require these Warrants to be accounted for as liabilities and measured at fair value.  The restated consolidated financial statements reflect the reclassification of the Warrants from shareholders’ equity to warrant liability and record changes in the fair value of the warrant liability in the consolidated statements of operations.

2. The Company’s Series A Non-Voting Convertible Redeemable Preferred Stock (“Series A Preferred Stock”) and its Series C Non-Voting Convertible Redeemable Preferred Stock (“Series B Preferred Stock”) received improper accounting treatment related to beneficial conversion features in these preferred securities which were triggered by the issuance by the Company of its securities in a private placement in the second quarter of 2010 at a price below the conversion price set forth in the Certificates of Determination for the Series A and C Preferred Stock. The Company’s loss per share for 2010 has been corrected.

Further, the Company’s Series A Preferred Stock, Series B Non-Voting Preferred Stock (“Series B Preferred Stock”) and its Series C Preferred Stock received improper accounting treatment since these preferred shares contain redemption provisions that are outside the control of the Company. As a result, these preferred shares have been removed from stockholders’ equity and are now presented as mezzanine at their redemption value.

Executive Summary

The Company incurred a net loss of $(3.1) and $(6.9) million for the years ended 2010 and 2009, respectively.    Although a pre-tax loss was incurred in 2009, income tax expense of $835 thousand was recognized, resulting from an increased valuation allowance for deferred tax assets.  No income tax benefit was recognized in 2010, as the valuation allowance for deferred tax assets was increased such that a 100% valuation allowance was maintained.

The Company incurred a net loss applicable to common shareholders of $(4.2) and $(6.6) million for the years ended 2010 and 2009, respectively. This represents a loss of $(.97) and $(4.87) per both basic and diluted shares for the years ended 2010 and 2009, respectively. Loss applicable to common shareholders is calculated by adding dividends accrued and discount accreted on preferred stock to the loss, less the earnings allocation associated with the two-class method of calculation for EPS.

As the recession that began in 2007 continued into 2009, demand for quality loans declined and total assets decreased to $193.1 million at December 31, 2009, a 10.4% decline from December 31, 2008.  As of December 31, 2010, total assets had increased to $217.8 million—a 12.8% increase from year-end 2009.  Loan balances in 2010 continued the decline begun in 2009, yet deposit growth was strong in both 2009 and 2010.  Deposits increased $19.0 million, or 13.1%, in 2009, and another $9.5 million, or 5.8%, in 2010.  With the deposit growth and contraction in loan balances, borrowed funds were reduced by $39.7 million in 2009 and by another $5.7 million in 2010.  Total earning assets (including securities and interest-bearing deposits in other banks) decreased by $22.6 million in 2009, and then increased by another $18.9 million in 2010.  This restructuring of the balance sheet has substantially strengthened the Company’s liquidity position over the past two years.

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The following are the major factors impacting the Company’s results of operations and financial condition over the past two years.

· A high level of provision for loan losses.  Real estate conditions weakened as the overall economy contracted during the first year of the Great Recession.  As the real estate contraction became more prolonged in 2009 and 2010, more of our borrowers were unable to weather the storm.  We charged off $1.8 million of construction and land development loans and $0.9 million of commercial and residential real estate loans in 2009.  Net charge-offs totaled $3.5 million in 2009, up from $1.5 million in 2008.  We had set aside additional reserves in 2008 that covered the 2009 charge-offs, but by year-end 2009 we had increased the allowance for loan and lease losses to $5.1 million—approximately $1.6 million higher than at the end of 2008.  In 2010, the provision for loan and lease losses increased to $5.8 million, although $5.25 million of that amount was directly related to a reclassification of certain loans to “held for sale,” as discussed below.

· A reclassification of certain loans to “held for sale.”  In order to allow for an orderly workout of some of the Bank’s larger classified loans, the Bank in mid-year 2010 reclassified $22.2 million of those loans to held for sale.  Those loans, along with all of the Bank’s OREO properties, were then sold by the Bank to the Company’s new Mission Asset Management, Inc. subsidiary.  Generally accepted accounting principles require that loans held for sale be carried at the lower of amortized cost or fair value.  Therefore, in conjunction with the reclassification, the Bank wrote down the value of those loans by $5.488 million, through charge-offs to the allowance for loan and lease losses.  The loan charge-offs did not directly affect net income but $5.250 million in loan loss provision was required to replenish the allowance for loan and lease losses to the appropriate level following the substantial level of charge-offs as a result of the reclassification to held for sale.  Excluding the loan loss provision related to this reclassification, the 2010 provision for loan losses would have been $550 thousand.

· An increase in non-performing assets.  Even as portions of the economy began to recover in 2009 and 2010, real estate related segments of the economy remained in recessionary territory, further stressing our loan portfolio.  Non-performing loans, including troubled debt restructurings, increased in 2009 to $6.7 million, up from $4.5 million at the end of 2008.  By December 31, 2010, non-performing loans had increased to $12.0 million.  Foreclosed real estate increased from $83 thousand at the end of 2008 to $1.6 million as of December 31, 2009, and $3.1 million at the end of 2010.

· A changing net interest margin.  The net interest margin for 2009 was 3.15%, down 0.38 percentage points from 2008.  For 2010, the margin recovered to 3.66%, an increase of 0.51 percentage points from 2009.  Short-term interest rates dropped 4 full percentage points in 2008 and remained at that low level throughout 2009 and 2010.  The steep rate drop in 2008 put downward pressure on the margin, as competition for deposits in the local market would not permit decreases in deposit rates at the same speed or to the same degree as loan rates were falling.  As reductions in deposit rates eventually caught up with the drop in loan rates, and high-cost borrowed funds were repaid, the margin began a steady improvement in April 2009, which continued until April 2010.  By mid-year 2010, an increase in non-accrual loans and a much more liquid balance sheet put more downward pressure on the margin.

· We increased our valuation allowance for deferred tax assets.  The valuation allowance ($7.4 million in 2010 and $4.6 million in 2009) was established because the Company’s cumulative net operating losses exceed its ability to fully recognize deferred tax assets by carrying the losses back to previous tax years.  The valuation allowance can begin to be reversed—providing a potential increase to net income in future years—as the Company returns to profitability.

· We raised $33.9 million in additional capital (a $19.8 million increase to equity net of stock issuance costs and the reclassification of approximately $8.6 million for associated warrants from equity to liabilities) over the past two years.  In 2009 the Company issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of Series D Fixed Rate Cumulative Perpetual Preferred Stock at $1,000 per share.  This transaction was a part of the Capital Purchase Program of the TARP.  The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital.  In 2010 the Company’s largest shareholder purchased an additional 5,000,000 shares of common stock and warrants to purchase 5,000,000 shares of common stock for an aggregate purchase price of $25 million.  A substantial majority of the proceeds from sales of these securities was used to enable a newly-formed subsidiary of the Company, Mission Asset Management, Inc., to purchase from the Bank certain non-performing loans and other real estate owned assets.  Subsequently, the Company conducted a Rights Offering to its other shareholders, pursuant to which each shareholder received, with respect to each share of common stock owned by the shareholder, the right to purchase 15 additional shares of common stock, each paired with a warrant, at a price of $5.00 per unit of common stock and warrant.  Rights to purchase 748,672 shares of common stock and warrants to purchase an additional 748,672 shares of common stock were exercised in the Rights Offering for gross proceeds to Bancorp of $3,743,360.

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Critical Accounting Policies

A critical accounting policy is defined as one that is both material to the presentation of the Company’s financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on the Company’s financial condition and results of operations and may change in future periods.  Note A to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the Consolidated Financial Statements.  Not all of these accounting policies require management to make difficult, subjective or complex judgments or estimates.  However, management believes that the following policies could be considered critical.

Reserves and Contingencies

In the normal course of business, the Company must manage and control certain risks inherent to the business of banking.  These include credit risk, interest rate risk, fraud risk, and operations and settlement risk.  The Company has established reserves for risk of losses, including loan losses.

The allowance for loan and lease losses represents management’s estimate of the probable credit losses that have occurred as of the date of the financial statements, as further described in Note A in the Notes to the Consolidated Financial Statements.  See also Allowance for Loan and Lease Losses below.  These reserves or accruals are reviewed by management at least quarterly.  If the latest estimate of loss (or the actual loss) differs from the accrual or reserve recorded to date, the financial impact is reflected in the period in which the estimate is revised (or the actual loss is determined).  Management believes that the allowance for loan and lease losses is a “critical accounting estimate” because it is based upon management’s assessment of various factors affecting the collectability of the loans, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans.  We cannot provide you with any assurance that economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur.  Such economic difficulties or other circumstances could be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Other real estate owned (“OREO”) represents properties acquired through foreclosure or physical repossession.  Write-downs to fair value at the time of transfer to OREO are charged to allowance for loan and lease losses.  Subsequent to foreclosure, management periodically evaluates the value of OREO held for sale and records a valuation allowance for any subsequent declines in fair value less selling costs.  Subsequent declines in value are charged to operations.  Fair value is based on management’s assessment of information available to the Company at the end of a reporting period and depends upon a number of factors, including economic conditions, the Company’s historical experience, and issues specific to individual properties.  Management’s evaluation of these factors involves subjective estimates and judgments that may change.

Compensation cost is recognized for all stock based awards that vest subsequent to January 1, 2006 based on the grant-date fair value of the awards.  We believe this is a “critical accounting estimate” since the grant-date fair value is estimated using the Black-Scholes-Merton option-pricing formula, which involves making estimates of the assumptions used, including the expected term of the option, expected volatility over the option term, expected dividend yield over the option term and risk-free interest rate.  In addition, when determining the compensation expense to amortize over the vesting period, management makes estimates about the expected forfeiture rate of options.

Loans designated as held for sale are carried at the lower of cost or fair market value.  The estimate of fair value is a critical accounting estimate because it is susceptible to changes in assumptions or other factors that are outside the control of management.  In addition, the assumptions used in determining the fair value of a loan held for sale may be based on a combination of observable and unobservable inputs.

Revenue recognition

The Company’s primary source of revenue is interest income from loans and investment securities.  Interest income is recorded on an accrual basis.  Note A in the Notes to the Consolidated Financial Statements contains an explanation of the process for determining when the accrual of interest income is discontinued on impaired loans and under what circumstances loans are returned to an accruing status.

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The Company also records gains in connection with the sale of the guaranteed portion of certain SBA-guaranteed loans for which the Bank retains the right to service the loans.  Recording of such gains involves the use of estimates and assumptions related to the expected life of the loans and future cash flows from loan servicing fees.  Notes A and C in the Notes to the Consolidated Financial Statements contain additional information regarding the Company’s accounting policy for revenue recorded in connection with the sale of loans.  SBA loan servicing rights are based upon estimates and are subject to the risk of prepayments and market value fluctuation.

Income Taxes

A net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income.  Deferred tax assets and liabilities are established for these items as they arise.  From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available.  We have determined the need to establish a valuation allowance for deferred tax assets, based on the weight of available evidence, that it is less likely that some portion or all of the deferred tax assets may be realized.

Additionally, we review our uncertain tax positions annually.  An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not” test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized.  Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Basis of Presentation

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

In this Amended 10-K, the Company restated its previously issued consolidated financial statements as of and for the year ended December 31, 2010 to correct errors in the accounting for certain warrants and certain preferred stock as discussed in Note U, Restatement, of the Notes to the Consolidated Financial Statements.
 

The following discussion and analysis is intended to assist in an understanding of the significant factors that affected our consolidated financial condition and results of operations for the years ended December 31, 2010 and 2009.  This discussion, which refers to the Company on a consolidated basis, should be read in conjunction with the Company’s consolidated financial statements and corresponding notes.

Bancorp is inactive except for interest expense associated with the junior subordinated debentures (related to the trust preferred securities), salaries and benefits of a small number of employees performing executive and administrative functions, and minimal other expenses.

The Bank operates as a traditional community bank, but has also used management’s expertise as a CDFI to provide a selection of financial services identified as “community development” activities, with a focus on financial services to under-served markets, small businesses and business professionals.  Historically, Bancorp and the Bank have received and used both grants and deposits under programs authorized by CDFI.  Due to a recent change in control, it is anticipated that the Bank and the Company will lose their respective status as CDFI’s in the near future and, accordingly, will no longer be eligible for grants and deposit programs available to CDFI’s from various government and public/private entities.  The CDFI status is dependent on management’s specialized knowledge of working with various governmental programs and requires a significant increase in reporting and documentation as compared with traditional bank activities.

MCDC provides financing and loan servicing for small businesses and low- to moderate-income areas based on direct loans or funding pools established in conjunction with others.  MCDC provides loan servicing for several small loans owned by the San Luis Obispo County Economic Vitality Corporation.  MCDC also manages a loan pool for the San Luis Obispo County Housing Trust Fund to assist in providing affordable housing.  MCDC had also been servicing the San Simeon Earthquake Recovery Loan Fund (the “Earthquake Fund”), a loan pool funded by the Bank and other local banks.  By December 31, 2010, as the loans made by the Earthquake Fund had been paid off, the full amount of the participating banks’ initial investments was returned.  The consortium is considering alternative community development uses for the loan pool.

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Mission Asset Management, Inc. (“MAM”) was established in 2010 to facilitate the orderly sale or resolution of the Bank’s foreclosed real estate and certain lower-quality loans.  To that end, in 2010 the Bank reclassified $22.4 million of classified loans (including $10.3 million of nonaccrual loans) to “held for sale,” writing down the value of those loans to $16.9 million through charge-offs to the allowance for loan and lease losses.  Those loans, along with $1.0 million of other real estate, were sold from the Bank to MAM at the aggregate purchase price of $17.9 million.

MCSC provides technical assistance services and training to the underserved segments of the community including small businesses, minorities and low-income entrepreneurs.  During 2006, MCSC was awarded a five-year, $750,000 grant from the U.S. Small Business Administration to fund one of 99 Women’s Business Centers nationwide.  While MCSC has not engaged in any direct lending, it may provide some lending in the near future.  As of December 31, 2010, the Bank has had limited direct benefit from its association with MCSC.  See also Note M to the Consolidated Financial Statements for additional information regarding MCSC.

Results of Operations

Average Balance Sheets and Analysis of Net Interest Income

The principal component of earnings for most banks is net interest income.  Net interest income is the difference between the interest earned on loans and investments and the interest paid on deposits and other interest-bearing liabilities.

The banking industry uses two key ratios to measure relative profitability of net interest income.  The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities.  The interest rate spread ignores the beneficial impact of non-interest bearing deposits and capital, and provides a direct perspective on the effect of market interest rate movements.  The net interest margin is defined as net interest income as a percentage of average interest-earning assets.  This ratio includes the positive impact of obtaining a portion of the funding for earning assets with non-interest bearing deposits and capital.

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The following table presents, for the periods indicated, the total dollar amounts of interest income from average interest-earning assets and the resultant yields. Also presented are the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates.

Net Interest Analysis
(Dollars in thousands)
	For the Year Ended
	December 31, 2010								December 31, 2009								December 31, 2008
	Average					Average			Average					Average			Average					Average
	Balance			Interest		Rate			Balacce			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	128,666		$	7,539		5.91	% *	$	148,636		$	8,889		6.03	% *	$	142,342		$	9,598		6.80	% *
Investment securities*		48,141			1,296		2.87	% *		35,945			1,259		3.70	% *		23,966			1,122		4.99	% *
Federal funds sold		-			-		-			7,419			16		0.21	%		7,314			122		1.67	%
Other interest income		16,260			47		0.29	%		15,865			119		0.75	%		7,610			231		3.03	%
Total interest-earning assets / interest income		193,067			8,882		4.68	%		207,865			10,283		5.02	%		181,232			11,073		6.19	%
Non-interest-earning assets:
Allowance for loan losses		(4,253	)							(3,635	)							(2,118	)
Cash and due from banks		3,251								2,720								2,987
Premises and equipment		3,318								2,833								3,529
Other assets		9,481								7,485								5,162
Total assets	$	204,864							$	217,268							$	190,792
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	18,353			135		0.73	%	$	12,594			145		1.15	%	$	17,187			361		2.10	%
Savings and Money Market deposit accounts		38,846			348		0.90	%		30,585			370		1.21	%		19,309			327		1.70	%
Certificates of deposit		84,513			1,192		1.41	%		93,540			2,150		2.30	%		72,187			2,471		3.42	%
Total interest-bearing deposits		141,712			1,675		1.18	%		136,719			2,665		1.95	%		108,683			3,159		2.91	%
Federal Home Loan Bank advances		3,616			181		4.99	%		28,161			1,096		3.89	%		37,232			1,450		3.89	%
Other borrowed funds		613			32		5.28	%		10			-		0.61	%		34			1		2.81	%
Subordinated debt		3,093			103		3.34	%		3,093			116		3.75	%		3,093			220		7.12	%
Total borrowed funds		7,322			316		4.32	%		31,264			1,212		3.88	%		40,359			1,671		4.14	%
Total interest-bearing liabilities / interest expense		149,034			1,991		1.34	%		167,983			3,877		2.31	%		149,042			4,830		3.24	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		23,244								23,147								22,158
Other liabilities		5,868								1,347								1,141
Total liabilities		178,146								192,477								172,341
Shareholders' equity		26,718								24,791								18,451
Total liabilities and shareholders' equity	$	204,864							$	217,268							$	190,792
Net interest-rate spread							3.34	%							2.71	%							2.95	%
Impact of non-interest-bearing sources and other changes in balance sheet composition							0.30	%							0.44	%							0.58	%
Net interest income / margin on earning assets				$	6,891		3.64	% **				$	6,406		3.15	% **				$	6,243		3.53	% **

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

** Net interest income as a % of earning assets

Non-accrual loans are included in the calculation of the average balances of loans; interest not accrued is excluded.

Net interest income is affected by changes in the amount and mix of our interest-earning assets and interest-bearing liabilities, referred to as the change due to volume.  Average interest-earning assets grew by $26.6 million in 2009 over 2008 and decreased by $15.6 million in 2010 over 2009.  All categories of interest-earning assets—both long-term and liquid assets—grew substantially in 2009, but loans contracted in 2010 (based on average balances outstanding during the year), as demand for new loans has been weak since the recession began.  Interest-bearing liabilities increased $18.9 million in 2009 as compared to 2008, and then contracted by $19.0 million in 2010.  Borrowed funds—a relatively high cost source of funds—were paid off in 2009 and 2010, as the Bank experienced strong growth in deposits and management executed on a plan to reduce non-core funding.

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Net interest income is also affected by changes in the yields we earn on interest-earning assets and the rates we pay on interest-bearing deposits and borrowed funds, referred to as the change due to rate.  The average yield on interest-earning assets decreased by 117 basis points (1.17%) in 2009, while the average rate paid on interest-bearing liabilities decreased by only 93 basis points, causing pressure on the net interest margin.  As a result, the net interest margin decreased 38 basis points in 2009, from 3.53% to 3.15%.  The 400-basis-point drop in the prime interest rate in 2008 put downward pressure on the margin, as competition for deposits in the local market would not permit decreases in deposit rates at the same speed or to the same degree as loan rates were falling.  As reductions in deposit rates eventually caught up with the drop in loan rates, and high-cost borrowed funds were repaid, the margin began a steady improvement in April 2009, which continued until April 2010.  By mid-year 2010, an increase in non-accrual loans and a much more liquid balance sheet put more downward pressure on the margin.

The following table sets forth changes in interest income and interest expense for each major category of interest-earning assets and interest-bearing liabilities, and the amount of those variances attributable to volume and rate changes for the years indicated.

Rate / Volume Variance Analysis
(In thousands)	Year Ended December 31, 2010									Year Ended December 31, 2009
	Compared to 2009									Compared to 2008
	Increase (Decrease)									Increase (Decrease)
	in interest income and expense									in interest income and expense
	due to changes in:									due to changes in:
	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(1,173	)	$	(177	)	$	(1,350	)	$	411		$	(1,120	)	$	(709	)
Investment securities		368			(331	)		37			467			(330	)		137
Federal funds sold		(16	)		-			(16	)		2			(108	)		(106	)
Other interest income		3			(75	)		(72	)		139			(251	)		(112	)
Total increase (decrease) in interest income		(818	)		(583	)		(1,401	)		1,019			(1,809	)		(790	)
Interest-bearing liabilities:
Transaction accounts		53			(63	)		(10	)		(80	)		(136	)		(216	)
Savings deposits		87			(109	)		(22	)		155			(112	)		43
Certificates of deposit		(191	)		(767	)		(958	)		617			(938	)		(321	)
Total interest-bearing deposits		(51	)		(939	)		(990	)		692			(1,186	)		(494	)
FHLB advances		(1,159	)		244			(915	)		(353	)		(1	)		(354	)
Other borrowed funds		29			3			32			(1	)		-			(1	)
Subordinated debt		-			(13	)		(13	)		-			(104	)		(104	)
Total borrowed funds		(1,130	)		234			(896	)		(354	)		(105	)		(459	)
Total increase (decrease) in interest expense		(1,181	)		(705	)		(1,886	)		338			(1,291	)		(953	)
Increase (decrease) in net interest income	$	363		$	122		$	485		$	681		$	(518	)	$	163

Changes not solely attributable to rate or volume have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

For most of the time period included in the preceding tables the Bank was asset sensitive (see the Asset and Liability Management section of this discussion).  For 2009, the positive change in net interest income due to volume more than offset the negative change due to rates, as the average balance of interest-earning assets increased to a greater extent than interest-bearing liabilities over the course of the year.  The result was a $163 thousand increase in net interest income in 2009 as compared to 2008.  For 2010, a continual reduction in deposit rates, combined with a substantially lower balance of higher-cost borrowed funds led to a $485 thousand increase in net interest income as compared to 2009.  Although FHLB borrowings have been paid off over the past three years, those that remained through much of 2010 were some of the higher-cost borrowings on the Bank’s balance sheet, increasing the average rate on borrowed funds.  As of December 31, 2010, the Bank’s balance sheet has shifted to a slightly liability sensitive position.

Provision for Loan Losses

Credit risk is inherent in the business of making loans.  The Bank makes provisions for loan losses when required to bring the total allowance for loan and lease losses to a level deemed appropriate for the risk in the loan portfolio. The determination of the appropriate level for the allowance is based on such factors as historical loss experience, the volume and type of lending conducted, the amount of nonperforming loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.  The provision for loan losses is charged to earnings and totaled $5,800,000 for 2010 and $5,056,000 for 2009.

See Allowance for Loan and Lease Losses below for additional information on the procedures for monitoring the adequacy of the allowance, as well as detailed information concerning the allowance for loan and lease losses.

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Non-interest Income

Non-interest income increased $4.5 million in 2010 as compared to 2009, due primarily to the $3.6 million change in fair value of warrant liability that was associated with the reclassification of certain warrants issued during the second quarter of 2010 and to a $250 thousand increase in gains realized on the sale of securities, as well as a $519 increase in grants and awards related to the Bank’s community development activity and a $51 thousand increase in gains on the sale of SBA loans.

The Bank historically has derived a material portion of its non-interest income from the sale and servicing of SBA guaranteed loans.  Gain on sale of SBA loans increased $192 thousand in 2009 (to $379 thousand), as compared to 2008, and increased another $51 thousand (to $430 thousand) in 2010.  In accordance with new accounting standards for the sale of a portion of a loan in 2010, gains on SBA loans sold and subject to a 90-day premium refund obligation have been deferred for that 90-day period.  Once the premium refund obligation has elapsed the transaction is recorded as a sale and the resulting gain on sale is recorded.  In February 2011, the SBA eliminated the refund obligation period, so the bank will not be required to defer gain recognition for SBA loan sales after February 15, 2011.

Loan servicing fees (net of amortization) increased $42 thousand in 2009 (to $114 thousand) and increased another $21 thousand (to $134 thousand) in 2010.

For both 2010 and 2009, non-interest income included one negative item: write-downs on fixed assets and other real estate.  In 2009, write-downs on other real estate (both foreclosed properties and property that had been held for a future branch site) totaled $472 thousand.  An additional $2 thousand write-down was taken on abandonment of leasehold improvements in 2009.  In 2010, write-downs on other real estate totaled $460 thousand.

Non-interest Expense

Non-interest expense increased in 2010 by $1.211 million, or 15%.

Non-interest expenses that had material changes from 2009 to 2010 were:

· Salary and benefits increased by $218 thousand, or 6%.  Actual outlays and accruals for salaries and benefits increased by only $136 thousand from 2009 to 2010.  However, salary and benefit costs deferred as loan origination costs in accordance with ASC 310-20 (an offset to salaries and benefits) were $82 thousand less in 2010 as compared to 2009.  Loan origination costs deferred under ASC 310-20 are amortized against interest income on loans over the life of the loans.

· Occupancy expense increased by $267 thousand, or 27%, primarily due to lease costs and amortization of tenant improvements associated with the Bank’s new main office at South Higuera Street and Prado Road in San Luis Obispo.

· Professional fees—including legal, accounting, internal audit, loan review and other consultants—were up $111 thousand, or 23%, in 2010, primarily due to legal, accounting loan review and consulting fees related to non-performing assets.

· Insurance and regulatory assessments increased by $68 thousand, or 11%, because FDIC deposit insurance assessments were up by $98 thousand.  These increased assessments were the result of scheduled increases to deposit insurance rates.

· Loan and lease expenses increased by $50 thousand, or 35%, principally due to $61 thousand in adjustments to the fair value of certain loans held for sale.

· Other real estate expenses increased by $154 thousand, or 426%, as the Company’s investment in other real estate (primarily foreclosures) has increased from $1.0 million as of December 31, 2008, to $2.2 million at December 31, 2009, and to $3.1 million at the end of 2010.

· Prepayment fee on borrowed funds—In October 2010 the Bank chose to prepay the remaining $3.0 million of its borrowings from the Federal Home Loan Bank of San Francisco (“FHLB”), incurring a prepayment penalty of $377,966.  Those borrowings were scheduled to mature in 2013 and carried an average interest rate of 4.89%.  Prepayment of these borrowings will reduce the Bank’s interest expense from 2011 through 2013 by a total of approximately $431,000.

· Marketing costs decreased $32 thousand, or 18% in 2010 as compared to 2009, as reductions were made in the Bank’s budget for advertising and sponsorships.

- 45 -

Income Taxes

The Company’s combined federal and state effective income tax rate was 0.0% in 2010 and (26.8)% (tax expense) in 2009.  The tax expense in 2009, even though the Company incurred a pre-tax loss, was due to an increase in the deferred tax valuation allowance that was established because the Bank’s losses in 2008 and 2009 exceeded its ability to fully recognize deferred tax assets by carrying the loss back to previous tax years.  As of December 31, 2010 and 2009, the ability of the Bank to reduce the deferred tax valuation allowance and recognize those deferred tax assets was entirely dependent on the Bank generating taxable income in future years.  The valuation allowance can begin to be reversed—providing a potential increase to net income in future years—as the Company returns to profitability.  See Note I to the consolidated financial statements for more information on income taxes.

Financial Condition

Investment Activities

Banks purchase and own investment securities for yield, to provide liquidity and to balance the overall interest-rate sensitivity of its assets and liabilities. The Bank does not maintain a trading account.

Investment goals are to obtain the highest yield consistent with maintaining a stable overall asset and liability position while limiting economic risks.  In accordance with this policy, management actively manages its investment portfolio between available for sale and held to maturity investments, the composition of which has shifted over time.  All securities in the Bank’s portfolio are classified as available for sale.

Investment policies and limits have been established by the board of directors.  Investments can include federally-insured certificates of deposit, obligations of the U.S. Treasury and U.S. agencies, mortgage-related instruments issued or backed by U.S. agencies, municipal bonds rated Baa or better (Moody’s), Aaa-rated private label mortgage-backed and asset-backed securities, and corporate securities rated A or A-1.  Guidelines have been established for diversification of the portfolio among these investment categories and per-transaction limits have been established as well.  The Bank’s chief financial officer reports investment purchase and sale activity to the Board on a monthly basis and more detailed quarterly reports are presented to the Board’s Investment Committee.

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The following table presents the distribution of investments by sector, the maturity dates of the investments, and the weighted average yields of the investments:

Investment securities composition
	December 31, 2010							December 31, 2009							December 31, 2008
	Amortized		Approx. Market		%			Amortized		Approx. Market		%			Amortized		Approx. Market		%
	Cost		Value		Yield			Cost		Value		Yield			Cost		Value		Yield
	(Dollars in thousands)
U.S. Government agencies:
Within one year	$	-	$	-				$	500	$	502		4.00	%	$	2,000	$	2,036		3.38	%
One to five years		20,100		19,878		1.23	%		14,442		14,465		2.12	%		500		518		4.00	%
Five to ten years		-		-					500		502		5.05	%		1,000		1,016		5.18	%
After 10 years		983		983		3.72	%		-		-					-		-
Total U.S. Government agencies		21,083		20,861		1.35	%		15,442		15,469		2.27	%		3,500		3,570		3.98	%
Mortgage-backed and asset-backed securities:
Within one year		2		2		6.50	%		245		249		4.28	%		334		334		4.07	%
One to five years		-		-					18		17		6.49	%		577		582		4.66	%
Five to ten years		15,302		15,297		2.30	%		8,674		8,747		3.50	%		1,810		1,873		4.83	%
After 10 years		34,693		34,352		2.69	%		9,522		9,698		3.96	%		14,689		15,053		4.94	%
Total mortgage-backed and asset-backed securities		49,997		49,651		2.57	%		18,459		18,711		3.75	%		17,410		17,842		4.90	%
Municipal securities:
Within one year		-		-					-		-					-		-
One to five years		-		-					-		-					-		-
Five to ten years		374		378		4.15	%		-		-					-		-
After 10 years		2,543		2,544		5.98	%		2,918		2,974		5.99	%		3,581		3,434		5.95	%
Total municipal securities		2,917		2,922		5.75	%		2,918		2,974		5.99	%		3,581		3,434		5.95	%
Corporate debt securities:
Within one year		1,980		2,000		5.48	%		959		997		5.96	%		-		-
One to five years		-		-					1,882		1,991		5.48	%		-		-
Five to ten years		-		-					-		-					-		-
After 10 years		-		-					-		-					-		-
Total corporate securities		1,980		2,000		5.48	%		2,841		2,988		5.64	%		-		-
Total investment securities	$	75,977	$	75,434		2.43	%	$	39,660	$	40,142		3.47	%	$	24,491	$	24,846		4.92	%

The non-accrual security is included in the amortized cost and market value of securities.  Yields reflect no interest income on the non-accrual security.  Yields on tax-exempt municipal securities have been adjusted to their fully-taxable equivalents.

The Bank increased the size of its investment portfolio by $35.3 million in 2010, as deposits grew by $9.5 million and loans contracted by $16.2 million.  The increase in securities was concentrated in mortgage-backed securities, which tended to offer the optimal balance of yield, relatively short duration and consistent cash flows.

Municipal securities have been included in the portfolio to take advantage of their higher yields on a fully taxable equivalent basis.  All of the municipal securities purchased to date are within California, bank qualified, insured and are considered high grade (i.e., all are rated at least AA+ by Standard & Poor’s or Aa3 by Moody’s).  Except for one security carried at $298 thousand, all municipal securities are insured by a company rated AA+ by S&P.

In 2004, management established a loss reserve for one of the Bank’s asset-backed securities after concluding it was “other than temporarily impaired.”  The security has been on non-accrual status, with any interest payments, which have been received to date on a regular basis, received being credited to the reserve.  As of December 31, 2010, the gross book value of the security was $288,000 and the reserve was $288,000, for a net book value of zero.  Therefore, all current interest payments are being credited to interest income.

See Note B in the notes to the consolidated financial statements for additional information on investment securities.

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Lending Activities

The Bank originates loans, participates in loans from other banks and structures loans for possible sale in the secondary market.

The following table sets forth the composition of our loan portfolio by type of loan as of the dates indicated:

Loan Portfolio Composition
(Dollars in thousands)
	As of December 31,
Type of Loan	2010		2009		2008		2007		2006
Commercial and industrial	$	17,701	$	19,633	$	24,454	$	25,653	$	18,000
Agricultural		1,022		750		-		122		123
Leases, net of unearned income		1,047		1,335		1,491		839		1,041
Municipal loans		2,987		3,476		2,729		2,789		2,903
Real estate		87,005		96,956		98,049		72,009		66,591
Construction and land development		8,972		12,512		22,857		22,513		31,639
Consumer		1,491		1,748		3,731		2,504		2,502
Total loans	$	120,225	$	136,410	$	153,311	$	126,429	$	122,799
Off-balance-sheet commitments:
Undisbursed loan commitments	$	19,482	$	18,219	$	28,427	$	28,608	$	35,375
Standby letters of credit		1,251		301		304		693		213

The following table sets forth as of December 31, 2010, the maturities and sensitivities of loans to interest rate changes:

Maturity and Rate Sensitivity of Loans
(Dollars in thousands)
									Rate Structure for Loans
	Maturity								Maturing Beyond One Year
	One year		One through		Over five				Fixed		Floating
	or less		five years		years		Total		Rate		Rate
Commercial and industrial	$	4,277	$	6,274	$	6,570	$	17,121	$	756	$	12,087
Agricultural		450		296		276		1,022		-		572
Leases, net of unearned income		25		1,022		-		1,047		1,022		-
Municipal loans		350		200		2,436		2,986		350		2,286
Real estate		644		25,511		61,074		87,229		2,192		84,393
Construction and land development		8,081		733		215		9,029		739		210
Consumer Loans		634		829		26		1,489		74		782
Total Loans	$	14,461	$	34,865	$	70,597	$	119,923	$	5,133	$	100,330

The Bank funds commercial loans to provide working capital, to finance the purchase of equipment and for other business purposes.  These loans can be short-term, with maturities ranging from thirty days to one year, or term loans, with maturities normally ranging from one to twenty-five years.  Short-term loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly.

Included in commercial loans are SBA loans.  The Bank originates and services SBA loans and is active in specific SBA programs.  Further, the Bank is designated as an SBA preferred lender which allows greater flexibility to meet small business loan requests with delegated authority, creating a more timely credit approval process.

The Bank makes adjustable rate SBA-guaranteed loans and generally sells the guaranteed portion of the SBA loans in the secondary market while retaining the servicing rights for those loans.  At December 31, 2010 and 2009, the Bank serviced approximately $30.7 million and $26.9 million, respectively, in SBA loans.

Consumer loans are used to finance automobiles, various types of consumer goods, and other personal purposes.  Consumer loans generally provide for the monthly payment of principal and interest.  Most consumer loans are secured by the personal property being purchased.

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The Bank had been active in construction lending for interim loans to finance the construction of commercial and single family residential property.  However, when the downturn in real estate began in 2007, new construction loan activity slowed markedly.  Since then, most of the Bank’s construction loan portfolio has either paid off or been charged off.  Construction loans totaled $8.9 million as of December 31, 2010, a $3.6 million decrease from a year earlier, and down $22.7 million from December 31, 2006 (prior to the real estate downturn).  Construction loans are typically extended for terms of no more than 12 to 18 months.  Generally, the Bank does not provide loans for speculative purposes.

Residential real estate loans are generally limited to home equity loans and home equity lines of credit.  The Bank has not been active in other forms of residential real estate lending.

Other real estate loans consist primarily of commercial and industrial real estate loans.  These loans are made based on the income generating capacity of the property or the cash flow of the borrower and are secured by the property.  The Bank offers both fixed and variable rate loans with maturities which generally do not exceed ten years.  Exceptions are made for SBA-guaranteed loans secured by real estate, or for other commercial real estate loans which can be readily sold in the secondary market.

Asset Quality

The risk of nonpayment of loans is inherent in the banking business. That risk varies with the type and purpose of the loan, the type of collateral utilized to secure payment and, ultimately, the creditworthiness of the borrower.  In order to minimize this credit risk, all loans exceeding lending officers’ individual lending limits are reviewed and approved by a Management Loan Committee.  Loans exceeding the Management Loan Committee’s authorization are reviewed and approved by the Loan Committee of the board of directors.  The Board Loan Committee is comprised of outside directors as well as the Bank’s chief executive officer, chief credit officer and its president.

The Bank employs both an internal and an external loan review process.  Monthly, all new loans are reviewed internally for asset quality and an independent external loan portfolio review is performed semi-annually by an outside credit review firm.  Loan grades are assigned based on a risk assessment of each loan.  Loans with minimum risk are graded as “pass,” with other classifications of “management watch,” “special mention,” “substandard,” “doubtful” and “loss,” depending on credit quality.  Loans graded substandard or doubtful are considered “classified” loans, and loans graded loss are charged off.  As an adjunct to the loan review process, an internal “stress test” is applied to the commercial real estate portfolio at least annually to determine the potential financial impact on the Bank under stressed real estate conditions, and semi-annually by an independent third party.

An allowance for loan and lease losses is provided for all loans, including those graded pass and watch.  As special mention and classified loans are identified in our review process, they are added to the internal criticized loan list and an increased loan loss allowance is established for them.  See Allowance for Loan and Lease Losses below for additional information on how the amount of allowance for loan and leases losses is determined.

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The following table provides year-end information with respect to the components of our impaired or nonperforming assets at the dates indicated:

Non-Performing Assets
(Dollars in thousands)	As of December 31,
	2010			2009			2008			2007			2006
Loans in nonaccrual status:
Nonaccrual loans held for investment--
Commercial and industrial	$	1,311		$	1,139		$	578		$	254		$	240
Real estate		682			2,724			1,427			190			-
Construction & land development		-			2,028			1,552			1,544			-
Total nonaccrual loans held for investment		1,993			5,891			3,557			1,988			240
Nonaccrual loans held for sale--
Commercial and industrial		-			-			-			-			-
Real estate		7,406			-			-			-			-
Construction & land development		2,605			-			-			-			-
Total nonaccrual loans held for sale		10,011			-			-			-			-
Total nonaccrual loans		12,004			5,891			3,557			1,988			240
Loans held for investment past due 90 days or more and accruing:
Commercial and industrial		-			-			-			54			-
Lease financing		-			-			-			14			-
Real estate		-			-			265			-			-
Construction & land development		-			-			-			-			1,929
Total loans 90 days past due and accruing		-			-			265			68			1,929
Restructured loans:
Commercial and industrial		-			731			-			-			-
Construction & land development		-			-			675			-			-
Consumer		-			100			-			-			-
Total restructured loans		-			831			675			-			-
Total nonperforming loans		12,004			6,722			4,497			2,056			2,169
Foreclosed real estate		3,137			1,641			83			-			-
Total nonperforming assets	$	15,141		$	8,363		$	4,580		$	2,056		$	2,169
Allowance for loan losses	$	3,198		$	5,537		$	3,942		$	1,150		$	1,026
Asset quality ratios:
Non-performing assets to total assets		6.95	%		4.33	%		2.13	%		1.30	%		1.37	%
Excluding loans held for sale*		2.53	%		4.35	%		2.14	%		1.32	%		1.37	%
Non-performing loans to total loans		9.98	%		4.93	%		2.93	%		1.63	%		1.77	%
Excluding loans held for sale*		1.90	%		4.96	%		2.96	%		1.67	%		1.77	%
Allowance for loan losses to total loans		2.66	%		4.06	%		2.57	%		0.91	%		0.84	%
Excluding loans held for sale*		3.04	%		4.09	%		2.59	%		0.93	%		0.84	%
Allowance for loan losses to total non-performing loans		27	%		82	%		88	%		56	%		47	%
Excluding loans held for sale*		160	%		82	%		88	%		56	%		47	%

* Loans held for sale are carried at the lower of amortized cost or fair value

Non-accrual loans are loans which management believes may not be fully collectible as to principal and interest. Generally, loans are placed in non-accrual status when they are 90 days or more past due unless they are well-secured and in the process of collection. Once placed in non-accrual status, a loan is not returned to accrual status until it is brought current with respect to both principal and interest payments, the loan is performing to current terms and conditions, the interest rate is commensurate with market interest rates and future principal and interest payments are no longer in doubt, at which time a further review of the loan is conducted.

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The increase in non-accrual loans in 2009 and 2010 was due to the significant downturn in the economy and reduction in real estate collateral values.  Approximately 19%, or $1.993 million, of the non-accrual commercial and real estate loans are in our SBA loan portfolio, $1.785 million of which are guaranteed by the SBA.  At December 31, 2009, $1.106 million of the Bank’s non-accrual loans were SBA-guaranteed loans, and $995 thousand was guaranteed by the SBA.

Troubled debt restructurings (“TDR’s”) are those loans with concessions in interest rates or repayment terms due to a decline in the financial condition of the borrower.

Other real estate owned is acquired in satisfaction of loans through foreclosure or other means and is carried on an individual asset basis at the lower of the recorded investment in the related loan or the estimated fair value of the property, less selling expenses.

The Bank has no foreign loans.

Potential Problem Loans

At December 31, 2010, the Company had approximately $7.2 million of loans that were not categorized as non-performing, but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans.  These loans were identified through the loan review process described above.  The $7.2 million of potential problem loans are supported by $0.5 million of SBA loan guarantees.  Potential problem loans are subject to continuing management attention and management has provided in the allowance for loan and lease losses for potential losses related to these loans, based on an evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation.

While credit quality, as measured by loan delinquencies and by the Company’s internal risk grading system, appears to be manageable as of December 31, 2010, there can be no assurances that new problem loans will not develop in future periods.  A further decline in economic conditions in the Company’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general.  The Company has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.

Loan Concentrations

The Board of Directors has approved concentration levels for various loan types based on the Bank’s business plan and historical loss experience.  On a quarterly basis, management provides a loan concentration report to the board with information relating to concentrations.  Management’s review of possible concentrations includes an assessment of loans to multiple borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.

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The following table reflects the major concentrations in the loan portfolio, by type of loan, as of December 31, 2010:

Loan Concentrations
(Dollars in thousands)	As of December 31,
	2010					2009					2008					2007					2006
Type of Loan	Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans			Amount		Percent of Total Loans
Construction and land development	$	8,972		7.4	%	$	12,512		9.2	%	$	22,857		14.9	%	$	22,513		17.8	%	$	31,639		25.8	%
Other real estate loans (by type of collateral):
Non-farm, non-residential property:
Owner-occupied		35,135		29.2	%		37,337		27.4	%		36,208		23.6	%		27,433		21.7	%		19,893		16.2	%
Non-owner-occupied		32,240		26.8	%		36,940		27.1	%		37,375		24.4	%		27,364		21.6	%		29,331		23.9	%
1 to 4 family residential:
First liens		2,398		2.0	%		3,963		2.9	%		5,464		3.6	%		4,091		3.2	%		3,737		3.0	%
Junior liens		10,541		8.8	%		12,678		9.3	%		11,840		7.7	%		6,282		4.9	%		6,249		5.1	%
Multi-family residential		3,702		3.1	%		2,757		2.0	%		3,340		2.2	%		3,102		2.5	%		4,972		4.0	%
Farmland		2,989		2.5	%		3,281		2.4	%		3,822		2.5	%		3,737		3.0	%		2,409		2.0	%
Total real estate-secured loans		95,977		79.8	%		109,468		80.3	%		120,906		78.9	%		94,522		74.7	%		98,230		80.0	%
Commercial and industrial		17,701		14.7	%		19,633		14.4	%		24,454		15.9	%		25,653		20.3	%		18,000		14.7	%
Agricultural		1,022		0.9	%		750		0.5	%		-		0.0	%		122		0.1	%		123		0.1	%
Lease financing		1,047		0.9	%		1,335		1.0	%		1,491		1.0	%		839		0.7	%		1,041		0.8	%
Municipal		2,987		2.5	%		3,476		2.5	%		2,729		1.8	%		2,789		2.2	%		2,903		2.4	%
Consumer		1,491		1.2	%		1,748		1.3	%		3,731		2.4	%		2,504		2.0	%		2,502		2.0	%
Total loans, including loans held for sale	$	120,225		100.0	%	$	136,410		100.0	%	$	153,311		100.0	%	$	126,429		100.0	%	$	122,799		100.0	%

The table indicates a concentration in commercial real estate loans (loans secured by non-farm, non-residential and multi-family residential properties, including construction loans) totaling $80.0 million.  However, under the regulatory definition of commercial real estate—which excludes owner-occupied properties—the Bank’s commercial real estate concentration is reduced to $44.9 million, or 37.4% of total loans.  Prior to 2008, the Bank had experienced no losses on construction and land development loans or on other types of commercial real estate loans.  From 2008 through 2010, however, the Bank recognized $5.1 million in losses on construction and land development loans and approximately $2.9 million in losses on other types of commercial real estate loans.  Approximately $2.1 million of those losses on construction and land development loans and $1.9 million of the losses on commercial real estate loans resulted from the 2010 reclassification of loans to “held for sale” prior to their sale from the Bank to MAM.

The Bank’s analysis of loan concentrations compared to a California peer group of 50 banks suggests that the Bank does not have an unusually high real estate concentration compared to other similar sized banks in California.  Banks in California typically are more prone than banks in other states to use real estate collateral for many commercial loans for business purposes where collateral is taken as an abundance of caution.  In its analysis of real estate concentrations, the Bank carefully considers economic trends and real estate values.  The commercial real estate market in San Luis Obispo County weakened from 2008 through 2010, rents and values have decreased and vacancies have increased. Although the local market has not seen the severe weakness seen in many other areas of California and the U.S., management continues to monitor closely trends in real estate in light of the Bank’s level of real estate lending.

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Allowance for Loan and Lease Losses

The following table summarizes, for each reported period, changes in the allowance for loan and lease losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance which have been charged to operating expenses, and certain ratios relating to the allowance for loan and lease losses:

Summary of Loan Loss Experience
(Dollars in thousands)	For the Year Ended December 31,
	2010			2009			2008			2007			2006
Allowance for loan and lease losses at beginning of year	$	5,537		$	3,942		$	1,150		$	1,026		$	1,141
Loans charged off:
Construction and land development		(2,755	)		(1,778	)		(547	)		-			-
Other real estate loans		(3,714	)		(911	)		-			-			-
Commercial and industrial		(1,583	)		(738	)		(880	)		(13	)		(102	)
Consumer		(134	)		(78	)		(52	)		(4	)		(19	)
Other		-			-			-			(14	)		-
Total loans charged off		(8,186	)		(3,505	)		(1,479	)		(31	)		(121	)
Recoveries:
Construction and land development		19			-			-			-			-
Other real estate loans		-			1			-			-			-
Commercial and industrial		27			42			22			4			6
Consumer		1			1			3			-			-
Other		-			-			1			1			-
Total recoveries		47			44			26			5			6
Net charge-offs		(8,139	)		(3,461	)		(1,453	)		(26	)		(115	)
Provision charged to operations		5,800			5,056			4,245			150			-
Allowance for loan and lease losses at end of year	$	3,198		$	5,537		$	3,942		$	1,150		$	1,026
Ratio of net charge-offs to average loans		6.33	%		2.33	%		1.02	%		0.02	%		0.10	%
Ratio of provision to average loans		4.51	%		3.40	%		2.98	%		0.12	%		0.00	%

The Bank performs a quarterly detailed review to identify the risks inherent in the loan portfolio, to assess the overall quality of the loan portfolio and to determine the adequacy of the allowance for loan and lease losses and the related provision for loan losses to be charged to expense.  Systematic reviews follow the methodology set forth by various regulatory policy statements on the allowance for loan and lease losses.

A key element of the Bank’s methodology is the previously discussed credit classification process.  The amount determined by management to be an appropriate level for the allowance is based on the Bank’s historical loss rate for each type of loan and risk grade, with adjustments made for certain qualitative factors such as current and expected economic conditions, trends in collateral values, the quality of the Bank’s loan review process, etc.  For loans identified as impaired under Statement of Financial Accounting Standards No. 114, the allowance allocated to the loan is the deficiency, if any, in either the present value of expected cash flows from the loan or the fair value of the collateral, as compared to the Bank’s investment in the loan.  The Bank engages an outside firm to perform, at least semi-annually, a review of the loan portfolio and to test the adequacy of the allowance for loan and lease losses.  In addition, loans are examined periodically by the Bank’s federal and state regulators.

Management considers the allowance for loan and lease losses to be adequate to provide for losses inherent in the loan portfolio. Although management uses all available information to recognize losses on loans and leases, future additions to the allowance may be necessary based on changes in economic conditions.  In addition, federal and state regulators periodically review our allowance for loan and lease losses and may recommend additions based upon their evaluation of the portfolio at the time of their examination.  Accordingly, there can be no assurance that our allowance for loan and lease losses will be adequate to cover future loan losses or that significant additions to the allowance for loan and leases losses will not be required in the future.  Material additions to the allowance for loan and lease losses would decrease earnings and capital and would thereby reduce the Bank’s ability to pay dividends, among other adverse consequences.

- 53 -

The ratio of allowance for loan and lease losses to total loans (excluding loans held for sale) as of December 31, 2010 was 3.04%.  Management and the board consider this to be adequate based on their analysis, trends and reviews of the portfolio. As part of the analysis of the allowance, the Bank assigns certain risk factors to unclassified loans in addition to the specific percentages used for classified loans.  The following tables summarize the allocation of the allowance for loan and lease losses by general loan types, based on collateral or security type, as used internally by the Bank as of the end of each of the past five years.

	December 31, 2010
			Percent of Total			Allowance		Percent of Total
(dollars in thousands)	Loans		Loans			Allocation		Allowance
Unclassified loans:
Commercial	$	16,699		13.9	%	$	881		27.5	%
Agricultural		1,022		0.9	%		32		1.0	%
Leases		1,036		0.9	%		10		0.3	%
Municipal loans		2,987		2.5	%		19		0.6	%
Real estate		85,201		70.8	%		1,106		34.6	%
Construction		7,648		6.4	%		80		2.5	%
Consumer		1,482		1.2	%		93		2.9	%
Total unclassified loans		116,075		96.6	%		2,221		69.4	%
Classified loans:
Commercial		1,002		0.8	%		108		3.4	%
Agricultural		-		0.0	%		-		0.0	%
Leases		11		0.0	%		2		0.1	%
Municipal loans		-		0.0	%		-		0.0	%
Real estate		1,804		1.5	%		260		8.1	%
Construction		1,324		1.1	%		450		14.1	%
Consumer		9		0.0	%		-		0.0	%
Total classified loans		4,150		3.4	%		820		25.7	%
Other economic factors							157		4.9	%
Total loans and allowance	$	120,225		100.0	%	$	3,198		100.0	%

- 54 -

	December 31, 2009
			Percent of Total			Allowance		Percent of Total
(dollars in thousands)	Loans		Loans			Allocation		Allowance
Unclassified loans:
Commercial	$	16,073		11.8	%	$	690		12.4	%
Agricultural		750		0.5	%		24		0.4	%
Leases		1,335		1.0	%		4		0.1	%
Municipal loans		3,476		2.5	%		27		0.5	%
Real estate		76,568		56.1	%		374		6.7	%
Construction		5,296		3.9	%		125		2.3	%
Consumer		1,604		1.2	%		93		1.7	%
Total unclassified loans		105,102		77.0	%		1,337		24.1	%
Classified loans:
Commercial		3,560		2.6	%		288		5.2	%
Agricultural		-		0.0	%		-		0.0	%
Leases		-		0.0	%		-		0.0	%
Municipal loans		-		0.0	%		-		0.0	%
Real estate		20,388		15.0	%		3,260		58.9	%
Construction		7,216		5.3	%		122		2.2	%
Consumer		144		0.1	%		17		0.3	%
Total classified loans		31,308		23.0	%		3,687		66.6	%
Other economic factors							513		9.3	%
Total loans and allowance	$	136,410		100.0	%	$	5,537		100.0	%

	December 31, 2008
			Percent of Total			Allowance		Percent of Total
(dollars in thousands)	Loans		Loans			Allocation		Allowance
Unclassified loans:
Commercial	$	22,252		14.5	%	$	860		21.8	%
Agricultural		-		0.0	%		-		0.0	%
Leases		1,491		1.0	%		14		0.4	%
Municipal loans		2,729		1.8	%		16		0.4	%
Real estate		88,735		57.9	%		719		18.2	%
Construction		15,430		10.1	%		200		5.1	%
Consumer		3,723		2.4	%		91		2.3	%
Total unclassified loans		134,360		87.7	%		1,900		48.2	%
Classified loans:
Commercial		2,202		1.4	%		454		11.5	%
Agricultural		-		0.0	%		-		0.0	%
Leases		-		0.0	%		-		0.0	%
Municipal loans		-		0.0	%		-		0.0	%
Real estate		9,314		6.1	%		337		8.5	%
Construction		7,427		4.8	%		1,057		26.9	%
Consumer		8		0.0	%		-		0.0	%
Total classified loans		18,951		12.3	%		1,848		46.9	%
Other economic factors							194		4.9	%
Total loans and allowance	$	153,311		100.0	%	$	3,942		100.0	%

- 55 -

	December 31, 2007
			Percent of Total			Allowance		Percent of Total
(dollars in thousands)	Loans		Loans			Allocation		Allowance
Unclassified loans:
Commercial	$	25,238		20.0	%	$	390		33.9	%
Agricultural		122		0.1	%		1		0.1	%
Leases		811		0.6	%		7		0.6	%
Municipal loans		2,789		2.2	%		14		1.2	%
Real estate		72,009		57.0	%		261		22.7	%
Construction		18,433		14.6	%		192		16.7	%
Consumer		2,491		2.0	%		22		1.9	%
Total unclassified loans		121,893		96.5	%		887		77.1	%
Classified loans:
Commercial		415		0.3	%		76		6.6	%
Agricultural		-		0.0	%		-		0.0	%
Leases		28		0.0	%		2		0.2	%
Municipal loans		-		0.0	%		-		0.0	%
Real estate		-		0.0	%		-		0.0	%
Construction		4,080		3.2	%		30		2.6	%
Consumer		13		0.0	%		1		0.1	%
Total classified loans		4,536		3.5	%		109		9.5	%
Other economic factors							154		13.4	%
Total loans and allowance	$	126,429		100.0	%	$	1,150		100.0	%

	December 31, 2006
			Percent of Total			Allowance		Percent of Total
(dollars in thousands)	Loans		Loans			Allocation		Allowance
Unclassified loans:
Commercial	$	17,855		14.6	%	$	234		22.8	%
Agricultural		123		0.1	%		1		0.1	%
Leases		1,041		0.8	%		5		0.5	%
Municipal loans		2,903		2.4	%		15		1.5	%
Real estate		66,591		54.2	%		313		30.5	%
Construction		29,710		24.2	%		135		13.2	%
Consumer		2,502		2.0	%		20		1.9	%
Total unclassified loans		120,725		98.3	%		723		70.5	%
Classified loans:
Commercial		145		0.1	%		30		2.9	%
Agricultural		-		0.0	%		-		0.0	%
Leases		-		0.0	%		-		0.0	%
Municipal loans		-		0.0	%		-		0.0	%
Real estate		-		0.0	%		-		0.0	%
Construction		1,929		1.6	%		-		0.0	%
Consumer		-		0.0	%		-		0.0	%
Total classified loans		2,074		1.7	%		30		2.9	%
Other economic factors							273		26.6	%
Total loans and allowance	$	122,799		100.0	%	$	1,026		100.0	%

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Deposits

Deposits are the primary source of funding for lending and investing needs.  Total deposits were $173.2 million as of December 31, 2010, and $163.8 million at December 31, 2009.  Deposits increased by $9.5 million, or 6%, following a $19.0 million, or 13%, increase in 2009.  Most of the Bank’s deposit growth in 2009 and 2010 was in core deposits: interest-bearing and non-interest-bearing checking accounts, money market accounts and savings accounts.

The Bank generally prices deposits at or above the median rate by classification based on periodic interest rate surveys in the local market.  Deposit rates are then adjusted to balance the cost of funds versus funding needs and asset and liability considerations.  The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for 2010 and 2009.

The Bank is one of only four banks in its primary service area participating in the Certificate of Deposit Account Registry Service (“CDARS”) program.  This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC.  The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of more than 3,000 banks with deposits in other network banks (in increments of less than the $250 thousand FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet.  The CDARS program became very attractive during the recent financial crisis as local depositors sought out safety and yield.  As of December 31, 2010, the Bank had issued $34.3 million of certificates of deposit to local customers through the CDARS program, down from $44.2 million as of December 31, 2009.

The following table reflects the maturity distribution of certificates of deposit in the amounts of $100,000 or more as of December 31, 2010:

Maturities of Time Deposits of $100,000 or More
	(Dollars in thousands)
Three months or less	$	19,701
Three months to six months		12,762
Six months to one year		17,919
Over one year		9,541
Total time deposits of $100,000 or more	$	59,923

Short Term and Other Borrowings

Other borrowings as of December 31, 2010 consists of $349 thousand in proceeds from the sale of SBA-guaranteed loans that have been sold but are subject to a 90-day premium refund obligation.  Once the 90-day premium refund obligation period has elapsed, the transaction will be recorded as a sale, with the loans and the secured borrowings removed from the balance sheet and the resulting gain on sale ($36 thousand) recorded in the consolidated statement of operations.  In February 2011, the SBA eliminated the refund obligation period; the Bank will not be required to defer gain recognition for SBA loan sales after February 15, 2011.

As of December 31, 2009, other borrowings was comprised of fixed rate advances from the Federal Home Loan Bank of San Francisco, with $3,000,000 scheduled to mature in 2010 and $3,000,000 scheduled to mature in 2013.  In October 2010 the Bank chose to prepay the remaining FHLB borrowings, incurring a prepayment penalty of $377,966, which is included in non-interest expenses.  The $6.0 million in borrowings at the end of 2009 represents a $39.7 million reduction in borrowing from December 31, 2008.  Note G to the consolidated financial statements contains additional information regarding these borrowings.

Off-Balance-Sheet Financial Instruments

In the normal course of business, the Bank enters into financial commitments to customers, primarily to extend credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheets.  As of December 31, 2010, the Bank had outstanding commitments to extend credit totaling $19.8 million and standby letters of credit totaling approximately $0.9 million.  See Note N to the consolidated financial statements for additional information on off-balance-sheet commitments and contingencies.

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The Bank has not entered into any off-balance-sheet derivative financial instruments as of December 31, 2010.

Liquidity Management

The objective of our asset/liability strategy is to manage liquidity and interest rate risks to ensure the safety and soundness of the Bank and its capital base, while maintaining an adequate net interest margin in order to provide an appropriate return to shareholders.

The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded.  The Bank’s liquidity is further augmented by payments of principal and interest on loans and securities, as well as increases in short-term liabilities such as demand deposits and short-term certificates of deposit.  Cash in the Federal Reserve Bank and other correspondent banks and short-term investments such as federal funds sold are the primary means for providing immediate liquidity.  The Bank had $10.8 million in cash and cash equivalents on December 31, 2010, and $8.6 million on December 31, 2009.

In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain appropriate liquidity ratios through policies set by the board of directors.  These include, but are not limited to, a ratio of loans to deposits no higher than 95%, core deposits at least 50% of total assets, short-term investments at least 2% of total assets, and short-term non-core funding less than 35% of total assets.

While the Bank uses cash and cash equivalents as the primary immediate source of cash liquidity, it has also established a short-term borrowing line (federal funds purchased) for $4.0 million from a correspondent bank.  This line of credit is for short-term needs and is rarely used.

The Bank also has a secured borrowing facility through the FHLB.  FHLB borrowings can be structured over various terms ranging from overnight to ten years.  As of December 31, 2010, the Bank had no outstanding borrowings from the FHLB.  Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased.  The Bank has the potential (on a secured basis) to borrow up to approximately 25 percent of its total assets. Based on this limitation and loans and securities pledged as of December 31, 2010, an additional $40.8 million could be borrowed from the FHLB if needed.  The Bank substantially reduced its FHLB borrowings in 2009, paying off $39.7 million in borrowings over the course of the year.  The FHLB borrowings remaining at the end of 2009 were paid off during 2010.  FHLB borrowings may be used from time to time when needed as part of the Bank’s normal liquidity management to fund asset growth or meet deposit withdrawal requirements on a cost-effective basis.  The Bank has adequate loans to pledge as collateral should it need additional liquidity that cannot be funded by deposits.

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

Following is a summary of the Company’s contractual obligations extending beyond one year from December 31, 2010:

Long-Term Contractual Obligations
	Less than 1 year		1 thru 3 years		3 thru 5 years		More than 5 years		Total
	(Dollars in thousands)
Borrowed funds	$	349	$	-	$	-	$	-	$	349
Junior subordinated debentures		-		-		-		3,093		3,093
Operating leases		815		1,439		1,134		4,869		8,257
Capital leases		-		-		-		-		-
Purchase obligations		-		-		-		-		-
Other long-term liabilities		425		-		-		-		425
Total contractual obligations	$	1,589	$	1,439	$	1,134	$	7,962	$	12,124

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While local deposits remain the primary source of deposits, the Bank also has alternate sources for competitive rate deposits.  Through the CDARS program (see Deposits earlier in this analysis), the Bank has the ability to bid on additional certificates of deposit through banks across the country if necessary to meet additional funding needs.  These “One-Way Buy” CDARS deposits, which are considered to be brokered deposits, are typically priced comparable to FHLB secured borrowing rates, but with no collateral required.  As of December 31, 2010, the Bank had no “One-Way Buy” CDARS deposits.

The Bank has a mix of deposits which includes some large deposit relationships, including 11 customers with deposits of $1 million or more totaling $52.8 million, approximately $32.0 million of which has been placed into the CDARS program.  Although these large deposit sources have been relatively stable in the past, should a substantial number of these large deposit customers choose to withdraw their funds when they mature, or if the Bank’s borrowing facility through the FHLB were reduced, and the Bank is unable to develop alternate funding sources, the Bank might have difficulty funding loans or meeting deposit withdrawal requirements.

Bancorp is a company separate and apart from the Bank and must provide for its own liquidity, as well as that of its non-bank subsidiary, MAM.  As of December 31, 2010, Bancorp had no borrowings other than the junior subordinated debentures reflected in the above table, and had approximately $4.1 million in unrestricted cash.  MAM had no borrowings as of December 31, 2010, and $669 thousand in unrestricted cash.  See Note R to the consolidated financial statements for additional financial information regarding Bancorp.

Under normal circumstances, substantially all of Bancorp’s revenues would be obtained from dividends declared and paid by the Bank.  However, because of the Bank’s net losses from 2008 through 2010, Bancorp’s and the Bank’s regulators have required that Bancorp and the Bank obtain approval in advance prior to the payment of any dividends.  See “Item 5—Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Dividends” and Note P to the consolidated financial statements for additional information regarding regulatory dividend and capital restrictions.

Asset and Liability Management

The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements in the market, to achieve consistent growth in net interest income and to profit from favorable market opportunities.  Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of assets, and timing lags in adjusting certain assets and liabilities that have varying sensitivities to market interest rates.

Interest rate sensitivity gap analysis attempts to capture interest rate risk, which is attributable to the mismatching of interest rate sensitive assets and liabilities.  A positive cumulative gap would mean that over the indicated period our assets would be expected to reprice faster than our liabilities (an asset sensitive structure), and a negative gap would mean that our liabilities would likely reprice faster than our assets (liability sensitive).

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The following Interest Rate Sensitivity table portrays a “static” gap analysis of the interest rate sensitivity of interest-earning assets and interest-bearing liabilities as of December 31, 2010.  For purposes of the table, an asset or liability is considered rate-sensitive in the first period when it is likely to be repriced, matures within its contractual terms, or is expected to be prepaid.  For example, based on their contractual terms, loans may reprice or mature beyond one year, but our prepayment assumptions would indicate that a certain percentage of them would likely be paid off earlier.  That portion estimated to be paid off early would be shown in one of the columns to the left of its actual maturity.

Interest Sensitivity - Static Gap Analysis
December 31, 2010	Sensitive to Rate Changes Within
	3 Months			4 to 12 Months			1 to 5 Years			Over 5 Years			Non-Rate- Sensitive			Total
	(Dollars in thousands)
Earning Assets:
Loans, net of unearned income	$	34,091		$	19,049		$	42,718		$	24,367		$	-		$	120,225
Investment securities		5,453			11,371			47,990			10,621			-			75,435
Other earning assets		10,305			50			-			-			-			10,355
Non-interest-earning assets		-			-			-			-			11,786			11,786
Total assets		49,849			30,470			90,708			34,988			11,786			217,801
Interest-Bearing Liabilities:
Non-maturity interest-bearing deposits		23,819			-			46,191			-			-			70,010
Certificates of deposit		25,007			39,681			15,632			-			-			80,320
Borrowed funds		349			-			-			-			-			349
Junior subordinated debentures		3,093			-			-			-			-			3,093
Non-interest-bearing liabilities and equity		-			-			-			-			64,029			64,029
Total liabilities and equity		52,268			39,681			61,823			-			64,029			217,801
Interest rate sensitivity gap	$	(2,419	)	$	(9,211	)	$	28,885		$	34,988		$	(52,243	)	$	-
Cumulative interest rate sensitivity gap	$	(2,419	)	$	(11,630	)	$	17,255		$	52,243		$	-
Cumulative gap to total earning assets		-1	%		-5	%		8	%		24	%

The table shows that during the first twelve months $80 million of the interest earning assets are expected to reprice, as well as $92 million of interest bearing liabilities, which would indicate a slightly liability-sensitive structure over that time period.  In general, this means that in a rising interest rate environment, with all other conditions remaining constant, net interest income would be expected to decrease, and in a declining interest rate environment net interest income would be expected to increase.  Although not detailed in the table, during the second year, $34 million of assets reprice along with $15 million of liabilities, indicating a slightly asset-sensitive structure ($7 million cumulative sensitivity gap) through 24 months.

One should use caution if attempting to predict future levels of net interest income through the use this type of static gap analysis, however.  Significant adjustments can be, and often are, made to the balance sheet in the short-term.  The actual impact of interest rate movements on net interest income often differs significantly from that implied by any gap measurement, depending on the direction and magnitude of the interest rate movements, the repricing characteristics of various on- and off-balance sheet instruments, as well as competitive pressures.  For example, many of the Bank’s loans are tied to the prime rate and adjust quickly when the Federal Reserve Board makes adjustments to the Federal Funds rate, which usually drives movements in the prime rate.  However, in a declining rate environment, as the Company experiencesd in 2008 and 2009, competitive pressures often keep deposit rates from dropping to the same degree and as quickly as loan rates.  On the other hand, in a rising rate environment customers may demand swift changes to deposit rates.

Also, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting this particular measure of interest rate sensitivity.  In addition, prepayments may have significant impact on our net interest margin.  Varying interest rate environments can create unexpected changes in prepayment activity as compared to prepayments assumed in the interest rate sensitivity  analysis.  These factors are not fully reflected in the gap analysis above and, as a result, the gap report may not provide a complete assessment of our interest rate risk.

Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain at a very low level through much of 2011 and, if so, we expect to see certificate of deposit rates continue to decline to a greater degree than loan rates, continuing to improve our net interest margin.  In the early stage of the next cycle of rising interest rates, however, we would expect to see deposits repricing slightly faster than loans because “floors” (minimum rates) have been implemented on much of the variable rate loan portfolio.  Many of those floor rates are currently higher than the rate would be without the imposition of the floor.  A potential additional risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months.  Additional non-accrual loans would put downward pressure on the net interest margin.

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Effects of Inflation and Economic Issues

A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively little investments in fixed assets or inventories.  Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.  Management believes that the impact of inflation on financial results depends on the Company’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance.  Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.

San Luis Obispo and Santa Barbara Counties continue to have lower than average unemployment rates (10.0% and 9.7%, respectively, as of December 2010, as compared to a California statewide seasonally-adjusted rate of 12.5%, but both are above the nationwide seasonally-adjusted rate of 9.4%.  SLO County’s rate is down from a high of 10.6% early in 2010, while Santa Barbara County’s rate peaked at 10.1%.  As unemployment increased during the Great Recession, real estate values declined significantly and, after several years of strong appreciation, residential and commercial sale activity—and especially construction activity—slowed dramatically.  There can be no assurance that the local economy will rebound quickly or that real estate values will return to pre-2006 levels in the near term.  As such, the Bank closely monitors credit quality, interest rate risk and operational expenses.

Return on Equity and Assets

The following table shows the Company’s return on average assets and return on average equity for past five years:

	2010		2009		2008		2007		2006
Return (Loss) on Average Assets		(1.52)%		(3.19)%		(2.02)%		0.48%		0.58%
Return (Loss) on Average Equity		(15.48)%		(27.94)%		(20.86)%		6.07%		7.53%

- 61 -

Item 8.       Financial Statements

MISSION COMMUNITY BANCORPAND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

WITH

INDEPENDENT AUDITORS’ REPORTS

December 31, 2010 (Restated) and 2009

CONTENTS

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS ON THE CONSOLIDATED FINANCIAL STATEMENTS  2

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets	4-5
Consolidated Statements of Operations	6
Consolidated Statement of Changes in Shareholders' Equity	7
Consolidated Statements of Cash Flows	8
Notes to Consolidated Financial Statements	9-41

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Mission Community Bancorp and Subsidiaries

We have audited the accompanying consolidated balance sheet of Mission Community Bancorp and subsidiaries (the "Company") as of December 31, 2010 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended.  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 audit.

We conducted our audit 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 consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the December 31, 2010 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mission Community Bancorp and subsidiaries as of December 31, 2010 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As more fully described in Note U to the consolidated financial statements, the 2010 financial statements have been restated to account for the proper classification of certain warrant liabilities, the beneficial conversion features and classification of certain preferred stock, and to record changes in the fair value of warrant liabilities in the statement of operations.

 

March 31, 2011, except for Note U as to which the date is March 29, 2012

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of

Mission Community Bancorp and Subsidiary

We have audited the accompanying consolidated balance sheets of Mission Community Bancorp and Subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of income, changes in shareholders' equity, and cash flows of the years then ended.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mission Community Bancorp and Subsidiary as of December 31, 2009 and December 31, 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Laguna Hills, California

April 14, 2010

3

MISSION COMMUNITY BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

	2010			2009
ASSETS	(Restated)
	See Note U
Cash and Due from Banks	$	10,816,850		$	8,595,410
Federal Funds Sold		-			-
TOTAL CASH AND CASH EQUIVALENTS		10,816,850			8,595,410
Certificates of Deposit in Other Banks		550,000			425,000
Investment Securities Available for Sale		75,434,942			40,142,412
Loans Held For Sale		15,114,520			903,680
Loans:
Commercial and Industrial		20,655,933			22,200,974
Agricultural		1,022,394			749,721
Leases, Net of Unearned Income		1,047,412			1,334,740
Construction and Land Development		4,434,674			12,511,994
Real Estate		76,459,659			96,954,983
Consumer		1,490,631			1,754,054
TOTAL LOANS		105,110,703			135,506,466
Allowance for Loan and Lease Losses		( 3,197,636	)		( 5,536,929	)
NET LOANS		101,913,067			129,969,537
Federal Home Loan Bank Stock and Other Stock, at Cost		2,682,146			3,002,575
Premises and Equipment		3,199,228			3,254,511
Other Real Estate Owned		3,136,879			2,205,882
Company-Owned Life Insurance		2,979,429			2,885,659
Accrued Interest and Other Assets		1,973,854			1,720,799
TOTAL ASSETS	$	217,800,915		$	193,105,465

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

4

MISSION COMMUNITY BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009

	2010			2009
	(Restated)
	See Note U
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand	$	22,910,002		$	24,615,530
Money Market, NOW and Savings		70,010,249			54,144,513
Time Deposits Under $100,000		20,396,708			32,064,624
Time Deposits $100,000 and Over		59,922,872			52,945,030
TOTAL DEPOSITS		173,239,831			163,769,697
Other Borrowings		349,458			6,000,000
Junior Subordinated Debt Securities		3,093,000			3,093,000
Accrued Interest and Other Liabilities		1,975,138			1,605,053
Warrant Liability		5,029,000			-
TOTAL LIABILITIES		183,686,427			174,467,750
Commitments and Contingencies
Mezzanine Financing:
Redeemable Preferred Stock, Series A, B & C at Liquidation Value		1,205,000			-
Shareholders' Equity:
Preferred Stock - Authorized 10,000,000 Shares:
Series A - $5 Stated Value; 100,000 Issued and Outstanding Liquidation Value of $500,000		-			392,194
Series B - $10 Stated Value; 20,500 Issued and Outstanding Liquidation Value of $205,000		-			191,606
Series C - $10 Stated Value; 50,000 Issued and Outstanding Liquidation Value of $500,000		-			500,000
Series D - $1,000 Par Value; 5,116 shares Issued and Outstanding Liquidation Value of $5,116,000		5,067,722			5,067,722
Common Stock - Authorized 50,000,000 Shares; Issued and Outstanding: 7,094,274 in 2010 and 1,345,602 in 2009		37,824,503			18,041,851
Additional Paid-In Capital		1,209,500			242,210
Retained Deficit		( 10,650,086	)		( 6,280,239	)
Accumulated Other Comprehensive (Loss) Income - Unrealized (Depreciation) Appreciation on Available-for-Sale Securities		( 542,151	)		482,371
TOTAL SHAREHOLDERS' EQUITY		32,909,488			18,637,715
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	217,800,915		$	193,105,465

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

5

MISSION COMMUNITY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2010 and 2009

	2010			2009
	(Restated)
	See Note U
INTEREST INCOME
Interest and Fees on Loans	$	7,538,488		$	8,889,166
Interest on Investment Securities		1,296,418			1,259,017
Other Interest Income		46,792			134,476
TOTAL INTEREST INCOME		8,881,698			10,282,659
INTEREST EXPENSE
Interest on Money Market, NOW and Savings Deposits		482,769			514,393
Interest on Time Deposits		1,192,354			2,150,036
Other Interest Expense		316,161			1,212,181
TOTAL INTEREST EXPENSE		1,991,284			3,876,610
NET INTEREST INCOME		6,890,414			6,406,049
Provision for Loan and Lease Losses		5,800,000			5,055,722
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES		1,090,414			1,350,327
NON-INTEREST INCOME
Service Charges on Deposit Accounts		353,676			333,583
Gain on Sale of Loans		430,317			379,186
Loan Servicing Fees, Net of Amortization		134,747			114,049
Grants and Awards		600,000			80,948
Loss or Writedown of Fixed Assets and Other Real Estate Owned		( 486,422	)		( 474,565	)
Gain on Sale of Available-For-Sale Securities		497,224			246,982
Change in fair value of warrant liability		3,573,100			-
Other Income and Fees		182,032			153,084
TOTAL NON-INTEREST INCOME		5,284,674			833,267
NON-INTEREST EXPENSE
Salaries and Employee Benefits		4,034,552			3,816,574
Occupancy Expenses		1,269,807			1,002,440
Furniture and Equipment		460,007			456,878
Data Processing		743,786			740,870
Professional Fees		588,984			478,353
Marketing and Business Development		144,726			176,758
Office Supplies and Expenses		238,135			255,609
Insurance and Regulatory Assessments		702,327			634,657
Loan and Lease Expenses		192,867			142,636
Other Real Estate Expenses		190,750			36,264
Fees Paid on Prepayment of Borrowed Funds		377,966			-
Other Expenses		542,028			534,163
TOTAL NON-INTEREST EXPENSE		9,485,935			8,275,202
LOSS BEFORE INCOME TAXES		( 3,110,847	)		( 6,091,608	)
Income Tax Expense		-			834,951
NET LOSS	$	( 3,110,847	)	$	( 6,926,559	)
NET LOSS ALLOCATED TO COMMON STOCK (Note O)	$	( 4,248,647	)	$	( 6,556,819	)
Per Share Data (Note O):
Net Loss - Basic	$	( 0.97	)	$	( 4.87	)

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

6

MISSION COMMUNITY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2010 (Restated) and 2009

	Preferred			Common Stock					Additional Paid-In		Comprehensive			Retained Earnings			Accumulated Other Comprehensive
	Stock			Shares		Amount			Capital		Loss			(Deficit)			Income (Loss)			Total
Balance at January 1, 2009	$	1,083,800			1,345,602	$	18,041,851		$	172,285				$	863,750		$	355,137		$	20,516,823
Issuance of Series D preferred stock to U.S. Treasury under TARP, net of issuance costs of $48,278		5,067,722																			5,067,722
TARP dividends paid															(217,430	)					(217,430	)
Stock-based compensation										69,925											69,925
Comprehensive Loss:
Net loss												(6,926,559	)		(6,926,559	)					(6,926,559	)
Less beginning of year unrealized gain on securities sold during the period, net of taxes of $-0-												(271,447	)					(271,447	)		(271,447	)
Plus net unrealized gain on available-for-sale securities, net of taxes of $-0-												398,681						398,681			398,681
Total Comprehensive Loss											$	( 6,799,325	)
Balance at December 31, 2009	$	6,151,522			1,345,602	$	18,041,851		$	242,210				$	( 6,280,239	)	$	482,371		$	18,637,715
Cumulative effect of reclassification of certain redeemable preferred stock		(1,083,800	)												(121,200	)					( 1,205,000	)
Effect of beneficial conversion feature of redeemable preferred stock		-								882,000					(882,000	)					-
Issuance of common stock and warrants in private placement, net of offering expenses of $181,728					5,000,000		24,818,272														24,818,272
Fair value of warrants issued , accounted for as liability							(8,602,100	)													(8,602,100	)
Issuance of common stock and warrants in shareholder rights offering, net of offering expenses of $176,880					748,672		3,566,480														3,566,480
TARP dividends paid															(255,800	)					(255,800	)
Stock-based compensation										85,290											85,290
Comprehensive Loss:
Net loss												(3,110,847	)		(3,110,847	)					(3,110,847	)
Less beginning of year unrealized gain on securities sold during the period, net of taxes of $-0-												( 173,478	)					(173,478	)		( 173,478	)
Net unrealized (loss) on available-for-sale securities, net of taxes of $-0-												( 851,044	)					( 851,044	)		( 851,044	)
Total Comprehensive Loss											$	( 4,135,369	)
Balance at December 31, 2010	$	5,067,722			7,094,274	$	37,824,503		$	1,209,500				$	( 10,650,086	)	$	( 542,151	)	$	32,909,488

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

7

MISSION COMMUNITY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2010 and 2009

	2010			2009
	(Restated)
	See Note U
OPERATING ACTIVITIES
Net loss	$	( 3,110,847	)	$	( 6,926,559	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for deferred income taxes		-			832,551
Depreciation		508,011			440,940
Amortization of premium (accretion of discount) on securities and loans, net		479,010			( 136,294	)
Provision for loan losses		5,800,000			5,055,722
Provision for losses on unfunded loan commitments		-			35,000
Stock-based compensation		85,290			69,925
Gain on sale of securities		( 497,224	)		( 246,982	)
Change in the fair value of warrant liability		(3,573,100	)		-
Write-downs on other real estate		486,422			472,019
Loss on disposal or abandonment of fixed assets		-			2,545
Gain on loan sales		( 430,317	)		( 379,186	)
Proceeds from loan sales		6,366,634			6,250,455
Loans originated for sale		( 4,787,727	)		( 5,780,076	)
Increase in company owned life insurance		( 93,770	)		( 96,293	)
(Increase) decrease in accrued taxes receivable		( 2,400	)		617,932
Other, net		23,704			( 308,972	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		1,253,686			( 97,273	)
INVESTING ACTIVITIES
Net decrease (increase) in Federal Home Loan Bank and other stock		312,100			( 246,050	)
Maturity (placement) of time deposits in other banks		( 125,000	)		11,285,000
Purchase of available-for-sale securities		(78,811,493	)		(34,441,942	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		18,411,337			10,399,966
Proceeds from sales of available-for-sale securities		24,012,103			9,135,234
Net decrease in loans		4,729,528			11,819,537
Additional investments in other real estate owned		( 80,948	)		-
Proceeds from sale of other real estate owned		1,024,311			-
Purchases of premises and equipment		( 452,728	)		( 1,099,299	)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(30,980,790	)		6,852,446
FINANCING ACTIVITIES
Net increase in demand deposits and savings accounts		14,160,208			23,289,704
Net decrease in time deposits		( 4,690,074	)		( 4,324,065	)
Net decrease in other borrowings		( 5,650,542	)		(39,700,000	)
Proceeds from issuance of common stock and warrants, net of issuance costs		28,384,752			-
Proceeds from issuance of preferred stock, net of issuance costs		-			5,067,722
Payment of dividends		( 255,800	)		( 217,430	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		31,948,544			(15,884,069	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,221,440			( 9,128,896	)
Cash and cash equivalents at beginning of year		8,595,410			17,724,306
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	10,816,850		$	8,595,410
Supplemental disclosures of cash flow information:
Interest paid	$	2,063,988		$	4,039,470
Taxes paid (refunds received)		2,400			(615,532	)
Supplemental schedule of non-cash investing activities:
Unrealized (loss) gain on available-for-sale securities	$	(1,024,522	)	$	127,234
Real estate acquired by foreclosure		2,360,782			1,694,801
Loans transferred from held for investment to held for sale		16,924,504			-

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

8

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements include the accounts of Mission Community Bancorp (“Bancorp”) and its subsidiaries, Mission Community Bank (“the Bank”) and Mission Asset Management, Inc. (“MAM”), and the Bank’s subsidiary, Mission Community Development Corporation (“MCDC”), collectively referred to herein as “the Company.” All significant intercompany transactions have been eliminated. The accounting and reporting policies of Mission Community Bancorp and Subsidiaries conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.

Nature of Operations

Mission Community Bancorp

Bancorp is a California corporation registered as a bank holding company under the Bank Holding Company Act, with no significant operations other than its investment in all of the outstanding common stock of the Bank and MAM. Bancorp’s principal source of revenue is dividends from the Bank and MAM.

Mission Community Bank

The Bank has been organized as a single reporting segment and operates four branches in the Central Coast area of California (in the cities of San Luis Obispo, Paso Robles, Arroyo Grande and Santa Maria). In addition, the Bank operates a loan production office in San Luis Obispo, with a primary focus on Small Business Administration (“SBA”) lending. Subsequent to December 31, 2010, the Bank created a Food and Agriculture Division, operating through a loan production office in Oxnard, California.

The Bank’s primary source of revenue is providing real estate, commercial (including SBA-guaranteed loans) and consumer loans to customers, who are predominately small and middle-market businesses and individuals. The Company remains committed to focusing on providing financial services to low- and moderate-income communities.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank participated in the FDIC’s Transaction Account Guarantee Program (TAGP). Under the program, through December 31, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. Coverage under the TAGP is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules.

Mission Asset Management, Inc.

MAM was established to facilitate the orderly sale or resolution of certain foreclosed real estate and lower-quality loans. To that end, in 2010 the Bank reclassified $22.4 million of lower-quality loans (including $10.3 million of nonaccrual loans) to “held for sale,” writing down the value of those loans to $16.9 million through charge-offs to the allowance for loan and lease losses. Those loans, along with $1.0 million of other real estate, were sold from the Bank to MAM at the aggregate $17.9 million fair value. On the consolidated balance sheet of Bancorp, these assets are included in loans held for sale and other real estate owned.

Mission Community Development Corporation

MCDC is a community development corporation that provides financing and services loans for small businesses and projects in low- to moderate-income areas. The Board of Directors of MCDC consists of all members of the Board of Directors of the Company. Community development investment is limited to 5% of the Bank’s capital and up to 10% with prior approval by the Federal Reserve Board. Operations of MCDC were not material for the years ended December 31, 2010 or 2009.

9

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Mission Community Services Corporation

Mission Community Services Corporation (“MCSC”), an affiliate organization, was organized in 1998 and the corporation was established as a not-for-profit company with Section 501(c)(3) status. MCSC’s primary focus is to provide technical support and training services to the underserved segments of the community including small businesses, minorities and low-income entrepreneurs. The Board of Directors of Mission Community Services Corporation includes two representatives from the Company, together with members representing the communities represented. The accounts of MCSC are not included in the Company’s consolidated financial statements. See Note M for additional information regarding MCSC.

Segment Information

Management has determined that since all of the banking products and services offered by the Bank are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10% of revenues for the Bank.

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 disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior year’s balances to conform to classifications used in 2010.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, amounts due from other banks 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 (“FRB”). The Bank was in compliance with this requirement, which was $852,000 as of December 31, 2010.

The Company maintains amounts due from other banks which may, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts and as of December 31, 2010, none of these accounts exceeded the $250,000 FDIC insurance limit.

10

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. None of the Company’s investment securities were classified as held-to-maturity as of December 31, 2010 or 2009.

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 net of taxes as a separate component of other comprehensive income (loss), which is included in shareholders’ equity. Premiums or discounts are amortized or accreted into income using the interest method. Interest income is recognized when earned. Realized gains or losses on sales of securities are recorded using the specific identification method.

An investment security is impaired when its amortized cost is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term "other than temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, and management does not intend to sell the security or it is more likely than not that the Bank will not be required to sell the security before recovery, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income (loss). If management intends to sell the security or it is more likely than not that the Bank will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.

Loans

Loans that are not classified as held for sale are reported at the principal amount outstanding, less deferred fees, costs, premiums and discounts. Substantially all loan origination fee, commitment fees, direct loan origination costs and purchased premiums and discounts on loans are deferred and recognized as an adjustment of yield. To be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans.

The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual cash flows over the cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally are recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected are recognized as an impairment. The Company may not “carry over” or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2010 and 2009, there were no loans being accounted for under this policy method.

11

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Loans for which the accrual of interest has been discontinued are designated as non-accrual loans. Loans are classified as non-accrual when principal or interest is past due 90 days or more based on the contractual terms of the loan or when, in the opinion of management, there exists a reasonable doubt as to the full and timely collection of either principal or interest, unless the loan is well secured and in the process of collection. Income on such loans is recognized only to the extent that cash is received and where the future collection of principal is probable. Payments received are applied to reduce principal to the extent necessary to ensure collection. Accrual of interest is resumed only when principal and interest are brought fully current and when such loans are considered to be collectible as to both principal and interest.

The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Loans for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings.Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Both non-accrual loans and troubled debt restructurings are generally considered to be impaired. Impairment is measured based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The change in the amount of impairment is reported as either an increase or decrease in the provision for loan and lease losses that otherwise would be reported.

Loans Held for Sale, Loan Sales and Servicing

Included in the portfolio are loans which are 50% to 90% guaranteed by the SBA. SBA loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value. The guaranteed portion of these loans may be sold, with the Company retaining the unguaranteed portion.

The Company has adopted accounting standards issued by the Financial Accounting Standards Board (“FASB”) that provide accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Included in commercial loans at December 31, 2010 is $349,458 in guaranteed portions of SBA loans sold and subject to a 90-day premium refund obligation. In accordance with new accounting standards for the sale of a portion of a loan, the Bank has recorded the proceeds from the sale of the guaranteed portion of those SBA loans, which totaled $385,546, as a secured borrowing and included $349,458 of that amount in other borrowings on the consolidated balance sheet, with the $36,088 deferred premium recorded in other liabilities. Once the premium refund obligation has elapsed the transaction will be recorded as a sale with the guaranteed portions of loans and the secured borrowings removed from the balance sheet and the resulting gain on sale recorded. In February 2011, the SBA eliminated the refund obligation period; the Bank will not be required to defer gain recognition for SBA loan sales after February 15, 2011. The Company accounts for the transfer and servicing of financial assets based on the fair value of financial and servicing assets it controls and liabilities it has assumed, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.

12

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold or securitized with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Fair values are estimated using discounted cash flows based in current market interest rates. For purposes of measuring impairment, servicing assets are stratified based on note rate and term. The amount of impairment recognized, if any, is the amount by which the servicing assets for a stratum exceed their fair value.

The company’s investment in the loan is allocated between the retained portion of the loan, the servicing asset, the interest-only (IO) strip, and the sold portion of the loan based on their relative fair values on the date the loan is sold. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. The servicing asset is recognized and amortized over the estimated life of the related loan. The servicing asset is recognized and amortized over the estimated life of the related loan. Assets accounted for as interest-only (IO) strips are recorded at the fair value of the difference between the note rates and the rates paid to purchasers (the interest spread) and contractual servicing fees, if applicable. Significant future prepayments of these loans will result in the recognition of additional amortization of related servicing assets and an adjustment to the carrying value of related IO strips.

At December 31, 2010 and 2009 the Company was servicing $30,712,000 and $26,879,000, respectively, in loans previously sold or participated. The Company has recorded servicing assets related to these sold loans of approximately $201,000 and $197,000 at December 31, 2010 and 2009, respectively. In calculating the gain on sale of SBA loans and the related servicing asset, the Company used the following assumptions for sales recorded in 2010:

	Range	Weighted Average
Discount Rate	5.75% to 7.25%	6.01%
Estimated Life	48 months	48 months

These assumptions are significant determinants on the value ascribed to the servicing asset. Following is a summary of the changes in the balance of the SBA loan servicing asset for 2010 and 2009:

	2010			2009
Balance at Beginning of Year	$	197,096		$	187,388
Additions to the Asset		92,341			104,979
Less amortization		( 87,975	)		( 95,271	)
Balance at End of Year	$	201,462		$	197,096

The estimated fair value of the servicing assets approximated the carrying amount at December 31, 2010 and 2009. These assets are included in accrued interest and other assets in the consolidated balance sheets. Amortization of these assets is netted against loan servicing fees in the consolidated statements of operations.

All loans held by the Company’s MAM subsidiary are classified as held for sale. Those loans are valued by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower. The projected amount and timing of cash flows expected to be received, including collateral liquidation if repayment weaknesses exist, is then discounted using an effective market rate to determine the fair value as of the reporting date.

13

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is an estimate of credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan and lease losses which is charged to expense. Adjustments to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are collectively evaluated for impairment.

The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include commercial and industrial (including agricultural production loans), real estate construction (including land and development loans), real estate mortgage (including owner-occupied and non-owner-occupied commercial real estate, residential real estate and other real estate loans) and all other loans (including consumer loans and lease financing). The allowance for loan and lease losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheets.

The Company assigns a risk rating to all loans except pools of homogeneous loans and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and its regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:

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

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

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

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

14

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Loss – Loans classified as loss are considered uncollectible and are of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be received in the future. Loans classified as loss are charged off immediately.

The general reserve component of the allowance for loan and lease losses also consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.

Construction and land development loans – Construction and land development loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial real estate mortgage loans – Commercial real estate (“CRE”) mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Owner-occupied CRE loans are generally considered to be less susceptible to these risks than non-owner-occupied CRE loans because the lender is relying on the operations of the business occupying the property, rather than rental income, to support debt service. In this respect, owner-occupied CRE loans have risks similar to commercial and industrial loans, but with commercial real estate as collateral.

Single family residential real estate loans and home equity lines of credit – The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Commercial and industrial loans – Commercial and industrial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural land and production loans – Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of the Bank and borrowers: commodity prices and weather conditions.

Consumer and installment loans – An installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made directly for consumer purchases, but business loans granted for the purchase of heavy equipment or industrial vehicles may also be included. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be deteriorating.

Credit card receivables – Credit card receivables generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends.

15

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Although management believes the allowance to be adequate, ultimate losses may vary from its estimates.  At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors.  If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted.  In addition, the Bank’s primary regulators, the California Department of Financial Institutions and the Federal Reserve Bank, review the adequacy of the allowance as an integral part of their examination process.  These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Bank also maintains a separate allowance for off-balance-sheet commitments.  Management estimates anticipated losses using historical data and utilization assumptions.  The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheets.

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

The Bank is a member of the Federal Home Loan Bank system and the Federal Reserve Bank of San Francisco.  FHLB members are required to own a certain amount of FHLB stock based on the level of borrowings and other factors, and may invest additional amounts.  FRB members are required to own a certain amount of FRB stock based on primarily on the Bank’s equity capital.  Investments in FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income.

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 range from three to ten years for furniture and fixtures and forty years for buildings.  Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter.  Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Other Real Estate Owned

Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan and lease losses, if necessary.  Other real estate owned is carried at the lower of the Bank’s cost basis or fair value.  Fair value is based on current appraisals, adjusted for estimated selling costs and as additional information becomes available or as events warrant.  Any subsequent write-downs are charged against operating expenses and may be recognized as a valuation allowance.  Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other operating expenses.  Other real estate held by the Company at December 31, 2010 and 2009, totaled $3,136,879 and $2,205,882, respectively, and was recorded net of $743,291 and $368,100 in valuation adjustments, respectively.

16

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Company-Owned Life Insurance

Company-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Income Taxes

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.  To the extent that evidence indicates deferred tax assets might not be realizable, through probable future taxable income or carry-backs to prior years, a deferred tax valuation allowance is provided.

The Company has adopted guidance issued by the FASB 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.  Any interest and penalties related to uncertain tax positions would be recorded as part of income tax expense.  No such interest or penalties were incurred for in 2009 or 2010.

Comprehensive Income (Loss)

Changes in unrealized gain or loss on available-for-sale securities net of income taxes is the only component of accumulated other comprehensive income (loss) 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.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Earnings (Loss) Per Share (“EPS”)

Basic EPS is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if options 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 Company.  The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS.  However, diluted EPS is not presented when a net loss occurs because the conversion of potential common stock is anti-dilutive.

17

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Stock-Based Compensation

The cost of equity-based compensation arrangements, including employee stock options, is recognized based on the grant-date fair value of those awards, over the period which an employee is required to provide services in exchange for the award, generally the vesting period.  The fair value of each grant is estimated using the Black-Scholes option pricing model.  The Plans do not provide for the settlement of awards in cash, and new shares are issued upon exercise of an option.

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 in active markets for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Model based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Bank’s estimate of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

See Note S for more information and disclosures relating to the Company’s fair value measurements.

Adoption of New Accounting Standards

Accounting for Transfers of Financial Assets

In June 2009, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Update ("ASU") 2009-16, Accounting for Transfers of Financial Assets (Statement 166), which amends previously issued accounting guidance to enhance accounting and reporting for transfers of financial assets, including securitizations or continuing exposure to the risks related to transferred financial assets.  Prior to the issuance of Statement 166, transfers under participation agreements and other partial loan sales fell under the general guidance for transfers of financial assets.  Statement 166 introduces a new definition for a participating interest along with the requirement for partial loan sales to meet the definition of a participating interest for sale treatment to occur.  If a participation or other partial loan sale does not meet the definition, the portion sold should remain on the books and the proceeds recorded as a secured borrowing until the definition is met.  Additionally, existing provisions that require the transferred assets to be  isolated from the  originating institution (transferor),  that the transferor does not maintain effective control through certain agreements to repurchase or redeem the transferred assets and that the purchasing institution (transferee) has the right to pledge or exchange the assets acquired were retained.  The new provisions became effective on January 1, 2010 and early adoption was not permitted. Under this new standard, the Company’s loan participations were not affected, but the Company deferred approximately $36,000 of gains and recorded $349,458 of secured borrowings related to the sale of a portion of certain loans as of December 31, 2010.  These gains will be recognized when the warranty periods that precluded the sales from meeting the participating interest standard expire.

18

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Fair Value Measurements

In January 2010, the FASB issued FASB ASU 2010-06, Improving Disclosures about Fair Value Measurements, which amends and clarifies existing standards to require additional disclosures regarding fair value measurements.  Specifically, the standard requires disclosure of the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis.  This standard clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities—previously separate fair value disclosures were required for each major category of assets and liabilities.  This standard also clarifies the requirement to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements.  Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, these disclosures are effective for the year ended December 31, 2010.  The requirement to separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements becomes effective for the Company for the year beginning on January 1, 2011.  The Company adopted this new accounting standard as of January 1, 2010 and the impact of adoption was not material to the consolidated financial statements.

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

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

19

NOTE B - INVESTMENT SECURITIES

Investment securities have been classified in the consolidated balance sheets as available for sale.  The amortized cost of securities and their approximate fair values at December 31, 2010 and 2009, were as follows:

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Securities Available-for-Sale:
December 31, 2010:
U.S. Government agencies	$	21,083,113	$	47,330	$	( 269,708	)	$	20,860,735
Mortgage-backed securities		49,831,343		214,719		( 566,253	)		49,479,809
Municipal securities		2,917,460		19,946		( 15,157	)		2,922,249
Corporate debt securities		1,980,033		20,417		-			2,000,450
Asset-backed securities		165,144		6,555		-			171,699
	$	75,977,093	$	308,967	$	( 851,118	)	$	75,434,942
December 31, 2009:
U.S. Government agencies	$	15,442,231	$	40,425	$	( 14,139	)	$	15,468,517
Mortgage-backed securities		16,631,325		243,491		( 40,158	)		16,834,658
Municipal securities		2,917,693		61,066		( 5,235	)		2,973,524
Corporate debt securities		2,840,493		147,297		-			2,987,790
Asset-backed securities		1,828,299		49,624		-			1,877,923
	$	39,660,041	$	541,903	$	( 59,532	)	$	40,142,412

During 2004, one of the Bank’s asset-backed securities was identified as “other than temporarily impaired,” and a loss reserve was established for this security.  As of December 31, 2010, the gross book value of the security and the reserve was $288,000, for a net book value of $-0-.  The security is in non-accrual status.  However, interest payments received since May 2010 (when the net book value was reduced to zero) have been credited to interest income.

The scheduled maturities of investment securities at December 31, 2010, were as follows.  Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.

	Available-for-Sale Securities
	Amortized		Fair
	Cost		Value
Within one year	$	1,982,038	$	2,002,469
Due in one year to five years		20,099,986		19,877,424
Due in five years to ten years		15,676,003		15,675,043
Due in greater than ten years		38,219,066		37,880,006
	$	75,977,093	$	75,434,942

20

NOTE B - INVESTMENT SECURITIES – Continued

Included in accumulated other comprehensive loss at December 31, 2010 were net unrealized losses on investment securities available-for-sale of $(542,151).  At December 31, 2009, accumulated other comprehensive income included net unrealized gains on available-for-sale securities of $482,371.  No deduction was made for income taxes on net unrealized gains (losses) as of December 31, 2010 or 2009.  During 2010 and 2009, the Bank sold $24,012,103 and $9,135,234 of investment securities for net gains of $497,224 and $246,982, respectively.

Investment securities in a temporary unrealized loss position as of December 31, 2010 and 2009 are shown in the following table, based on the length of time they have been continuously in an unrealized loss position:

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
December 31, 2010:
U.S. Government agencies	$	15,984,370	$	269,708	$	-	$	-	$	15,984,370	$	269,708
Mortgage-backed securities		37,274,270		566,253		-		-		37,274,270		566,253
Municipal securities		1,169,107		15,157		-		-		1,169,107		15,157
	$	54,427,747	$	851,118	$	-	$	-	$	54,427,747	$	851,118
December 31, 2009:
U.S. Government agencies	$	4,420,862	$	14,139	$	-	$	-	$	4,420,862	$	14,139
Mortgage-backed securities		5,712,226		40,158		-		-		5,712,226		40,158
Municipal securities		875,414		5,235		-		-		875,414		5,235
	$	11,008,502	$	59,532	$	-	$	-	$	11,008,502	$	59,532

As of December 31, 2010, the Company held 26 securities that had been in an unrealized loss position for less than 12 months.  No securities have been in an unrealized loss position for 12 months or longer as of December 31, 2010.  The unrealized losses relate principally to changes in market interest rate conditions.  Other than the one impaired asset-backed security noted previously, none of the Bank’s securities has exhibited a decline in value as a result of changes in credit risk and all continue to pay as scheduled.  When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery.  As of December 31, 2010, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis.  Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of December 31, 2010 are other than temporarily impaired.

Investments securities carried at $5,969,000 and $5,133,000 as of December 31, 2010 and 2009, respectively, were pledged to secure public deposits as required by law.  As of December 31, 2010, securities carried at $18,126,000 were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco, as described in Note G.

21

NOTE C – LOANS

The Bank’s loan portfolio consists primarily of loans to borrowers within the Central Coast area of 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 area and, as a result, the Bank’s loan and collateral portfolios are concentrated in those industries and in that geographic area.  As of December 31, 2010, 65% of the loan portfolio was secured by commercial real estate (including construction and land development loans as well as loans secured by non-farm, non-residential and multi-family residential properties).  Under guidelines for commercial real estate (“CRE”) lending issued by the bank regulatory agencies in 2006, which generally excludes owner-occupied properties from the definition of commercial real estate, CRE loans represented 36% of the loan portfolio as of December 31, 2010.

Included in total loans are deferred loan origination costs (net of deferred loan origination fees) of $126,000 and $(21,000) at December 31, 2010 and 2009, respectively.  As of December 31, 2010, loans totaling $60,681,000 were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco, as described in Note G.

NOTE D – CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES

An allowance for loan and lease losses is provided for loans held for investment (i.e., not held for sale), as more fully described in Note A.  Loans held for sale are carried on the consolidated balance sheets at the lower of cost or fair value, therefore no related allowance for loan losses is provided.  Following is a summary of the changes in the Bank’s allowance for loan and lease losses for the years ended December 31:

	2010			2009
Balance at Beginning of Year	$	5,536,929		$	3,942,219
Provision for Loan and Lease Losses Charged to Expense		5,800,000			5,055,722
Loans Charged Off:
Loans Held for Investment		(2,697,683	)		(3,504,435	)
Fair Value Adjustments Upon Reclassification to Held for Sale		(5,488,275	)		-
Recoveries on Loans Previously Charged Off		46,665			43,423
Balance at End of Year	$	3,197,636		$	5,536,929

22

NOTE D – CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES (continued)

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

	Risk Ratings
			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
As of December 31, 2010:
Construction and land development	$	2,931,755	$	178,859	$	1,324,060	$	-	$	4,434,674
Commercial real estate - owner-occupied		29,589,847		-		1,023,112		-		30,612,959
Commercial real estate - non-owner-occupied		22,476,929		6,076,667		781,182		-		29,334,778
Residential real estate		15,322,355		-		-		-		15,322,355
All other real estate		1,315,552		-		-		-		1,315,552
Commercial and industrial		14,872,858		149,744		876,629		13,161		15,912,392
Consumer and all other loans and lease financing		8,045,670				132,323		-		8,177,993
Total Loans	$	94,554,966	$	6,405,270	$	4,137,306	$	13,161	$	105,110,703
As of December 31, 2009:
Construction and land development	$	3,080,538	$	2,214,971	$	6,864,638	$	351,847	$	12,511,994
Commercial real estate - owner-occupied		26,941,215		1,031,158		9,516,471		228,440		37,717,284
Commercial real estate - non-owner-occupied		29,305,237		666,052		6,935,698		-		36,906,987
Residential real estate		17,321,125		323,266		1,753,235		-		19,397,626
All other real estate		1,327,005		-		1,953,695		-		3,280,700
Commercial and industrial		12,425,343		325,034		2,722,300		13,209		15,485,886
Consumer and all other loans and lease financing		9,237,181		-		968,808		-		10,205,989
Total Loans	$	99,637,644	$	4,560,481	$	30,714,845	$	593,496	$	135,506,466

During 2010 the Bank reclassified $22,412,779 million of loans with risk ratings of substandard or doubtful to “held for sale,” adjusting the carrying value of those loans by $5,488,275, to reflect their approximate fair values, through charge-offs to the allowance for loan losses.  Those loans were sold from the Bank to MAM following the adjustment to fair value.  As of December 31, 2010, loans held for sale totaled $15,115,000, of which $10,012,000 was impaired.

23

NOTE D – CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES (continued)

The following table shows information related to impaired loans (excluding loans held for sale) as of and for the year ended December 31, 2010 (amounts in thousands):

							For the Year Ended
	As of December 31, 2010						December 31, 2010
			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
	Investment		Balance		Allowance		Investment		While Impaired
Impaired Loans With a Related Allowance for Loan and Lease Losses:
Construction and land development	$	-	$	-	$	-	$	1,817,286	$	-
Commercial real estate - owner-occupied		-		-		-		2,052,618		-
Commercial real estate - non-owner-occupied		-		-		-		1,392,994		-
Residential real estate		-		-		-		94,452		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,010,361		1,424,431		9,025		1,193,407		-
Consumer and all other loans and lease financing		-		-		-		225,686		-
Total Impaired Loans With An Allowance Recorded		1,010,361		1,424,431		9,025		6,776,443		-
Impaired Loans With No Related Allowance for Loan and Lease Losses:
Construction and land development		355,899		374,935		-		307,199		-
Commercial real estate - owner-occupied		325,504		396,450		-		46,169		-
Commercial real estate - non-owner-occupied		-		-		-		958,361		-
Residential real estate		-		-		-		-		-
All other real estate		-		-		-		-		-
Commercial and industrial		300,951		321,892		-		298,712		27,296
Consumer and all other loans and lease financing		-		-		-		-		-
Total Impaired Loans With No Allowance Recorded		982,354		1,093,277		-		1,610,441		27,296
Total Loans Individually Evaluated for Impairment:
Construction and land development		355,899		374,935		-		2,124,485		-
Commercial real estate - owner-occupied		325,504		396,450		-		2,098,787		-
Commercial real estate - non-owner-occupied		-		-		-		2,351,355		-
Residential real estate		-		-		-		94,452		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,311,312		1,746,323		9,025		1,492,119		27,296
Consumer and all other loans and lease financing		-		-		-		225,686		-
Total Loans Individually Evaluated For Impairment	$	1,992,715	$	2,517,708	$	9,025	$	8,386,884	$	27,296
Loans Collectively Evaluated for Impairment:
Construction and land development	$	4,078,775	$	4,078,775	$	530,473
Commercial real estate - owner-occupied		30,287,455		30,287,455		165,181
Commercial real estate - non-owner-occupied		29,334,778		29,334,778		696,239
Residential real estate		15,322,355		15,322,355		501,008
All other real estate		1,315,552		1,315,552		3,289
Commercial and industrial		14,601,080		14,601,080		1,012,215
Consumer and all other loans and lease financing		8,177,993		8,177,993		123,727
Unallocated		-		-		156,479
Total Loans Collectively Evaluated For Impairment	$	103,117,988	$	103,117,988	$	3,188,611
Total Loans:
Construction and land development	$	4,434,674	$	4,453,710	$	530,473
Commercial real estate - owner-occupied		30,612,959		30,683,905		165,181
Commercial real estate - non-owner-occupied		29,334,778		29,334,778		696,239
Residential real estate		15,322,355		15,322,355		501,008
All other real estate		1,315,552		1,315,552		3,289
Commercial and industrial		15,912,392		16,347,403		1,021,240
Consumer and all other loans and lease financing		8,177,993		8,177,993		123,727
Unallocated		-		-		156,479
Total Loans	$	105,110,703	$	105,635,696	$	3,197,636

24

NOTE D – CREDIT QUALITY AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES (continued)

Information on impaired loans as of and for the year ended December 31, 2009, follows:

	2009
Impaired Loans:
Impaired Loans With a Related Allowance for Loan Losses	$	672,355
Impaired Loans With No Related Allowance for Loan Losses		5,721,257
Total impaired loans	$	6,393,612
Related Allowance for Loan Losses	$	66,821
Average Recorded Investment in Impaired Loans		6,312,843
Interest Income Recognized for Cash Payments While Impaired		184,492
Total Loans on Non-accrual		5,891,045
Total Loans Past Due 90 Days or More and Still Accruing		-

The following table shows an aging analysis of the loan portfolio (excluding loans held for sale) by delinquency status as of the dates indicated:

	Recorded Balance of Loans Past Due												Loans 90+ Days Past		Loans in Non-
	30-59 Days		60-89 Days		90+ Days		Total Past Due		Current		Total Loans		Due and Accruing		Accrual Status
As of December 31, 2010:
Construction and land development	$	-	$	-	$	-	$	-	$	4,434,674	$	4,434,674	$	-	$	-
Commercial real estate - owner-occupied		-		681,402		-		681,402		29,931,557		30,612,959		-		640,890
Commercial real estate - non-owner-occupied		-		-		-		-		29,334,778		29,334,778		-		-
Residential real estate		-		-		-		-		15,322,355		15,322,355		-		-
All other real estate		-		-		-		-		1,315,552		1,315,552		-		-
Commercial and industrial		237,088		165,120		821,334		1,223,542		14,688,850		15,912,392		-		1,351,825
Consumer and all other loans and lease financing		37,996		-		-		37,996		8,139,997		8,177,993		-		-
Total Loans	$	275,084	$	846,522	$	821,334	$	1,942,940	$	103,167,763	$	105,110,703	$	-	$	1,992,715
As of December 31, 2009:
Construction and land development	$	-	$	1,738,385	$	633,638	$	2,372,023	$	10,139,971	$	12,511,994	$	-	$	2,028,085
Commercial real estate - owner-occupied		-		-		596,655		596,655		37,120,629		37,717,284		-		1,074,713
Commercial real estate - non-owner-occupied		-		846,604		1,648,808		2,495,412		34,411,575		36,906,987		-		1,648,808
Residential real estate		-		-		-		-		19,397,626		19,397,626		-		-
All other real estate		-		-		-		-		3,280,700		3,280,700		-		-
Commercial and industrial		352,078		231,659		889,285		1,473,022		14,012,864		15,485,886		-		1,139,439
Consumer and all other loans and lease financing		-		-		-		-		10,205,989		10,205,989		-		-
Total Loans	$	352,078	$	2,816,648	$	3,768,386	$	6,937,112	$	128,569,354	$	135,506,466	$	-	$	5,891,045

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Bank, for economic reasons related to the borrower’s financial difficulties, grants a concession to the borrower. Such concessions may be granted in various forms, including reduction in the standard interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date.  There were no troubled debt restructurings in accruing status and less than 90 days past due as of December 31, 2010, and $831,000 as of December 31, 2009.  The Bank has no commitments to lend additional funds to customers with loans classified as troubled debt restructurings.

25

NOTE E - PREMISES AND EQUIPMENT AND OTHER REAL ESTATE OWNED

A summary of premises and equipment as of December 31 follows:

	2010			2009
Land	$	976,498		$	976,498
Buildings		766,943			766,943
Leasehold Improvements		1,353,254			1,312,691
Furniture, Fixtures, and Equipment		3,325,217			2,942,724
		6,421,912			5,998,856
Accumulated Depreciation and Amortization		( 3,222,684	)		( 2,744,345	)
Net Premises and Equipment	$	3,199,228		$	3,254,511

The Bank has entered into operating leases for its branches and operating facilities, which expire at various dates through 2024.  These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses.  Rental expense relating to these leases was $819,000 in 2010 and $676,000 in 2009.

At December 31, 2010, the approximate future minimum annual expense under these leases for the next five years is as follows:

2011	$	814,969
2012		806,619
2013		632,195
2014		567,247
2015		567,247
Later years		4,868,872
	$	8,257,149

The minimum rental payments shown above are given for the existing lease obligations only and do not represent a forecast of future rents.  Future increases in rent are not included unless the increases are scheduled and currently determinable.

Included in the above table are obligations under a 15-year lease for an administrative office in San Luis Obispo, California, in which the Bank also intends to open a full-service branch at a future date.  Currently the lease provides for rentals of $39,139 per month.

Following is a summary of the changes in the balance of other real estate owned for 2010 and 2009:

	2010			2009
Balance at Beginning of Year	$	2,205,882		$	983,100
Real Estate Acquired by Foreclosure		2,360,782			1,694,801
Additional Investments in Other Real Estate		80,948			-
Sales of Other Real Estate		(1,050,542	)		-
Write-downs of Other Real Estate		( 460,191	)		( 472,019	)
Balance at End of Year	$	3,136,879		$	2,205,882

26

NOTE F - DEPOSITS

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

Due in One Year	$	62,831,374
Due in One to Two Years		16,791,078
Due in Two to Three Years		697,128
	$	80,319,580

One of the Bank’s customers comprised $34.1 million, or 19.7%, of the Bank’s total deposits as of December 31, 2010.  Deposit overdrafts reclassified as loan balances were $1,006 and $5,495 as of December 31, 2010 and 2009, respectively.

NOTE G - OTHER BORROWINGS

Other borrowings on the December 31, 2010 balance sheet of $349,458 consists of proceeds from the sale of SBA loans that have been sold but are subject to a 90-day premium refund obligation.  Once the 90-day premium refund obligation period has elapsed, the transaction will be recorded as a sale, with the loans and the secured borrowings removed from the balance sheet and the resulting gain on sale ($36,000) recorded in the consolidated statement of operations.  See Note A for further discussion of loans held for sale.

As of December 31, 2009, other borrowings was comprised of fixed rate advances from the Federal Home Loan Bank of San Francisco, with $3,000,000 scheduled to mature in 2010 and $3,000,000 scheduled to mature in 2013.  In October 2010 the Bank chose to prepay the remaining FHLB borrowings, incurring a prepayment penalty of $377,966, which is included in non-interest expenses.

As of December 31, 2010, loans of approximately $98 million and securities of approximately $18 million were pledged to the FHLB to secure potential borrowings.  Utilizing that collateral, the Bank had the capability to borrow up to $40.8 million from the FHLB.  That borrowing capacity could be increased by another $7.7 million if additional securities were pledged as collateral.

As of December 31, 2010, the Bank also had access to the Federal Reserve Bank of San Francisco’s (“FRB-SF”) “Discount Window” for additional secured borrowing should the need arise.  However, no loans or securities had been pledged to secure those potential borrowings as of that date.

The Bank also has a $4.0 million unsecured borrowing line with a correspondent bank.  As of December 31, 2010, there was no balance outstanding on this line.

27

NOTE H - JUNIOR SUBORDINATED DEBT SECURITIES

On October 14, 2003, the Company issued $3,093,000 of junior subordinated debt securities (the “debt securities”) to Mission Community 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 October 7, 2033.  Interest is payable quarterly on these debt securities at 3-mo. LIBOR plus 2.95% for an effective rate of 3.24% as of December 31, 2010.  The debt securities can be redeemed at par.

The Company also purchased a 3% minority interest in Mission Community Capital Trust. The balance of the equity of Mission Community Capital Trust is comprised of mandatorily redeemable preferred securities. Mission Community Capital Trust is not consolidated into the Company’s financial statements.  The Federal Reserve Board has ruled that subordinated notes payable to unconsolidated special purpose entities (“SPE’s”) such as Mission Community Capital Trust, net of the bank holding company’s investment in the SPE, qualify as Tier 1 Capital, subject to certain limits.

NOTE I - INCOME TAXES

The income tax expense for the years ended December 31, 2010 and 2009 is comprised of the following:

	2010			2009
Current Taxes:
Federal	$	-		$	-
State		-			2,400
		-			2,400
Deferred		( 2,835,105	)		( 2,615,033	)
Change in Valuation Allowance		2,835,105			3,447,584
Income Tax Expense	$	-		$	834,951

A comparison of the federal statutory income tax rates to the Company’s effective income tax (benefit) follows:

	Restated
	2010						2009
	Amount			Rate			Amount			Rate
Federal Tax Rate	$	(1,057,688	)		34.0	%	$	(2,071,147	)		34.0	%
California Franchise Taxes, Net of Federal Tax Benefit		(227,859	)		7.3	%		(439,100	)		9.2	%
Allowance for Deferred Tax Assets		2,835,105			(91.1	)%		3,447,584			(72.2	)%
Interest on Municipal Securities and Loans		(93,152	)		3.0	%		(90,654	)		1.9	%
Increase in Cash Surrender Value of Company-Owned Life Insurance		(31,882	)		1.0	%		(32,740	)		0.7	%
Change in fair value of warrant liability		(1,470,488	)		47.3	%		-			0	%
Other Items - Net		45,964			(1.5	)%		21,008			( 0.4	)%
Income Tax Expense	$	-			0.0	%	$	834,951			( 26.8	)%

Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition.

28

NOTE I - INCOME TAXES - Continued

The following is a summary of the components of the net deferred tax asset (liability) accounts recognized in the accompanying consolidated balance sheets:

	2010			2009
Deferred Tax Assets:
Allowance for Loan Losses Due to Tax Limitations	$	374,332		$	1,904,860
Reserve for Impaired Security		118,370			120,100
Other Real Estate Owned		499,764			388,514
Interest on Non-Accrual Loans		78,831			1,705
Net Operating Loss Carryforwards		6,652,809			2,311,916
Charitable Contribution Carryforwards		91,726			86,161
Other		171,432			179,674
Deferred Tax Assets Before Valuation Allowance		7,987,264			4,992,930
Deferred Tax Valuation Allowance		( 7,408,574	)		( 4,573,469	)
Total Deferred Tax Assets		578,690			419,461
Deferred Tax Liabilities:
Deferred Loan Costs		( 196,377	)		( 210,697	)
Depreciation Differences		( 82,682	)		( 125,645	)
BEA Award Deferred for Tax Purposes		( 225,757	)		-
Other		( 73,874	)		( 83,119	)
Total Deferred Tax Liabilities		( 578,690	)		( 419,461	)
Net Deferred Tax Assets	$	-		$	-

The valuation allowance was established because of the Company’s ongoing operating losses and cumulative deficit position.  The Company has net operating loss carry forwards of approximately $16,127,000 for federal income and $16,350,000 for California franchise tax purposes.  The federal and California net operating loss carry forwards, to the extent not used, will expire from 2028 through 2030.

As of December 31, 2010, tax years for 2007 through 2010 remain open to audit by the Internal Revenue Service and by the California Franchise Tax Board.  In the opinion of management, all significant tax positions taken, or expected to be taken, by the Company in any open tax year would more likely than not be sustained upon examination by the tax authorities.

29

NOTE J - STOCK OPTION PLANS

The Company adopted in 1998 a stock option plan under which 180,000 shares of the Company’s common stock may be issued.  The 1998 Plan has been terminated with respect to the granting of future options under the Plan.  In 2008 the Company adopted and received shareholder approval for the Mission Community Bancorp 2008 Stock Incentive Plan.  The 2008 Plan provides for the grant of various equity awards, including stock options.  A total of 201,840 common shares may be issued under the 2008 Plan.  Options are granted at a price not less than 100% of the fair value of the stock on the date of grant, generally for a term of ten years, with vesting occurring ratably over five years.  The Plans do not provide for the settlement of awards in cash, and new shares are issued upon exercise of an option.  The Plans provide for acceleration of vesting of all options upon change in control of the Company.  The Company recognized in 2010 and 2009 stock-based compensation of $85 thousand and $70 thousand, respectively, which represents the fair value of options vested during those years.  No income tax benefits related to that stock-based compensation were recognized in 2010 or 2009.

On July 1, 2010, the Company granted to its chief executive officer options to purchase a total of 100,368 shares of common stock at an exercise price of $5.00 per share (equal to the grant date fair value of the Company’s common stock).  These non-qualified stock options were granted under the 2008 Plan, vest over three years, and expire ten years after the date of grant.  The fair value ascribed to those options, using the Black-Scholes option pricing model, was $2.85 per share, or a total of $286,050.  Additional assumptions used in determining the fair value of options granted in 2010 included: stock price volatility of 45.6% and a 1.80% risk-free rate of return.  No options were granted in 2009.

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

						Weighted-	Aggregate
				Weighted-		Average	Intrinsic
				Average		Remaining	Value of
				Exercise		Contractual	In-the-Money
	Shares			Price		Term	Options
Outstanding at Beginning of Year		87,564		$	16.44
Granted		100,368			5.00
Exercised		-
Forfeited/Expired		( 4,500	)
Outstanding at End of Year		183,432		$	10.39	7.4 Years	$	-
Options Vested at Year-End		58,426		$	16.44	3.7 Years	$	-
Options Vested or Expected to Vest		183,432		$	10.39	7.4 Years	$	-
Weighted-Average Fair Value of Options Granted During the Year				$	2.85

No options were exercised in 2010 or 2009.

As of December 31, 2010, the Company has unvested options outstanding with unrecognized compensation expense totaling $329,000, which is scheduled to be recognized as follows:

2011	$	133,000
2012		133,000
2013		63,000
Total unrecognized compensation cost	$	329,000

30

NOTE K – DEFINED CONTRIBUTION PLAN

The Company has adopted a defined contribution plan, the Mission Community Bank 401k Profit Sharing Plan (“the 401k Plan”), covering substantially all employees fulfilling minimum age and service requirements. Matching and discretionary employer contributions to the 401k Plan are determined annually by the Board of Directors. The expense for the 401k Plan was $(5,000) in 2010 and $36,000 in 2009. The negative expense in 2010 was due to an adjustment to the December 31, 2009, accrued 401k Plan liability.

NOTE L - PREFERRED AND COMMON STOCK- Restated

On March 13, 2012, the Company concluded that the Company’s Series A Non-Voting Convertible Redeemable Preferred Stock ("Series A Preferred Stock") and its Series C Non-Voting Convertible Redeemable Preferred Stock ("Series C Preferred Stock") received improper accounting treatment related to beneficial conversion features in these preferred securities which were triggered by the issuance by the Company of its securities in a private placement in the second quarter of 2010 at a price below the conversion price set forth in the Certificates of Determination for the Series A Preferred Stock and Series C Preferred Stock. This beneficial conversion impacts the Company’s loss per common share. See Note U, Restatement of these Consolidated Financial Statements for further detail of explanation.

Further, the Company concluded that the Company's Series A Preferred Stock, Series B Non-Voting Preferred Stock ("Series B Preferred Stock") and its Series C Preferred Stock received improper accounting treatment since these preferred shares contain redemption provisions that are outside of the control of the Company. As a result, these preferred shares have been removed from stockholders’ equity and are now presented as mezzanine financing at their liquidation value.

Series A Preferred Stock – the Series A Preferred Stock has a $5.00 stated value and is non-voting, convertible and redeemable. Each share is convertible into one-half share of voting common stock of the Company. Series A shares are not entitled to any fixed rate of return, but do participate on the same basis (as if converted on a two-for-one exchange) in any dividends declared on the Company’s common stock. Series A shares may be redeemed upon request of the holder at their stated value if the Bank is found to be in default under any Community Development Financial Institutions Program Assistance Agreement for Equity Investments in Regulated Institutions, or any successor agreement. In the event of liquidation, the holders of Series A shares will be entitled to a liquidation preference of $5.00 per share before the holders of common stock receive any distributions and after the holders of common stock receive distributions of $10.00 per share, all distributions will be on the same basis (as if converted on a one-for-two exchange). These shares were issued for $392,194 (net of issuance costs of $107,806) pursuant to an award from the Community Development Financial Institutions Fund of the Department of the Treasury.

Series B Preferred Stock – the Series B Preferred Stock has a $10.00 stated value and is non-voting, non-convertible and non-redeemable. Series B shares are not entitled to any fixed rate of return but do participate on the same basis in any dividends declared on the Company’s common stock. In the event of liquidation, the holders of Series B shares will be entitled to a liquidation preference of $10.00 per share before the holders of common stock receive any distributions. Additionally, in the event of a specified “change in control event” (including certain mergers or sales of assets), holders of the Series B Preferred Stock shall be entitled to receive payment on the same basis as the holders of the common stock of the Company. These shares were issued for $191,606 (net of issuance costs of $13,394) pursuant to an investment from the National Community Investment Fund (“NCIF”). In connection with this investment, NCIF also purchased 29,500 shares of the Company’s common stock for $10.00 per share. As part of the investment agreement, the Company by covenant agreed that so long as NCIF or any successor owns and holds any of the Shares to remain a CDFI and to meet certain reporting requirements.

31

NOTE L - PREFERRED AND COMMON STOCK (continued) - Restated

Series C Preferred Stock – the Series C Preferred Stock has $10.00 stated value and is non-voting, convertible and redeemable. Each share is convertible into one share of voting common stock of the Company. Series C shares are not entitled to any fixed rate of return, but do participate on the same basis (as if converted on a one-to-one exchange) in any dividends declared on the Company’s common stock. Series C shares may be redeemed upon request of the holder at their stated value if the Bank is found to be in default under any Community Development Financial Institutions Program Assistance Agreement for Equity Investments in Regulated Institutions, or any successor agreement. In the event of liquidation, the holders of Series C shares will be entitled to a liquidation preference of $10.00 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares) before the holders of common stock receive any distributions. These shares were issued for $500,000 pursuant to an award from the Community Development Financial Institutions Fund of the Department of the Treasury.

Series D Preferred Stock – On January 9, 2009, in exchange for aggregate consideration of $5,116,000, Mission Community Bancorp issued to the United States Department of the Treasury (“the Treasury”) a total of 5,116 shares of a new Series D Fixed Rate Cumulative Perpetual Preferred Stock (the “Series D Preferred”) having a liquidation preference of $1,000 per share. This transaction was a part of the Capital Purchase Program of the Treasury’s Troubled Asset Relief Program (TARP). The $5.1 million in new capital was subsequently invested in Mission Community Bank as Tier 1 capital. The Series D Preferred pays cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series D Preferred may not be redeemed during the first three years after issuance except from the proceeds of a “Qualified Equity Offering.” Thereafter, Mission Community Bancorp may elect to redeem the Series D Preferred at the original purchase price plus accrued but unpaid dividends, if any.

Common Stock – As of December 31, 2010 and 2009, the Company had 7,094,274 and 1,345,602 shares, respectively, of common stock outstanding.

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

On June 15, 2010, the Investors purchased an aggregate of 3,000,000 additional shares of common stock and warrants to purchase 3,000,000 shares of common stock at a purchase price of $5.00 per unit of one share of common stock and one warrant in the second closing under the Securities Purchase Agreement (the “Second Closing”), for an aggregate purchase price of $15,000,000.

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

On March 13, 2012, the Company concluded that certain of the Company's warrants issued in private placement transactions in 2010 have received improper accounting treatment. Specifically, due to certain of the anti-dilution features in these warrants, these warrants should have been reflected as liabilities on the consolidated balance sheets (as opposed to a component of equity) in the Company's originally filed Annual Report on Form 10-K for the year ended December 31, 2010. The change in treatment of the warrants results in a change to the equity and liability portions of the balance sheet and a gain or loss on the change in estimated fair value of the warrants which impacts net loss and loss per share on the consolidated statement of operations. Refer to Note U, Restatement, of these consolidated financial statements for further detail of explanation.

32

NOTE L - PREFERRED AND COMMON STOCK (continued) - Restated

The Securities Purchase Agreement further provided that the Company would conduct a rights offering to its existing shareholders, pursuant to which each shareholder was offered the right to purchase 15 additional shares of common stock, paired with a warrant, for each share held, at a price of $5.00 per unit of common stock and warrant. The rights offering commenced on October 8, 2010, and closed on December 15, 2010, with the issuance of 748,672 shares of common stock and warrants to purchase 748,672 shares of common stock, for an aggregate purchase price of $3,743,360.

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

NOTE M - RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the Bank’s opinion, all loans and loan commitments to such parties are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons.

The following is a summary of the activity in these loans:

	2010			2009
Balance at the beginning of the year	$	205,247		$	4,986,295
New loans and advances		13,047			112,254
Repayments		(3,075	)		(1,938	)
Reclassifications (persons no longer considered related parties)		(13,406	)		(4,891,364	)
Balance at the end of the year	$	201,813		$	205,247

Deposits from related parties held by the Bank totaled approximately $1,511,000 at December 31, 2010, and $1,714,000 at December 31, 2009.

During 2008, Bancorp pledged certificates of deposit in an unaffiliated bank totaling $75,000 as collateral for borrowings of MCSC under a line of credit. One of the certificates matured in 2009 and was replaced by a certificate for $25,000, which has been pledged as collateral for the line of credit. As of December 31, 2010, MCSC had borrowed $15,000 on the line. No potential liability was recognized by Bancorp as of December 31, 2010, because the outstanding balance on the line is expected to be repaid with funds to be received from other sources, including a grant program through the U.S. Small Business Administration. During 2009 Bancorp made cash contributions to MCSC totaling $709. No cash contributions were made to MCSC during 2010.

33

NOTE N - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

As of December 31, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:

	2010		2009
Commitments to Extend Credit	$	19,832,000	$	18,219,000
Standby Letters of Credit		901,000		301,000
	$	20,733,000	$	18,520,000

34

NOTE N - COMMITMENTS AND CONTINGENCIES (continued)

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. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank is based on management's credit evaluation of the customer.

The Bank has established an allowance for possible losses on unfunded loan commitments in the amount of $105,000, which is included in other liabilities in the consolidated balance sheets. To date, no losses have been charged against this allowance.

In the ordinary course of business, various claims and lawsuits are brought by and against the Company and the Bank. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of the Company.

NOTE O - LOSS PER SHARE

The following is a reconciliation of net loss and shares outstanding to the loss and number of shares used in the computation of loss per share:

	2010			2009
	Restated See Note U
Average common shares outstanding during the year (used for basic EPS)		4,388,691			1,345,602
Net loss	$	(3,110,847	)	$	(6,926,559	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		-			(487,278	)
Non-convertible preferred (Series B)		-			(99,892	)
Accretion of discount on beneficial conversion of preferred (Series A and C)		882,000			-
Dividends on Non-convertible TARP preferred (Series D)		255,800			217,430
Total income (loss) allocated to preferred stock		1,137,800			(369,740	)
Net loss allocated to common stock	$	(4,248,647	)	$	(6,556,819	)
Basic loss per common share	$	(0.97	)	$	(4.87	)

NOTE P - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly 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 classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

35

NOTE P - REGULATORY MATTERS – continued

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) 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). Management believes, as of December 31, 2010, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2010, the most recent notification from the Federal Reserve Board categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s prompt corrective action category. To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below.

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

						Amount of Capital Required
						To Be					To Be Adequately
	Actual					Well-Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010:
Total Capital (to Risk-Weighted Assets)	$	21,649		17.20	%	$	12,587		10.0	%	$	10,069		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,054		15.93	%	$	7,552		6.0	%	$	5,035		4.0	%
Tier 1 Capital (to Average Assets)	$	20,054		10.18	%	$	9,852		5.0	%	$	7,881		4.0	%
As of December 31, 2009:
Total Capital (to Risk-Weighted Assets)	$	22,053		14.22	%	$	15,509		10.0	%	$	12,407		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,069		12.94	%	$	9,306		6.0	%	$	6,204		4.0	%
Tier 1 Capital (to Average Assets)	$	20,069		9.59	%	$	10,462		5.0	%	$	8,369		4.0	%

The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $500 million, the minimum asset size criteria for bank holding companies subject to those requirements.

Banking regulations limit the amount of cash dividends that may be paid without prior approval of the Bank’s primary regulatory agency. Cash dividends are limited by the California Financial Code to the lesser of the Bank’s retained earnings or its net income for the last three fiscal years, less any dividends or other capital distributions made during those periods. Under this rule, due to the Bank’s 2010 and 2009 net losses, regulatory approval is required as of December 31, 2010, for any dividend distributions from the Bank to Bancorp. However, dividend distributions from the Bank would not downgrade the Bank’s prompt corrective action status from well-capitalized to adequately-capitalized unless they exceeded $9,062,000.

The California Corporation Law provides that a corporation, such as Bancorp, may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution. In the event that sufficient retained earnings are not available for the proposed distribution, under the law a corporation may nevertheless make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (i) the corporation’s assets equal at least 1.25 times its liabilities, and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation’s interest expenses for such fiscal years, then the corporation’s current assets must equal at least 1.25 times its current liabilities.

36

NOTE Q - GRANTS AND AWARDS

In 2010 the Bank received a $600,000 grant from the Bank Enterprise Award (“BEA”) program of the Department of the Treasury, based on lending activity of the Bank in 2009. In 2009 the Bank received an $81,000 BEA award. These awards were recognized in non-interest income.

Although the Bank is a certified CDFI bank and expects to continue to apply for various grants and awards, there can be no assurance that it will receive similar future grants or awards.

NOTE R - MISSION COMMUNITY BANCORP (Parent Company Only)

Following are the separate financial statements for Mission Community Bancorp (parent company only):

Mission Community Bancorp (Parent Company Only)
CONDENSED BALANCE SHEETS
	2010		2009
	(Restated)
ASSETS	See Note U
Cash	$	4,067,105	$	842,766
Time deposits in other banks		50,000		75,000
Investment in subsidiary bank		19,533,493		20,570,694
Investment in non-bank subsidiary		17,969,083		-
Other real estate owned		565,000		565,000
Other assets		97,005		104,628
TOTAL ASSETS	$	42,281,686	$	22,158,088
LIABILITIES AND SHAREHOLDERS' EQUITY
Junior subordinated debt securities	$	3,093,000	$	3,093,000
Due to Mission Community Bank		9,019		377,433
Other liabilities		36,179		49,940
Warrant Liability		5,029,000		-
TOTAL LIABILITIES		8,167,198		3,520,373
Redeemable Preferred stock, Series A, B and C		1,205,000		-
TOTAL SHAREHOLDERS' EQUITY		32,909,488		18,637,715
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	42,281,686	$	22,158,088

CONDENSED STATEMENTS OF OPERATIONS
	2010			2009
	(Restated) See Note U
Interest income	$	26,877		$	22,604
Interest expense		103,263			116,092
Net interest expense		( 76,386	)		( 93,488	)
Changes in fair value of warrant liability		3,573,100			-
Less salaries and benefits		464,441			202,006
Less other expenses		311,909			356,636
Income before equity in undistributed income of subsidiary		2,720,364			( 652,130	)
Equity in undistributed loss of subsidiaries		( 5,831,211	)		( 6,274,429	)
Net loss	$	( 3,110,847	)	$	( 6,926,559	)

37

NOTE R - MISSION COMMUNITY BANCORP (Parent Company Only)- continued

CONDENSED STATEMENTS OF CASH FLOWS
	2010			2009
	(Restated) See Note U
Operating activities:
Net loss	$	( 3,110,847	)	$	( 6,926,559	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss of subsidiaries		5,831,211			6,274,429
Stock-based compensation		47,675			-
Write-downs on other real estate		-			250,000
Changes in fair value of warrant liability		( 3,573,100	)		-
Income tax refunds received		-			615,532
Other, net		( 374,552	)		241,483
Net cash provided by (used in) operating activities		( 1,179,613	)		454,885
Investing activities:
Maturity of time deposits in other banks		25,000			-
Purchase of other real estate from subsidiary		-			( 815,000	)
Investment in bank subsidiary		( 5,500,000	)		( 5,116,000	)
Investment in non-bank subsidiary		( 18,250,000	)		-
Net cash (used in) investing activities		(23,725,000	)		( 5,931,000	)
Financing activities:
Proceeds from issuance of common stock and warrants, net of issuance costs		28,384,752			-
Proceeds from issuance of preferred stock, net of issuance costs		-			5,067,722
Cash dividends paid		( 255,800	)		( 217,430	)
Net cash provided by financing activities		28,128,952			4,850,292
Net increase (decrease) in cash		3,224,339			( 625,823	)
Cash at beginning of year		842,766			1,468,589
Cash at end of year	$	4,067,105		$	842,766

NOTE S - 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 investment securities available for sale are determined by obtaining quoted market prices (Level 1), if available. If quoted market prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities. Rather than relying exclusively on quoted prices for specific securities, matrix pricing relies on the securities’ relationship to other benchmark quoted securities (Level 2).

In certain cases where there is limited activity or less transparency for inputs to the valuation, securities are classified in Level 3 of the valuation hierarchy. For instance, the Bank has one security in its available-for-sale portfolio that has been assessed as “impaired” since 2004. Due to the illiquidity in the secondary market for this security and the lack of observable inputs to the estimation process, this fair value estimate cannot be corroborated by observable market data. Therefore, management concluded that Level 3 pricing was more appropriate for this security. There were no changes in the valuation techniques used during 2010 or 2009 and there were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the year ended December 31, 2010.

38

NOTE S - FAIR VALUE MEASUREMENT – Continued

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

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

Loans Held for Sale: Loans held for sale are carried at the lower of cost or market value. The fair value of SBA loans held for sale is determined using quoted market prices for similar assets (Level 2). The fair value of loans held for sale by the Company’s MAM subsidiary are valued by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower. The projected amount and timing of cash flows expected to be received, including collateral liquidation if repayment weaknesses exist, is then discounted using an effective market rate to determine the fair value as of the reporting date (Level 3).

SBA Loan Servicing Rights: SBA loan servicing rights are initially recorded at fair value in accordance with FASB guidance regarding accounting for transfers of financial assets. Subsequent measurements of servicing assets use the amortization method, which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Loan servicing rights are evaluated for impairment subsequent to initial recording. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, risk grade and loan type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. SBA loan servicing rights do not trade in an active market with readily observable prices. Accordingly, the Bank determines the fair value of loan servicing rights by estimating the present value of the future cash flows associated with the loans being serviced. Key economic assumptions used in measuring the fair value of loan servicing rights include prepayment speeds and discount rates. While market-based data is used to determine the input assumptions, the Bank incorporates its own estimates of assumptions market participants would use in determining the fair value of loan servicing rights (Level 3).

Warrant Liability

To determine the fair value of the warrant liability, a Black-Scholes model is used as the basis however, the strike price input for this model is determined using a Monte Carlo simulation to generate expected strike prices (the “Model”). An average lower strike price resulting from potential adjustment is then used in a Black-Scholes model to determine the value of the Warrants. As a result of this simulation analysis using the Model, we concluded that the probability of a strike price being something less than the contractual strike price was remote and that it is appropriate to use the contractual strike price in a Black-Scholes model to determine the value of the warrants (Level 3).

The following assumptions were used in the Black-Scholes Simulation model to determine the fair value of the warrant liability for the 2010 warrants as of December 31, 2010:

	December 31, 2010
Warrants issued in:	Apr-10			Jun-10
Risk-free interest rate		1.52	%		2.10	%
Expected volatility		41.44	%		41.05	%
Expected life (in years)		4.32			4.45
Expected dividend yield		0.00	%		0.00	%

39

NOTE S - FAIR VALUE MEASUREMENT – Continued

Impaired Loans: Except for certain loans held for sale, the Company 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, (2) the present value of the expected cash flows from the loan, or (3) 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 or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected (Level 3).

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

(in thousands)	Fair Value Measurements Using
December 31, 2010 (Restated) See Note U	Level 1		Level 2		Level 3			Total
					(Restated) See Note U
Available for sale securities:
U.S. Government agencies	$	-	$	20,861	$	-		$	20,861
Mortgage-backed securities		-		49,480		-			49,480
Municipal securities		-		2,922		-			2,922
Corporate debt securities		-		2,000		-			2,000
Asset-backed securities		-		172		-			172
Total available-for-sale securities		-		75,435		-			75,435
Loans held for sale		-		-		15,115			15,115
Warrant liability		-		-		(5,029	)		(5,029	)
Total assets and liabilities measured at fair value on a recurring basis, net	$	-	$	75,435	$	10,086		$	85,521
December 31, 2009
Available for sale securities:
U.S. Government agencies	$	-	$	15,468	$	-		$	15,468
Mortgage-backed securities		-		16,835		-			16,835
Municipal securities		-		2,974		-			2,974
Corporate debt securities		-		2,987		-			2,987
Asset-backed securities		-		1,869		9			1,878
Total available-for-sale securities		-		40,133		9			40,142
Loans held for sale		-		-		904			904
Total assets measured at fair value on a recurring basis	$	-	$	40,133	$	913		$	41,046

40

NOTE S - FAIR VALUE MEASUREMENT – Continued

SBA loan servicing rights, which are carried at the lower of cost or fair value, have resulted in no write-down or valuation allowance as of December 31, 2010.

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

(in thousands)	Fair Value Measurements Using								Full Year
December 31, 2010:	Level 1		Level 2		Level 3		Total		Gains (Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	1,010	$	1,010	$	(648	)
Commercial real estate - owner-occupied		-		-		326		326		(97	)
Construction and land development		-		-		356		356		(10	)
Total impaired loans, net of specific reserves	$	-	$	-	$	1,692	$	1,692	$	(755	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-		3,137	$	3,137	$	(486	)
December 31, 2009:
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	606	$	606	$	(153	)
Commercial real estate - owner-occupied		-		-		63		63		(9	)
Commercial real estate - non-owner-occupied		-		-		1,649		1,649		(576	)
Construction and land development		-		-		2,028		2,028		(564	)
Total impaired loans, net of specific reserves	$	-	$	-	$	4,346	$	4,346	$	(1,302	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-		2,206	$	2,206	$	(472	)

41

NOTE S - FAIR VALUE MEASUREMENT – Continued

Total losses of $755,000 and $1,302,000 represent impairment charges recognized during the years ended December 31, 2010 and 2009, respectively related to the above impaired loans. There were no changes in the valuation techniques used during 2010.

The following table presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2010 and 2009:

(in thousands)	Level 3 Securities Available for Sale, Loans Held for Sale and Warrant Liability
	2010			2009
	(Restated) See Note U
Balance at beginning of year	$	913		$	1,297
Securities transfered into Level 3		-			92
Net decrease in SBA loans held for sale		(904	)		(361	)
Loans held for sale transfered into Level 3		16,925			-
Settlements - principal reductions in loans held for sale		(1,749	)		-
Securities valuation reserve		(9	)		(115	)
Loans held for sale valuation reserve		(61	)		-
Fair value of warrant liability at issuance		(8,602	)		-
Changes in fair value of warrant liability		3,573			-
Balance at end of year	$	10,086		$	913

NOTE T - FAIR VALUE 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.

42

NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

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

Financial Assets

The carrying amounts of cash and short-term investments are considered to approximate fair value. Short-term investments include federal funds sold and interest bearing deposits in other banks. The fair values of investment securities are generally based on quoted matrix pricing. The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available. The carrying amounts of FHLB and FRB stock approximate their fair values. These investments are carried at cost and are redeemable at par with certain restrictions. The fair value of accrued interest receivable approximates its carrying value.

Financial Liabilities

The carrying amounts of deposit liabilities payable on demand and short-term borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long-term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities. The fair value of accrued interest payable approximates its carrying value.The Company estimates the fair value of the warrant liability utilizing both the Black-Scholes and Monte Carlo Simulation method. The use of these methods assumes multiple probabilities.

Off-Balance Sheet Financial Instruments

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

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

	December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(Restated)
	See Note U
Financial Assets:
Cash and due from banks	$	10,817,000	$	10,817,000	$	8,595,000	$	8,595,000
Interest-bearing deposits in other banks		550,000		550,000		425,000		425,000
Investment securities		75,435,000		75,435,000		40,142,000		40,142,000
Loans held for sale		15,115,000		15,115,000		904,000		904,000
Loans, net		101,913,000		102,926,000		129,970,000		131,859,000
Federal Home Loan Bank and other stocks		2,682,000		2,682,000		3,003,000		3,003,000
Accrued interest receivable		697,000		697,000		730,000		730,000
Financial Liabilities:
Deposits		173,240,000		173,590,000		163,770,000		164,174,000
Other borrowings		349,000		349,000		6,000,000		6,087,000
Junior subordinated debt securities		3,093,000		1,333,000		3,093,000		3,090,000
Accrued interest payable		180,000		180,000		253,000		253,000
Warrant liability		5,029,000		5,029,000		-		-

43

NOTE U – RESTATEMENT

The Company has restated its previously issued consolidated financial statements as of and for the year ended December 31, 2010 to correct errors in the accounting for certain warrants and certain preferred stock. The Company determined that certain warrants (“Warrants”) issued in 2010 contain anti-dilution provisions which should have been accounted for as derivatives in accordance with the amended provisions of ASC 815. ASC 815, effective January 1, 2009, provides an approach for companies to evaluate whether an equity-linked financial instrument or embedded feature in the instrument is indexed to its own stock for the purpose of evaluating the scope exception in ASC 815. Since the Company has issued Warrants which contain anti-dilution features for the holder, they are not considered indexed to the Company’s own stock, and therefore, do not qualify for the scope exception in ASC 815 and must be accounted for as derivatives. Accordingly, beginning at the issuance of the Warrants in the second quarter of 2010, the Company should have reclassified the Warrants as liabilities and recorded the Warrants at estimated fair value at each subsequent reporting date. Thereafter, changes in the warrant liability from period to period should have been recorded in the consolidated statements of operations.

The Company computed the fair value of the warrant liability using a Monte Carlo Simulation. The fair value of the warrant liability as of the issuance date in the second quarter of 2010 was $8.6 million and as of December 31, 2010 was $5.0 million. Accordingly, as of December 31, 2010, the Company recorded a warrant liability of $5.0 million, a reduction in common stock of $8.6 million and a change in retained deficit of $3.6 million. The net change in fair value of the warrant liability from June 30, 2010 through December 31, 2010 of $3.6 million was recorded as non-interest income in the Consolidated Statements of Operations for the year ended December 31, 2010. The Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statement of Changes in Shareholders’ Equity and Consolidated Statements of Cash Flows, and Notes to the Consolidated Financial Statements have been restated where applicable to reflect the adjustments.

The accompanying annual financial statements have been restated to report the following Warrants as derivative liabilities measured at estimated fair value, calculated using a Monte Carlo Simulation:

Warrant Issuance Dates	Number of Warrants at Issuance		Exercise Price		Warrant Expiration Date	Fair Value of Warrants at Issue Date		Change in Fair Value of Warrants in 2010			Fair Value of Warrants at December 31, 2010
April 27, 2010		2,000,000	$	5.00	April 27, 2015	$	3,422,000	$	(1,457,200	)	$	1,964,800
June 15, 2010		3,000,000	$	5.00	June 15, 2015		5,180,100		(2,115,900	)		3,064,200
					Total Fair Value	$	8,602,100	$	(3,573,100	)	$	5,029,000

To determine the fair value of the warrant liability, a Black-Scholes model is used as the basis however, the strike price input for this model is determined using a Monte Carlo simulation to generate expected strike prices (the “Model”). An average lower strike price resulting from a potential adjustment is then used in a Black-Scholes model to determine the value of the Warrants. As a result of this simulation analysis using the Model, we concluded that the probability of a strike price being something less than the contractual strike price was remote and that it is appropriate to use the contractual strike price in a Black-Scholes model to determine the value of the warrants.

44

NOTE U – RESTATEMENT - Continued

The following assumptions were used in the Black-Scholes Simulation model to determine the fair value of the warrant liability as of December 31, 2010:

	December 31, 2010
Warrants issued in:	Apr-10			Jun-10
Risk-free interest rate		1.52	%		2.10	%
Expected volatility		41.44	%		41.05	%
Expected life (in years)		4.32			4.45
Expected dividend yield		0.00	%		0.00	%

The Company’s Series A Non-Voting Convertible Redeemable Preferred Stock (“Series A Preferred Stock”) and its Series C Non-Voting Convertible Redeemable Preferred Stock (“Series C Preferred Stock”) received improper accounting treatment related to beneficial conversion features in these preferred securities which were triggered by the issuance by the Company of its common stock in a private placement in the second quarter of 2010 at a price below the conversion price set forth in the Certificates of Determination for the Series A and C Preferred Stock. As a result of the revised accounting related to the beneficial conversion feature for both the Series A and C Preferred Stock, the Company recorded a discount of $882 thousand related to the Series A and C Preferred Stock. The initial recognition of the beneficial conversion feature is accomplished through the establishment of a discount on the Series A and C Preferred Stock and a corresponding increase in additional paid in capital. These adjustments also reflect the recognition of the immediate accretion of the discount through retained earnings which occurred in June 2010. The Company properly reflected the impact on loss per common share – See Note O of the Notes to Consolidated Financial Statement.

Further, the Company’s Series A Preferred Stock, Series B Non-Voting Preferred Stock (“Series B Preferred Stock”) and its Series C Preferred Stock received improper accounting treatment since these preferred shares contain redemption provisions that are outside of the control of the Company. As a result, these preferred shares with an aggregate redeemable value of $1.2 million have been removed from stockholders’ equity and are now presented as mezzanine financing at their liquidation value.

45

NOTE U – RESTATEMENT - Continued

The following tables summarize the effects of the restatement on the specific items presented in the Company’s consolidated financial statements previously included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010:

Consolidated Balance Sheet
	December 31, 2010
	(As previously reported)			(As restated)
Warrant Liability, previously classified as equity		-			5,029,000
Total Liabilities	$	178,657,427		$	183,686,427
Redeemable Preferred Stock (Series A, B and C), previously classified as equity	$	-		$	1,205,000
Shareholders' Equity:
Preferred stock:
Series A	$	392,194		$	-
Series B		191,606			-
Series C		500,000			-
Series D		5,067,722			5,067,722
Common stock		46,426,603			37,824,503
Additional paid-in capital		327,500			1,209,500
Retained deficit		(13,219,986	)		(10,650,086	)
Accumulated Other Comprehensive (Loss) Income		(542,151	)		(542,151	)
Total Shareholders' Equity	$	39,143,488		$	32,909,488

Consolidated Statements of Operations
	For the Year Ended December 31, 2010
	(As previously reported			(As restated)
Change in fair value of warrant liability	$	-		$	3,573,100
Net Loss	$	(6,683,947	)	$	(3,110,847	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		(153,902	)		-
Non-convertible preferred (Series B)		(31,550	)		-
Accretion of discount on preferred as a result of beneficial conversion feature (Series A and C)		-			882,000
Dividends on Non-convertible TARP preferred (Series D)		255,800			255,800
Total income (loss) allocated to preferred stock		70,348			1,137,800
Net loss allocated to common stock	$	(6,754,295	)	$	(4,248,647	)
Basic loss per common share	$	(1.54	)	$	(0.97	)

46

NOTE U – RESTATEMENT - Continued

Consolidated Statements of Cash Flows
	For the Year Ended
	December 31, 2010
	(As previously reported			(As restated)
Net (loss)	$	(6,683,947	)	$	(3,110,847	)
Change in fair value of warrant liability		-			(3,573,100	)
Net cash provided by operating activities	$	1,253,686		$	1,253,686

47

Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

There have been no disagreements with the Company’s accountants regarding accounting and financial disclosure.

Item 9A.  Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer carried out an evaluation as of December 31, 2010, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 15a-15.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that current disclosure controls and procedures are effective in timely alerting them to material information relating to the Company and/or Bank that is required to be included in our periodic filings with the Securities and Exchange Commission and also with bank or bank holding company regulatory agencies.

In connection with the revision to the consolidated financial statements as described in Note U, Restatement of the Notes to the Consolidated Financial Statements of this Amendment No. 1, Management reevaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2010. In connection therewith, Management identified a material weakness in internal control over financial reporting.  Management determined that the Company did not maintain effective control over the financial reporting process utilized to interpret the applicable accounting literature for certain warrants and certain preferred stock. As a result, Management believes this control deficiency resulted in a misstatement of shareholder equity and loss per share. As a result of this material weakness, Management concluded that the Company’s disclosure controls were not effective as of December 31, 2010.  In light of the material weakness described above, Management revised its consolidated financial statements in this Form 10-K/A as discussed previously to ensure that the accounting for certain preferred stock and warrants was in conformity with the applicable accounting guidance.  Management also believes that the consolidated financial statements included in this Form 10-K/A were prepared in accordance with U.S. generally accepted accounting principles (GAAP) in all material respects.

Remediation of Material Weakness

The Company is in the process of actively remediating this material weakness.  The Company will focus remediation efforts on establishing additional financial reporting processes when events or transactions occur outside of the Company’s usual and routine course of business.

Management believes the additional control procedure, upon implementation, will remediate this material weakness.  Management will validate, through testing of internal controls, the effectiveness of this remediation.  However, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that the Company’s internal control over financial reporting will prevent or detect all errors.  The Company will continue to evaluate and strengthen its internal control over financial reporting system in order to prevent future errors in financial reporting.

Other than mentioned above, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls over financial reporting in the fourth quarter of 2010.

Management’s Annual Report on Internal Control Over Financial Reporting

The following section of this Annual Report on Form 10-K/A will not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K/A into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and will not otherwise be deemed filed under these Acts.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company and the Bank, including periodic filings with the Securities Exchange Commission, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Bank of San Francisco (“FRBSF”) and the California Department of Financial Institutions (“DFI”).  Such periodic financial reports are prepared internally and reviewed by management prior to filing.  These financial reports are also reviewed for timely filing, completeness and accuracy with possible civil monetary penalties for late filing and intentional inaccurate reporting by the various agencies where the reports are filed.

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The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles that are generally accepted in the United States of America.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records which, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control and, accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and interpretive guidance provided by the Securities and Exchange Commission.  Considering  the identified material weakness as a result of revisions to the consolidated financial statements that are further described in Note U, based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2010 is ineffective.

Internal controls over the Bank’s operational, lending procedures and underwriting, financial systems and other systems are reviewed by internal auditors, holding company and/or bank examiners, and by registered public accountants.  At present, Bancorp, based on its asset size and lack of activity other than banking, is not independently examined by the FRB.

Bancorp and the Bank have elected to outsource the internal audit function to firms who specialize in performing such auditing functions for community banks.  Internal audit engagements are in writing, including the anticipated scope, and are generally for 12 to 18 months with interim auditing during the term of the engagement.  Engagements are presented to and approved by the Board’s Audit Committee.  Each of the internal audits, along with management’s response to any observations, is completed in writing and presented to the Audit Committee.  Management is then responsible to take any corrective action required to modify procedures or policies to improve internal controls and procedures. Other than the identified material weakness as a result of revisions to the consolidated financial statements as described above and that are further described in Note U, based on internal audits performed in 2009 and 2010, neither management nor the Audit Committee has been informed of any material weaknesses in internal controls over financial reporting.

Internal controls, lending, and financial reporting are also periodically reviewed by bank and bank holding company examiners.  As a state charted bank, the Bank is examined by the FRBSF and the DFI.  Written reports of examination by state or federal regulators are provided to the Bank, reviewed by management and by the Board’s Audit Committee.  If an examination revealed material issues, the Bank could be subject to regulatory action including formal or informal agreements to take corrective action.  Bank examination reports are confidential, and the results are not disclosed unless there are material exceptions noted.  In the event of material exceptions, a bank could be required to enter into a formal agreement, which would document the specific weaknesses and corrective action that must be taken.  These formal agreements are generally required to be disclosed to the public.  As of December 2010, the Bank is not operating under any formal agreement with the FRB or DFI.

The Company’s independent registered public accountants are not engaged to perform an audit of the Company’s internal control over financial reporting.  The independent auditors consider internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  In addition to their opinion on the financial statements, the independent auditors may, however, provide recommendations for improvements in accounting or internal controls, and any such reports are presented to management and the Board’s Audit Committee.  In connection with the internal control deficiencies related to financial reporting and the ability to properly interpret the applicable accounting literature for warrants and preferred stock, the Company's independent registered public accountants have provided notice to management and the audit committee which indicates the existence of certain material weaknesses in the Company's internal controls.

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This Annual Report on Form 10-K/A does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered pubic accounting firm pursuant to the rules of the Securities and Exchange Commission applicable to non-accelerated filers, which permit us to provide only management’s report in this Annual Report on Form 10-K/A.

Item 9B.  Other Information

None.

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PART III

Item 10.  Directors, Executive Officers, and Corporate Governance.

The Company has adopted a Code of Conduct (Code of Ethics) that applies to all employees, directors and officers, including the Company’s principal executive officer, principal financial officer and principal accounting officer.

The Company does not have a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.  Therefore, the Company’s officers and directors, and persons who own more than 10% of the Company’s common stock, are not subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934.  The remainder of the information required under this Item is incorporated by reference to the Company’s proxy statement for the annual meeting of shareholders.

Item 11.  Executive Compensation

The information for this item is incorporated by reference to the Company’s proxy statement for the annual meeting of shareholders.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information required by Item 12 with respect to securities authorized for issuance under equity compensation plans is set forth under “Item 5—Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities,” above.  The other information for this item is incorporated by reference to the Company’s proxy statement for the annual meeting of shareholders.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

The information for this item is incorporated by reference to the Company’s proxy statement for the annual meeting of shareholders.

Item 14.  Principal Accounting Fees and Services

The information for this item is incorporated by reference to the Company’s proxy statement for the annual meeting of shareholders.

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PART IV

Item 15.  Exhibits

Exhibit Index:

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

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10.17	Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N)
10.18	Lease Agreement – 1670 South Broadway, Santa Maria (O)
10.19	Mission Community Bancorp 2008 Stock Incentive Plan (P)
10.20	Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q)
10.21	Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q)
10.22	Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q)
10.23	Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which include the Securities Purchase Agreement—Standard Term attached thereto, with respect to the issuance and sale of the Series D. Preferred Stock (R)
10.24	Side Letter Agreement dated January 9, 2009 amendment the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R)
10.25	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R)
10.26	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R)
10.27	Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (U)
10.28	Form of Warrant issued in connection with the Securities Purchase Agreement (U)
10.29	Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (V)
10.30	Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (W)
10.31	Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (X)
10.32	Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (Y)
14	Code of Ethics (previously filed)
21	Subsidiaries of the registrant (previously filed)
23.1	Consent of Independent Registered Public Accounting Firm – Perry-Smith LLP
23.2	Consent of Independent Registered Public Accounting Firm – Vavrinek, Trine, Day & Co. LLP
31.1	Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act
31.2	Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act
32.1	Certification of CEO pursuant to Section 906 of Sarbanes Oxley Act
32.2	Certification of CFO pursuant to Section 906 of Sarbanes Oxley Act

101 Interactive Data Files

(A) Included in the Company’s Form 8-K filed on December 18, 2000

(B) Included in the Company’s Form 10-KSB filed on April 2, 2001

(C) Included in the Company’s Form 10-QSB filed August 12, 2002

(D) Included in the Company’s Form 10-QSB filed on November 12, 2002

(E) Included in the Company’s Form 8-K filed on October 21, 2003

(F) Included in the Company’s Form 10-QSB filed on August 10, 2004

(G) Included in the Company’s Form 8-K filed on January 19, 2005

(H) Intentionally omitted

(I) Included in the Company’s Form 10-QSB filed on August 14, 2006

(J) Included in the Company’s Form 8-K filed on June 13, 2007

(K) Included in the Company’s Form SB-2 Registration Statement filed on June 13, 2007

(L) Included in the Company’s Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement filed on July 24, 2007

(M) Included in the Company’s Form 8-K filed on August 14, 2007

(N) Included in the Company’s Form 8-K filed on October 23, 2007

(O) Included in the Company’s Form 10-KSB filed on March 28, 2008

(P) Included in the Company’s Form 10-Q filed on May 15, 2008

(Q) Included in the Company’s Form 8-K filed on December 30, 2008

(R) Included in the Company’s Form 8-K filed on January 14, 2009

(S) Included in the Company’s Form 10-Q filed on August 14, 2009

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(T) Included in the Company’s Form 10-K filed on March 16, 2009

(U) Included in the Company’s From 8-K filed on December 24, 2009

(V) Included in the Company’s Form 8-K filed on March 22, 2010

(W) Included in the Company’s Form 8-K filed on March 26, 2010

(X) Included in the Company’s Form 8-K filed on June 1, 2010

(Y) Included in the Company’s Form 8-K filed on August 2, 2010

(Z) Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010

(AA) Included in Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on October 1, 2010

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

As of the date of the filing of this report, neither the Company’s proxy materials nor annual report to shareholders has been sent to the Company’s shareholders.  The Company will furnish copies of the Company’s proxy materials and annual report to shareholders to the Commission on or prior to the time it is sent to the Company’s shareholders.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MISSION COMMUNITY BANCORP

By: /s/ James W. Lokey

JAMES W. LOKEY

Chief Executive Officer

Dated:   March 29, 2012

By: /s/ Mark R. Ruh

MARK R. RUH

Executive Vice President and Chief Financial Officer

Dated:   March 29, 2012

[Signatures continue on next page]

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ George H. Andrews	Director	March 29, 2012
GEORGE. H. ANDREWS
/s/ Bruce M. Breault	Director	March 29, 2012
BRUCE M. BREAULT
/s/ William B. Coy	Vice Chairman of the Board	March 29, 2012
WILLIAM B. COY
/s/ Howard N. Gould	Director	March 29, 2012
HOWARD N. GOULD
/s/ Richard Korsgaard	Director	March 29, 2012
RICHARD KORSGAARD
/s/ James W. Lokey	Chairman of the Board and Chief Executive Officer	March 29, 2012
JAMES W. LOKEY	(Principal Executive Officer)
/s/ Mark R. Ruh	Executive Vice President and Chief Financial Officer	March 29, 2012
MARK R, RUH	(Principal Financial and Accounting Officer)
/s/ Harry H. Sackrider	Director	March 29, 2012
HARRY H. SACKRIDER
/s/ Gary E. Stemper	Director	March 29, 2012
GARY E. STEMPER
/s/ Brooks W. Wise	Director	March 29, 2012
BROOKS W. WISE
/s/ Stephen P. Yost	Director	March 29, 2012
STEPHEN P. YOST

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