mcb_10qa2-063011.htm

10-Q/A 1 mcb_10qa2-063011.htm FORM 10-Q/A (AMENDMENT NO. 2) mcb_10qa2-063011.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

Amendment No. 2

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

For the quarterly period ended June 30, 2011

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

Commission file number 333-12892

MISSION COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

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

3380 S. Higuera St., San Luis Obispo, California 93401

(Address of principal executive offices)

(805) 782-5000

Issuer’s telephone number

Not applicable

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

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

þ Yes o No

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 o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 7,094,274 shares of common stock outstanding as of August 8, 2011.

Mission Community Bancorp

June 30, 2011

Index

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets at June 30, 2011, December 31, 2010 and June 30, 2010

Condensed Consolidated Statements of Operations for the Three- and Six-Month Periods Ended June 30, 2011 and 2010

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2011 and 2010

Condensed Consolidated Statements of Cash Flows for the Three- and Six-Month Periods Ended June 30, 2011 and 2010

Notes to Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II – OTHER INFORMATION

Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Reserved
Item 5. Other Information
Item 6. Exhibits

EXPLANATORY NOTE

This Amendment No. 2 hereby amends our Quarterly Report on Form 10-Q (“Form 10-Q/A”) as of and for the three and six months ended June 30, 2011 which was originally filed with the Securities and Exchange Commission on August 15, 2011 and amended on August 16, 2011 (the “Original 10-Q”). This amendment is being filed mainly to include restated consolidated financial statements as described in Note 11, Restatement of the Notes to the Consolidated Financial Statements. The consolidated financial statements are being restated to correct accounting errors as follows:

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.

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.

The tables below outline the changes to the balance sheet, equity and net loss for the period noted (see Note 11, Restatement, of the Notes to the Consolidated Financial Statements for further details):

	June 30, 2011
(in thousands)	(As previously reported)		(Restated)
Warrant Liability, previously classified as equity		-	$	4,070
Total Other Liabilities	$	186,741	$	190,811

Redeemable Preferred Stock (Series A, B and C), previously classified as equity	$	-	$	1,205

	See Note 11
(in thousands)	Stockholders' Equity
	June 30, 2011				December 31, 2010		June 30, 2010

Balance previously reported	$	38,528		$	39,143		$	37,814
Cumulative effect of reclassification of redeemable preferred stock, Series A, B and C		(1,205	)		(1,205	)		(1,205	)
Fair value of warrants issued in 2010		(8,602	)		(8,602	)		(8,602	)
Cumulative net change in fair value of warrant liability		4,532			3,573			-
Total Adjustments	$	(5,275	)	$	(6,234	)	$	(9,807	)
Total restated shareholders' equity	$	33,253		$	32,909		$	28,007

The table below outlines the changes to the calculation for loss per share for the period noted (see Note 11, Restatement, of the Notes to the Consolidated Financial Statements for further details):

	Loss Per Share
	For the three months ended						For the six months ended
	June 30, 2011						June 30, 2011
(dollars in thousands except share and per share (loss)/earnings)	(As previously reported)			(Restated)			(As previously reported)			(Restated) See Note 11

Average common shares outstanding during the year (used for basic EPS)		7,094,274			7,094,274			7,094,274			7,094,274
Dilutive effect of outstanding stock options		-			-			-			-
Average common shares used for diluted EPS		7,094,274			7,094,274			7,094,274			7,094,274

Net loss, as previously reported	$	(974	)	$	(974	)	$	(1,441	)		(1,441	)
Change in fair value of warrant liability		-			407			-			959
Net loss	$	(974	)	$	(567	)	$	(1,441	)	$	(482	)
Less loss and dividends allocated to preferred stock:											-
Convertible preferred (Series A and C)		(14	)		-			(22	)		-
Non-convertible preferred (Series B)		(3	)		-			(4	)		-
Accretion of discount on preferred (Series A and C)		-			-			-			-
Dividends on Non-convertible TARP preferred (Series D)		64			64			128			128
Net loss allocated to common stock	$	(1,021	)	$	(631	)	$	(1,543	)	$	(610	)

Basic loss per common share	$	(0.14	)	$	(0.09	)	$	(0.22	)	$	(0.09	)

	Loss Per Share
	For the three months ended						For the six months ended
	June 30, 2010						June 30, 2010
(dollars in thousands except share and per share (loss)/earnings)	(As previously reported)			(Restated)			(As previously reported)			(Restated) See Note 11

Average common shares outstanding during the year (used for basic EPS)		3,301,646			3,301,646			2,329,027			2,329,027
Dilutive effect of outstanding stock options		-			-			-			-
Average common shares used for diluted EPS		3,301,646			3,301,646			2,329,027			2,329,027

Net loss	$	(5,665	)	$	(5,665	)	$	(6,051	)		(6,051	)
Change in fair value of warrant liability		-			-			-			-
Net loss	$	(5,665	)	$	(5,665	)	$	(6,051	)	$	(6,051	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		(223	)		-			(253	)		-
Non-convertible preferred (Series B)		(46	)		-			(53	)		-
Accretion of discount on preferred (Series A and C) resulting from beneficial feature		-			882			-			882
Dividends on Non-convertible TARP preferred (Series D)		64			64			128			128
Total income (loss) allocated to preferred stock		(205	)		946			(178	)		1,010
Net loss allocated to common stock	$	(5,460	)	$	(6,611	)	$	(5,873	)	$	(7,061	)

Basic loss per common share	$	(1.65	)	$	(2.00	)	$	(2.52	)	$	(3.03	)

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

Part I - Item I – Financial Statements

Part I - Item – 2 – Management’s Discussion and Analysis of Financial Condition and Result of Operations

Part I - Item – 4 –Controls and Procedures

For the convenience of the reader, this Form 10-Q/A sets forth the Company’s Original 10-Q 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-Q 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-Q/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 are given as of a current date. Accordingly, this Form 10-Q/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-Q, including any amendments to those filings.

PART I

Item 1. Financial Statements

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Balance Sheets

Unaudited

(dollars in thousands)

	June 30, 2011			December 31, 2010			June 30, 2010
	(Restated)
	See Note 11
Assets
Cash and due from banks	$	6,755		$	10,817		$	25,632
Interest-bearing deposits in other banks		302			550			400
Investment securities available for sale		91,956			75,435			48,598

Loans held for sale		10,029			15,115			16,976

Loans, net of unearned income		106,296			105,110			108,920
Less allowance for loan and lease losses		(3,182	)		(3,198	)		(3,731	)
Net loans		103,114			101,912			105,189

Federal Home Loan Bank stock and other stock, at cost		2,489			2,682			2,814
Premises and equipment		3,138			3,199			3,336
Other real estate owned		2,833			3,137			1,528
Company owned life insurance		3,025			2,980			2,932
Accrued interest and other assets		1,628			1,974			1,377
Total Assets	$	225,269		$	217,801		$	208,782

Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	25,549		$	22,910		$	22,443
Money market, NOW and savings		69,168			70,010			51,343
Time certificates of deposit		87,563			80,320			87,340
Total deposits		182,280			173,240			161,126
Other borrowings		-			349			4,142
Junior subordinated debt securities		3,093			3,093			3,093
Accrued interest and other liabilities		1,368			1,976			2,607
Warrant liability		4,070			5,029			8,602
Total liabilities		190,811			183,687			179,570

Redeemable Preferred Stock, Series A, B,C		1,205			1,205			1,205

Shareholders' equity:
Preferred stock - 10,000,000 shares authorized:
Series A (100,000 shares issued and outstanding)		-			-			-
Series B (20,500 shares issued and outstanding)		-			-			-
Series C (50,000 shares issued and outstanding)		-			-			-
Series D (5,116 shares issued and outstanding)		5,068			5,068			5,068


Common stock - 50,000,000 shares authorized; issued and outstanding: 7,094,274 at June 30, 2011 and December 31, 2010, and 6,345,602 at June 30, 2010		37,785			37,824			34,287
Additional paid-in capital		1,278			1,209			1,143
Retained deficit		(11,260	)		(10,650	)		(13,461	)
Accumulated other comprehensive income (loss)		382			(542	)		970
Total shareholders' equity		33,253			32,909			28,007
Total Liabilities and Shareholders' Equity	$	225,269		$	217,801		$	208,782

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

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statements of Operations

Unaudited

(dollars in thousands, except per share data)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(Restated)
	See Note 11
Interest Income
Interest and fees on loans	$	1,697		$	1,930		$	3,486		$	3,988
Interest on investment securities		461			304			880			613
Other interest income		6			10			16			17
Total interest income		2,164			2,244			4,382			4,618
Interest Expense
Interest on money market, NOW and savings deposits		104			117			219			236
Interest on time certificates of deposit		229			293			476			631
Other interest expense		25			86			55			185
Total interest expense		358			496			750			1,052
Net interest income		1,806			1,748			3,632			3,566
Provision for loan and lease losses		-			5,250			-			5,450
Net interest income after provision for loan and lease losses		1,806			(3,502	)		3,632			(1,884	)
Non-interest income
Service charges on deposit accounts		121			92			198			174
Gain on sale of loans		35			181			141			181
Loan servicing fees, net of amortization		35			39			59			73
Gain on sale of available-for-sale securities		-			-			-			58
Change in fair value of warrant liability		407			-			959			-
Other real estate income		18			-			38			-
Net gains(losses) and writedowns of fixed assets or other real estate		70			(344	)		23			(450	)
(Losses) gains on disposition of loans held for sale		(4	)		-			46			-
Other income and fees		42			47			84			86
Total non-interest income		724			15			1,548			122
Non-interest expense
Salaries and employee benefits		1,448			921			2,763			1,844
Occupancy expenses		331			315			652			615
Furniture and equipment		112			112			226			236
Data processing		262			176			463			364
Professional fees		403			184			533			318
Marketing and business development		56			33			93			70
Office supplies and expenses		67			61			126			118
Insurance and regulatory assessments		81			192			226			396
Loan and lease expenses		123			29			160			57
Other real estate expenses		42			29			98			39
Other expenses		167			126			317			232
Total non-interest expense		3,092			2,178			5,657			4,289
Loss before income taxes		(562	)		(5,665	)		(477	)		(6,051	)
Income tax expense		5			-			5			-
Net loss	$	(567	)	$	(5,665	)	$	(482	)	$	(6,051	)
Net loss applicable to common stock	$	(631	)	$	(6,611	)	$	(610	)	$	(7,061	)

Per Common Share Data:
Net loss - basic	$	(0.09	)	$	(2.00	)	$	(0.09	)	$	(3.03	)

Average common shares outstanding - basic		7,094,274			3,301,646			7,094,274			2,329,027

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

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders' Equity

(Unaudited - dollars in thousands)

																	Accumulated
									Additional								Other
	Preferred			Common Stock					Paid-In		Comprehensive			Retained			Comprehensive
	Stock			Shares		Amount			Capital		Income(Loss)			Deficit			Loss			Total

Balance at January 1, 2010	$	6,152			1,345,602	$	18,042		$	242				$	(6,280	)	$	482		$	18,638
Cumulative effect of reclassification of certain redeemable preferred stock		(1,084	)												(121	)				$	(1,205	)
Effect of beneficial conversion feature of redeemable preferred stock										882					(882	)				$	-
Issuance of common stock in private placement, net of issuance costs of $153					5,000,000		24,847														24,847
Fair value of warrants issued ,accounted for as liability							(8,602	)												$	(8,602	)
Dividends declared and paid on Series D preferred stock															(127	)					(127	)
Stock-based compensation										19											19
Comprehensive loss:
Net (loss)											$	(6,051	)		(6,051	)					(6,051	)
Less beginning of year unrealized gain on securities sold during the period, net of taxes of $-0-												(22	)					(22	)		(22	)
Net unrealized gain on remaining available-for-sale securities, net of taxes of $-0-		-			-		-			-		510			-			510			510
Total comprehensive loss											$	(5,563	)

Balance at June 30, 2010 (Restated) See Note 11	$	5,068			6,345,602	$	34,287		$	1,143				$	(13,461	)	$	970		$	28,007

Balance at January 1, 2011	$	5,068			7,094,274	$	37,824		$	1,209				$	(10,650	)	$	(542	)	$	32,909

Dividends declared and paid on Series D preferred stock															(128	)					(128	)

Stock-based compensation										69											69

Additional expenses of 2010 shareholder rights offering							(39	)													(39	)

Comprehensive loss:
Net (loss)											$	(482	)		(482	)					(482	)

Net unrealized gain on available-for-sale securities, net of taxes of $-0-		-			-		-			-		924			-			924			924
Total comprehensive income(loss)											$	442

Balance at June 30, 2011 (Restated) See Note 11	$	5,068			7,094,274	$	37,785		$	1,278				$	(11,260	)	$	382		$	33,253

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

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited - dollars in thousands)

	For the Three Months Ended						For the Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011				June 30, 2010
	(Restated)
	See Note 11
Operating Activities
Net loss	$	(567	)	$	(5,665	)	$	(482	)	$	(6,051	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation		127			126			252			259
Accretion of discount on securities and loans, net		138			(1	)		257			(24	)
Provision for credit losses		-			5,250			-			5,450
Stock-based compensation		35			10			69			19
Gain on sale of available-for-sale securities		-			-			-			(58	)
Change in warrant liability		(407	)		-			(959	)		-
Gain on sale of loans		(35	)		(181	)		(141	)		(181	)
Losses (gains) on disposition of loans held for sale		4			-			(46	)		-
Net losses (gains) and writedowns of fixed assets or other real estate		(70	)		344			(23	)		450
Increase in company-owned life insurance		(23	)		(24	)		(45	)		(47	)
Other, net		463			(199	)		(260	)		304
Proceeds from loan sales		475			1,482			1,440			4,402
Loans originated for sale		(629	)		(1,542	)		(1,562	)		(3,583	)
Net cash (used in) provided by operating activities		(489	)		(400	)		(1,500	)		940
Investing Activities
Net decrease in Federal Home Loan Bank and other stock		117			189			193			189
Net decrease in deposits in other banks		-			-			248			25
Purchase of available-for-sale securities		(14,038	)		(19,193	)		(22,033	)		(23,160	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		2,439			7,124			6,142			10,660
Proceeds from sales of available-for-sale securities		-			5,564			-			5,622
Net decrease in loans		1,610			(130	)		3,160			2,279
Purchases of premises and equipment		(100	)		(127	)		(191	)		(340	)
Additional investments in other real estate owned		(79	)		-			(111	)		-
Proceeds from sale of other real estate owned		1,368			5			1,507			605
Net cash used in investing activities		(8,683	)		(6,568	)		(11,085	)		(4,120	)
Financing Activities
Net increase (decrease) in demand deposits and savings accounts		6,665			(6,387	)		1,797			(4,974	)
Net increase in time deposits		956			2,162			7,243			2,330
Net (decrease) in other borrowings		-			(1,858	)		(349	)		(1,858	)
Proceeds from common stock issued, net of issuance costs		-			24,847			(40	)		24,847
Payment of TARP-CPP dividends		(64	)		(64	)		(128	)		(128	)
Net cash provided by financing activities		7,557			18,700			8,523			20,217
Net (decrease) increase in cash and cash equivalents		(1,615	)		11,732			(4,062	)		17,037
Cash and cash equivalents at beginning of period		8,370			13,900			10,817			8,595
Cash and cash equivalents at end of period	$	6,755		$	25,632		$	6,755		$	25,632

Non-cash changes:
Change in unrealized gains (losses) on available-for-sale securities	$	1,109			402		$	925			488
Real estate acquired by foreclosure		-			377			1,069			377
Loans reclassified to held for sale		-			16,689			-			16,689
Supplemental disclosures of cash flow information:
Interest paid		378			590			760			1,135
Taxes paid		2			-			2			-

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

Mission Community Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation and Management Representations

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

These financial statements have been prepared in accordance with the Securities and Exchange Commission’s rules and regulations for quarterly reporting and, therefore, do not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. These financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2010, as amended, which was originally filed on March 31, 2011 and amended on the same date as the filing of this Form 10-Q/A.

In this Amended 10-Q/A, the Company restated its previously issued consolidated financial statements as of and for the three and six months ended June 30, 2011 and 2010 to correct errors in the accounting for certain warrants and certain preferred stock as discussed in Note 11, Restatement, of the Notes to the Consolidated Financial Statements.

Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial statements for the three- and six-month periods ended June 30, 2011 and 2010 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.

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

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

Certain reclassifications have been made to prior period balances to conform to classifications in 2011.

Note 2 – Stock Based Compensation Plans

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

The Company accounts for equity-based compensation arrangements, including employee stock options, using the “modified prospective method,” where stock-based compensation expense is recognized using the fair value based method for all new awards granted.

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

The fair value of options granted in the six months ended June 30, 2011, were estimated on the date of grant using the following assumptions:

Date of grant	1/25/2011			4/4/2011
Exercise price	$	5.00		$	5.00
Market price of common stock	$	3.65		$	3.61
Expected stock price volatility		37.4	%		37.3	%
Expected option life	6 years			6 years
Risk-free interest rate		2.32	%		2.53	%

Weighted average fair value of all options granted during the period:
3 months ended 6/30/11				$	1.07
6 months ended 6/30/11				$	1.08

No options were granted during the six months ended June 30, 2010.

During the three-month periods ended June 30, 2011 and 2010, the Company recognized pre-tax stock-based compensation expense of $35,000 and $10,000, respectively. For the six-month periods ended June 30, 2011 and 2010, stock-based compensation expense was recognized totaling $69,000 and $19,000, respectively. As of June 30, 2011, the Company has unvested options outstanding with unrecognized compensation expense totaling $303,000, which is scheduled to be recognized as follows (in thousands):

July 1 through December 31, 2011	$	71
2012		142
2013		72
2014		9
2015		8
2016		1
Total unrecognized compensation cost	$	303

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

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

						Weighted-	Aggregate
				Weighted-		Average	Intrinsic
				Average		Remaining	Value of
				Exercise		Contractual	In-the-Money
	Shares			Price		Term	Options
Outstanding at beginning of year		183,432		$	10.39
Options granted		40,000			5.00
Options exercised		-
Options cancelled		(7,000	)		8.25
Outstanding at end of period		216,432		$	9.46	7.6 Years	$	-

Options exercisable at end of period		93,094		$	13.08	5.9 Years	$	-

Options Vested or Expected to Vest		216,432		$	9.46	7.6 Years	$	-

Note 3 — Investment Securities

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

(in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
June 30, 2011:
U.S. Government agencies	$	29,826	$	165	$	(59	)	$	29,932
Mortgage-backed securities		58,704		358		(123	)		58,939
Municipal securities		2,917		42		(5	)		2,954
Corporate debt securities		-		-		-			-
Asset-backed securities		127		4		-			131
	$	91,574	$	569	$	(187	)	$	91,956

December 31, 2010:
U.S. Government agencies	$	21,083	$	47	$	(270	)	$	20,860
Mortgage-backed securities		49,831		215		(566	)		49,480
Municipal securities		2,917		20		(15	)		2,922
Corporate debt securities		1,981		20		-			2,001
Asset-backed securities		165		7		-			172
	$	75,977	$	309	$	(851	)	$	75,435

The scheduled maturities of investment securities at June 30, 2011, were as follows. Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.

(in thousands)	Available-for-Sale Securities
	Amortized		Fair
	Cost		Value
Within one year	$	-	$	-
Due in one year to five years		28,907		28,994
Due in five years to ten years		16,101		16,222
Due in greater than ten years		46,566		46,740
	$	91,574	$	91,956

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

(in thousands)	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
June 30, 2011:
U.S. Government agencies	$	11,938	$	59	$	-	$	-	$	11,938	$	59
Mortgage-backed securities		28,143		123		-		-		28,143		123
Municipal securities		575		5		-		-		575		5
Corporate debt securities		-		-		-		-		-		-
Asset-backed securities		-		-		-		-		-		-
	$	40,656	$	187	$	-	$	-	$	40,656	$	187

December 31, 2010:
U.S. Government agencies	$	15,985	$	270	$	-	$	-	$	15,985	$	270
Mortgage-backed securities		37,274		566		-		-		37,274		566
Municipal securities		1,169		15		-		-		1,169		15
Corporate debt securities		-		-		-		-		-		-
Asset-backed securities		-		-		-		-		-		-
	$	54,428	$	851	$	-	$	-	$	54,428	$	851

As of June 30, 2011, the Company held 19 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 June 30, 2011. The unrealized losses relate principally to changes in market interest rate conditions. All of the securities continue to pay as scheduled. When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery. As of June 30, 2011, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of June 30, 2011 are other than temporarily impaired.

During the first quarter of 2010, the Bank sold $5,532,000 of investment securities for gross gains of $58,000. Settlement of these transactions occurred during the second quarter of 2010. No securities were sold in the first six months of 2011.

As of June 30, 2011, investment securities carried at $11,665,000 and $17,628,000 were pledged to secure public deposits, as required by law, and to secure borrowing facilities from the Federal Home Loan Bank of San Francisco, respectively.

Note 4 — Loans

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

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

Loan Composition
(Dollars in thousands)
	June 30, 2011					December 31, 2010					June 30, 2010
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	9,866		8.5	%	$	8,972		7.4	%	$	9,659		7.7	%
Commercial real estate - owner-occupied		31,572		27.2	%		35,135		29.2	%		34,977		27.8	%
Commercial real estate - non-owner-occupied		32,717		28.1	%		32,240		26.8	%		35,374		28.1	%
Residential real estate		15,338		13.2	%		16,641		13.9	%		17,414		13.8	%
All other real estate loans		2,951		2.5	%		2,989		2.5	%		3,100		2.5	%
Commercial and industrial loans		16,659		14.3	%		17,701		14.7	%		18,725		14.9	%
Agricultural loans		2,596		2.2	%		1,022		0.9	%		390		0.3	%
Municipal loans		2,429		2.1	%		2,987		2.5	%		3,589		2.8	%
Leases, net of unearned income		815		0.7	%		1,047		0.9	%		1,097		0.9	%
Consumer loans		1,382		1.2	%		1,491		1.2	%		1,571		1.2	%
Total loans	$	116,325		100.0	%	$	120,225		100.0	%	$	125,896		100.0	%

The table above includes loans held for sale as follows:

Loans Held for Sale
(Dollars in thousands)
	June 30, 2011					December 31, 2010					June 30, 2010
Type of Loan	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Commercial	$	252		0.2	%	$	32		0.0	%	$	376		0.3	%
Real estate		6,372		5.5	%		10,545		8.8	%		11,074		8.8	%
Construction and land development		3,405		2.9	%		4,538		3.8	%		5,526		4.4	%
Total loans held for sale	$	10,029		8.6	%	$	15,115		12.6	%	$	16,976		13.5	%

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

As of June 30, 2011, and December 31, 2010, loans totaling $94,759,000 and $60,681,000, respectively, were pledged to secure potential borrowing facilities from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco.

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

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

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

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

	Three Months Ended						Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Balance at beginning of period	$	3,244,630		$	5,080,392		$	3,197,636		$	5,536,929
Provision for loan and lease losses charged to expense		-			5,250,000			-			5,450,000
Loans charged off		(91,564	)		(6,600,145	)		(99,613	)		(7,287,500	)
Recoveries on loans previously charged off		28,926			1,221			83,969			32,039
Balance at end of period	$	3,181,992		$	3,731,468		$	3,181,992		$	3,731,468

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

	Three Months Ended June 30, 2011
Loan Portfolio Segment	Balance at Beginning of Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	624,555	$	(501,909	)	$	-		$	-	$	122,646
Commercial real estate - owner-occupied		311,687		80,792			-			-		392,479
Commercial real estate - non-owner-occupied		474,121		238,974			-			-		713,095
Residential real estate		431,370		167,849			(83,000	)		-		516,219
All other real estate loans		3,261		792			-			-		4,053
Commercial and industrial loans		920,275		100,214			(8,564	)		26,076		1,038,001
Consumer and all other loans and lease financing		110,255		117			-			2,850		113,222
Unallocated		369,106		(86,829	)		-			-		282,277
Totals	$	3,244,630	$	-		$	(91,564	)	$	28,926	$	3,181,992

	Six Months Ended June 30, 2011
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	530,473	$	(407,827	)	$	-		$	-	$	122,646
Commercial real estate - owner-occupied		165,181		216,823			-			10,475		392,479
Commercial real estate - non-owner-occupied		696,239		16,856			-			-		713,095
Residential real estate		501,008		84,702			(83,000	)		13,509		516,219
All other real estate loans		3,289		764			-			-		4,053
Commercial and industrial loans		1,021,240		(31,730	)		(8,564	)		57,055		1,038,001
Consumer and all other loans and lease financing		123,727		(5,386	)		(8,049	)		2,930		113,222
Unallocated		156,479		125,798			-			-		282,277
Totals	$	3,197,636	$	-		$	(99,613	)	$	83,969	$	3,181,992

	Year Ended December 31, 2010
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Year
Construction and land development	$	1,529,114	$	1,737,805		$	(2,755,179	)	$	18,733	$	530,473
Commercial real estate - owner-occupied		669,727		822,197			(1,326,743	)		-		165,181
Commercial real estate - non-owner-occupied		1,272,180		234,669			(810,610	)		-		696,239
Residential real estate		162,505		1,679,365			(1,340,862	)		-		501,008
All other real estate loans		248,029		(9,279	)		(235,461	)		-		3,289
Commercial and industrial loans		866,580		1,710,065			(1,582,702	)		27,297		1,021,240
Consumer and all other loans and lease financing		275,646		(18,153	)		(134,401	)		635		123,727
Unallocated		513,148		(356,669	)		-			-		156,479
Totals	$	5,536,929	$	5,800,000		$	(8,185,958	)	$	46,665	$	3,197,636

The Company assigns a risk rating to all loans except pools of homogeneous loans and those risk ratings are continuously reviewed and updated by management at least quarterly or as conditions dictate. These risk ratings are also subject to semi-annual examination by independent specialists engaged by the Company, and also by its regulators. The following table shows the Company’s loan portfolio (excluding loans held for sale) allocated by management’s internal risk ratings as of the dates indicated:

Loans by Risk Rating	Risk Ratings
(in thousands)			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
As of June 30, 2011:
Construction and land development	$	4,970	$	168	$	1,323	$	-	$	6,461
Commercial real estate - owner-occupied		26,144		3,518		1,251		-		30,913
Commercial real estate - non-owner-occupied		24,143		4,527		1,170		-		29,840
Residential real estate		14,147		-		92		19		14,258
All other real estate		1,297		-		-		-		1,297
Commercial and industrial		14,441		454		1,301		-		16,196
Consumer and all other loans and lease financing		7,280		-		51		-		7,331
Total loans, net of unearned income	$	92,422	$	8,667	$	5,188	$	19	$	106,296

As of December 31, 2010:
Construction and land development	$	2,932	$	179	$	1,324	$	-	$	4,435
Commercial real estate - owner-occupied		29,590		-		1,023		-		30,613
Commercial real estate - non-owner-occupied		22,477		6,077		781		-		29,335
Residential real estate		15,322		-		-		-		15,322
All other real estate		1,315		-		-		-		1,315
Commercial and industrial		14,872		150		877		13		15,912
Consumer and all other loans and lease financing		8,046		-		132		-		8,178
Total loans, net of unearned income	$	94,554	$	6,406	$	4,137	$	13	$	105,110

As of June 30, 2010:
Construction and land development	$	2,428	$	1,699	$	6	$	-	$	4,133
Commercial real estate - owner-occupied		27,857		-		2,208		-		30,065
Commercial real estate - non-owner-occupied		24,209		2,784		4,825		-		31,818
Residential real estate		15,853		321		154		-		16,328
All other real estate		1,380		-		-		-		1,380
Commercial and industrial		14,234		428		1,725		13		16,400
Consumer and all other loans and lease financing		8,501		93		202		-		8,796
Total loans, net of unearned income	$	94,462	$	5,325	$	9,120	$	13	$	108,920

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

Loans by Delinquency Status													Accruing		Past Due
(in thousands)	Recorded Balance of Loans Past Due												Troubled		90+ Days		Non-
	30-59 Days		60-89 Days		90+ Days		Total Past Due		Current		Total Loans		Debt Restructurings		and Accruing		Accrual Loans
As of June 30, 2011:
Construction and land development	$	-	$	-	$	1,323	$	1,323	$	5,138	$	6,461	$	-	$	-	$	1,323
Commercial real estate - owner-occupied		-		-		682		682		30,231		30,913		-		-		709
Commercial real estate - non-owner-occupied		393		-		-		393		29,447		29,840		-		-		393
Residential real estate		-		-		92		92		14,166		14,258		-		-		111
All other real estate		-		-		-		-		1,297		1,297		-		-		-
Commercial and industrial		153		156		-		309		15,887		16,196		-		-		739
Consumer and all other loans and lease financing		-		-		-		-		7,331		7,331		7		-		-
Total loans, net of unearned income	$	546	$	156	$	2,097	$	2,799	$	103,497	$	106,296	$	7	$	-	$	3,275

As of December 31, 2010:
Construction and land development	$	-	$	-	$	-	$	-	$	4,435	$	4,435	$	-	$	-	$	-
Commercial real estate - owner-occupied		-		681		-		681		29,932		30,613		-		-		641
Commercial real estate - non-owner-occupied		-		-		-		-		29,335		29,335		-		-		-
Residential real estate		-		-		-		-		15,322		15,322		-		-		-
All other real estate		-		-		-		-		1,315		1,315		-		-		-
Commercial and industrial		237		165		821		1,223		14,689		15,912		-		-		1,352
Consumer and all other loans and lease financing		38		-		-		38		8,140		8,178		-		-		-
Total loans, net of unearned income	$	275	$	846	$	821	$	1,942	$	103,168	$	105,110	$	-	$	-	$	1,993

As of June 30, 2010:
Construction and land development	$	-	$	185	$	7	$	192	$	3,941	$	4,133	$	-	$	-	$	6
Commercial real estate - owner-occupied		-		-		785		785		29,280		30,065		-		-		785
Commercial real estate - non-owner-occupied		-		-		233		233		31,585		31,818		-		-		671
Residential real estate		-		-		-		-		16,328		16,328		-		-		-
All other real estate		-		-		-		-		1,380		1,380		-		-		-
Commercial and industrial		609		150		1,098		1,857		14,543		16,400		168		-		1,527
Consumer and all other loans and lease financing		-		-		-		-		8,796		8,796		109		-		-
Total loans, net of unearned income	$	609	$	335	$	2,123	$	3,067	$	105,853	$	108,920	$	277	$	-	$	2,989

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

Impaired Loans							For the Six Months Ended
(in thousands)	As of June 30, 2011						June 30, 2011
			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	$	-	$	-	$	-	$	-	$	-
Commercial real estate - owner-occupied		353		424		32		345		-
Commercial real estate - non-owner-occupied		393		393		51		131		-
Residential real estate		111		194		19		37		-
All other real estate		-		-		-		-		-
Commercial and industrial		345		805		100		482		-
Consumer and all other loans and lease financing		7		7		-		5		-
Total Impaired Loans With An Allowance Recorded		1,209		1,823		202		1,000		-

Impaired Loans With No Related Allowance for Loan and Lease Losses:
Construction and land development		1,680		1,698		-		797		-
Commercial real estate - owner-occupied		-		-		-		-		-
Commercial real estate - non-owner-occupied		-		-		-		-		-
Residential real estate		-		-		-		-		-
All other real estate		-		-		-		-		-
Commercial and industrial		393		445		-		419		-
Consumer and all other loans and lease financing		-		-		-		-		-
Total Impaired Loans With No Allowance Recorded		2,073		2,143		-		1,216		-

Total Loans Individually Evaluated for Impairment:
Construction and land development		1,680		1,698		-		797		-
Commercial real estate - owner-occupied		353		424		32		345		-
Commercial real estate - non-owner-occupied		393		393		51		131		-
Residential real estate		111		194		19		37		-
All other real estate		-		-		-		-		-
Commercial and industrial		738		1,250		100		901		-
Consumer and all other loans and lease financing		7		7		-		4		-
Total Loans Individually Evaluated For Impairment	$	3,282	$	3,966	$	202	$	2,215	$	-

Loans Collectively Evaluated for Impairment:
Construction and land development	$	4,781	$	4,781	$	123
Commercial real estate - owner-occupied		30,560		30,560		361
Commercial real estate - non-owner-occupied		29,447		29,447		662
Residential real estate		14,147		14,147		497
All other real estate		1,297		1,297		4
Commercial and industrial		15,458		15,458		938
Consumer and all other loans and lease financing		7,324		7,324		113
Unallocated		-		-		282
Total Loans Collectively Evaluated For Impairment	$	103,014	$	103,014	$	2,980

Total Loans:
Construction and land development	$	6,461	$	6,479	$	123
Commercial real estate - owner-occupied		30,913		30,984		393
Commercial real estate - non-owner-occupied		29,840		29,840		713
Residential real estate		14,258		14,341		516
All other real estate		1,297		1,297		4
Commercial and industrial		16,196		16,708		1,038
Consumer and all other loans and lease financing		7,331		7,331		113
Unallocated		-		-		282
Total Loans	$	106,296	$	106,980	$	3,182

Impaired Loans							For the Year Ended
(in thousands)	As of December 31, 2010						December 31, 2010
			Unpaid				Average		Interest Income
	Recorded		Principal		Related		Recorded		Recognized
	Investment		Balance		Allowance		Investment		While Impaired
Impaired Loans With a Related Allowance for Loan and Lease Losses:
Construction and land development	$	-	$	-	$	-	$	1,817	$	-
Commercial real estate - owner-occupied		-		-		-		2,053		-
Commercial real estate - non-owner-occupied		-		-		-		1,393		-
Residential real estate		-		-		-		94		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,010		1,424		9		1,193		-
Consumer and all other loans and lease financing		-		-		-		226		-
Total Impaired Loans With An Allowance Recorded		1,010		1,424		9		6,776		-

Impaired Loans With No Related Allowance for Loan and Lease Losses:
Construction and land development		356		375		-		307		-
Commercial real estate - owner-occupied		326		396		-		46		-
Commercial real estate - non-owner-occupied		-		-		-		958		-
Residential real estate		-		-		-		-		-
All other real estate		-		-		-		-		-
Commercial and industrial		301		322		-		299		27
Consumer and all other loans and lease financing		-		-		-		-		-
Total Impaired Loans With No Allowance Recorded		983		1,093		-		1,610		27

Total Loans Individually Evaluated for Impairment:
Construction and land development		356		375		-		2,124		-
Commercial real estate - owner-occupied		326		396		-		2,099		-
Commercial real estate - non-owner-occupied		-		-		-		2,351		-
Residential real estate		-		-		-		94		-
All other real estate		-		-		-		-		-
Commercial and industrial		1,311		1,746		9		1,492		27
Consumer and all other loans and lease financing		-		-		-		226		-
Total Loans Individually Evaluated For Impairment	$	1,993	$	2,517	$	9	$	8,386	$	27

Loans Collectively Evaluated for Impairment:
Construction and land development	$	4,079	$	4,079	$	531
Commercial real estate - owner-occupied		30,287		30,287		165
Commercial real estate - non-owner-occupied		29,335		29,335		696
Residential real estate		15,322		15,322		501
All other real estate		1,315		1,315		3
Commercial and industrial		14,601		14,601		1,012
Consumer and all other loans and lease financing		8,178		8,178		124
Unallocated		-		-		157
Total Loans Collectively Evaluated For Impairment	$	103,117	$	103,117	$	3,189

Total Loans:
Construction and land development	$	4,435	$	4,454	$	531
Commercial real estate - owner-occupied		30,613		30,683		165
Commercial real estate - non-owner-occupied		29,335		29,335		696
Residential real estate		15,322		15,322		501
All other real estate		1,315		1,315		3
Commercial and industrial		15,912		16,347		1,021
Consumer and all other loans and lease financing		8,178		8,178		124
Unallocated		-		-		157
Total Loans	$	105,110	$	105,634	$	3,198

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

Note 6 — Shareholders’ Equity and Loss Per Share

Common Stock

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

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

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

In regard to both the April 27, 2010 and June 15, 2010 transactions under the Securities Purchase Agreement, the Company determined that the associated warrants contained anti-dilution provisions which should be accounted for as derivatives in accordance with ASC 815. Since the Company issued Warrants which contain anti-dilution features for the holder, they are not considered indexed to the Company’s own stock, and therefore, must be accounted for as derivatives. (See Note 11, Restatement, of the Notes to the Consolidated Financial Statements)

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 closed on December 15, 2010, with 748,672 shares being issued. Net proceeds from the rights offering totaled $3,527,000.

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

Loss per Share

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

	For the three months ended						For the six months ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(Restated)
	See Note 11

Average common shares outstandingduring the period (used for basic EPS)		7,094,274			3,301,646			7,094,274			2,329,027
Dilutive effect of outstanding stock options		-			-			-			-
Average common shares used for diluted EPS		7,094,274			3,301,646			7,094,274			2,329,027

Net income (loss)	$	(567	)	$	(5,665	)	$	(482	)	$	(6,051	)
Accretion on discount of preferred (Series A and C) resulting from beneficial conversion feature		-			882			-			882
Dividends on Non-convertible TARP preferred (Series D)		64			64			128			128
Income (loss) allocated to common stock	$	(631	)	$	(6,611	)	$	(610	)	$	(7,061	)

Basic earnings (loss) per common share	$	(0.09	)	$	(2.00	)	$	(0.09	)	$	(3.03	)

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

Note 7 —Income taxes

Due to a limitation on the Company’s ability to recognize deferred tax assets, no federal income tax expense or benefit was recognized for the three- and six-month periods ended June 30, 2011, although a $5 thousand minimum state franchise tax expense was recorded. For the first six months of 2010, no federal or state income tax expense or benefit was recognized due to the deferred tax asset limitation.

Note 8 — Fair Value Measurement

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

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

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

Level 3—Estimates based on significant unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include management’s judgment, which may be a significant factor.

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

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

(in thousands)	Fair Value Measurements Using
June 30, 2011(Restated)	Level 1		Level 2		Level 3			Total
Available for sale securities:
U.S. Government agencies	$	-	$	29,932	$	-		$	29,932
Mortgage-backed securities		-		58,939		-			58,939
Municipal securities		-		2,954		-			2,954
Corporate debt securities		-		-		-			-
Asset-backed securities		-		131		-			131
Total available-for-sale securities		-		91,956		-			91,956
Loans held for sale		-		-		10,029			10,029
Warrant liability		-		-		(4,070	)		(4,070	)
Net assets and liabilities measured at fair value on a recurring basis	$	-	$	91,956	$	5,959		$	97,915


December 31, 2010 (Restated)
Available for sale securities:
U.S. Government agencies	$	-	$	20,860	$	-		$	20,860
Mortgage-backed securities		-		49,480		-			49,480
Municipal securities		-		2,922		-			2,922
Corporate debt securities		-		2,001		-			2,001
Asset-backed securities		-		172		-			172
Total available-for-sale securities		-		75,435		-			75,435
Loans held for sale		-		-		15,115			15,115
Warrant liability		-		-		(5,029	)		(5,029	)
Net assets and liabilities measured at fair value on a recurring basis	$	-	$	75,435	$	10,086		$	85,521

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

Loans held for sale that are carried at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary. Those loans are valued by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows to MAM, including collateral liquidation if repayment weaknesses exist.

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 June 30, 2011 and December 31, 2010:

	June 30, 2011						December 31, 2010
Warrants issued in:	Apr-10			Jun-10			Apr-10			Jun-10
Risk-free interest rate		1.29	%		1.29	%		1.52	%		2.10	%
Expected volatility		43.51	%		42.78	%		41.44	%		41.05	%
Expected life (in years)		3.82			3.96			4.32			4.45
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

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

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

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

(in thousands)									Current
									Period
	Fair Value Measurements Using								Gains
June 30, 2011	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of charge-offs and specific reserves--
Construction and land development	$	-	$	-	$	1,680	$	1,680	$	-
Commercial real estate - owner-occupied		-		-		321		321		(32	)
Commercial real estate - non-owner-occupied		-		-		342		342		(52	)
Residential real estate		-		-		92		92		(102	)
Commercial and industrial		-		-		638		638		(99	)
Consumer and all other loans and lease financing		-		-		7		7		-
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	3,080	$	3,080	$	(285	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	2,833	$	2,833	$	23


									Full Year
	Fair Value Measurements Using								Gains
December 31, 2010	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of charge-offs and specific reserves--
Commercial and industrial	$	-	$	-	$	1,010	$	1,010	$	(648	)
Commercial real estate - owner-occupied		-		-		326		326		(97	)
Construction and land development		-		-		356		356		(10	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	1,692	$	1,692	$	(755	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	3,137	$	3,137	$	(486	)

The following methods were used to estimate the fair value of each class of assets above. The fair value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less estimated costs to sell if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Collateral-dependent impaired loans are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data which, in turn, required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans were measured and reported at fair value through specific valuation allocations of the allowance for loan and lease losses and/or partial charge-offs of the impaired loans.

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

The following table presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first six months of 2011 and 2010:

(in thousands)	Level 3 Available-for-Sale Securities, Loans Held for Sale and Warrant Liability
(Restated) See Note 11	Six Months Ended June 30
	2011			2010
Balance at beginning of year	$	10,086		$	913
Securities transfered into Level 3		-			-
Net increase (decrease) in SBA loans held for sale		244			(616	)
Loans held for sale transfered into Level 3		-			16,689
Unrealized gains (losses) included in other comprehensive income (loss)		-			-
Purchases		-			-
Settlements - principal reductions in loans held for sale		(4,186	)		-
Loans held for sale transferred to other real estate owned		(1,069	)		-
Securities valuation reserve		-			(10	)
Loans held for sale valuation reserve		(75	)		-
Warrant liability as issuance		-			(8,602	)
Change in warrant liability		959			-
Balance at end of period	$	5,959		$	8,374

“Settlements” in the above table relate to actual cash payments received from borrowers on loans held for sale and do not represent refinancings or write-downs to fair value. The following methods and assumptions were used to estimate the fair value of significant financial instruments that are not carried at fair value in the consolidated balance sheet:

Financial Assets. The carrying amounts of cash and short-term investments are considered to approximate fair value. Short-term investments include federal funds sold and interest bearing deposits with other banks. For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of values provided by brokers. The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available. The carrying value of accrued interest receivable approximates fair value. The fair value of Company owned life insurance policies are based on current cash surrender values at each reporting date provided by the insurers. The carrying amount of FHLB and FRB stock approximate their fair value.

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 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:

(in thousands)	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(Restated)
	See Note 11
Financial Assets:
Cash and due from banks	$	6,755	$	6,755	$	10,817	$	10,817
Interest-bearing deposits in other banks		302		302		550		550
Investment securities		91,956		91,956		75,435		75,435
Loans held for sale		10,029		10,029		15,115		15,115
Loans, net of allowance for loan and lease losses		103,114		103,791		101,912		102,926
Federal Home Loan Bank and other stocks		2,489		2,489		2,682		2,682
Company owned life insurance		3,025		3,025		2,980		2,980
Accrued interest receivable		805		805		697		697

Financial Liabilities:
Deposits		182,280		182,512		173,240		173,590
Other borrowings		-		-		349		349
Junior subordinated debt securities		3,093		1,328		3,093		1,333
Accrued interest payable		171		171		180		180
Warrant liability		4,070		4,070		5,029		5,029

Note 9 — Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

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

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

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

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

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. ASU 2011-01 approved the deferral of certain disclosure requirements surrounding TDRs included in ASU 2010-20, which were scheduled to be effective on January 1, 2011. The disclosure requirements were delayed until the FASB finalized the standards update related to their exposure draft, Clarifications to Accounting for Troubled Debt Restructurings by Creditors. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR. The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011. The disclosures which were deferred by ASU 2011-01 are required for interim and annual periods beginning on or after June 15, 2011. Management is currently determining the potential impact that the adoption of this standard may have on the Company’s financial position, results of operations and disclosures.

Note 10 — Pending Acquisition

On June 24, 2011, the Company entered into an Agreement and Plan of Merger by and among Carpenter, as General Partner of Carpenter Community BancFund L.P. and Carpenter Community BancFund A., L.P. (the “Funds”), the Bank, Santa Lucia Bancorp (“SL Bancorp”) and Santa Lucia Bank (“SL Bank”) (the “Merger Agreement”). Pursuant to the Merger Agreement, the Funds will acquire SL Bancorp for $3.5 million, as described below, and will immediately thereafter merge SL Bank, a wholly-owned subsidiary of SL Bancorp, with and into Mission Community Bank (the “Bank Merger”).

Subject to the terms and conditions of the Merger Agreement, a to-be-formed wholly-owned subsidiary of the Funds (“NewCo”) will merge with and into SL Bancorp, with SL Bancorp being the surviving corporation (the “Merger”). At the effective time of the Merger, each outstanding share of SL Bancorp common stock, other than any shares dissenting from the Merger, will be converted into the right to receive $0.35 in cash, or an aggregate of approximately $700,000. In addition, as a condition to the Merger, NewCo will acquire, from the United States Department of the Treasury (“UST”), for a purchase price of $2.8 million, all of the issued and outstanding shares of preferred stock and warrants issued by SL Bancorp to UST in connection with the Troubled Asset Relief Capital Purchase Program (the “TARP Securities”), which $2.8 million payment will also settle past due dividends on the TARP Securities. Following such purchase, NewCo will surrender the TARP Securities to SL Bancorp for cancellation..

In addition, in connection with the Merger, SL Bank will transfer to SL Bancorp certain non-performing assets so that following the Merger and the Bank Merger the Funds will own SL Bancorp, which will have as its principal asset certain non-performing assets. The Merger and Bank Merger have been unanimously approved by the board of directors of each of the Company, the Bank, SL Bancorp and SL Bank.

The transaction is subject to customary conditions, including the approval of the shareholders of SL Bancorp and receipt of all required regulatory approvals. The transaction is subject to further conditions, including: the repurchase of the TARP Securities from UST; SL Bank and SL Bancorp meeting certain financial conditions at the closing date; and receipt of a fairness opinion to the effect that the per share Merger Consideration is fair to the shareholders of SL Bancorp from a financial point of view.

The Merger Agreement contains representations and warranties customary for transactions of this type. In addition, each of SL Bank and SL Bancorp has agreed to various customary covenants and agreements, including, among others, (i) to conduct its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the effectiveness of the Merger and the Bank Merger, (ii) not to engage in certain kinds of transactions during this period, (iii) to convene and hold a meeting of its shareholders to consider and vote upon the Merger, (iv) to recommend approval of the Merger to its shareholders and, subject to certain exceptions, not make any changes to such recommendation and (v) not solicit, initiate, or knowingly encourage any alternative proposal to acquire SL Bank or SL Bancorp.

Upon consummation of the Merger and the Bank Merger, which are currently expected to occur in the fourth quarter of 2011, management projects the Company’s consolidated assets to exceed $460 million and deposits to exceed $400 million.

Note 11 — Restatement

In this Amended 10-Q/A, the Company restated its previously issued consolidated financial statements as of and for the three and six months ended June 30, 2011 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 the Monte Carlo Simulation approach. The fair value as of the issuance date in the second quarter of 2010 was $8.6 million and was $5.0 million, $4.5 million and $4.1 million at December 31, 2010, March 31, 2011 and June 30, 2011, respectively. The net change in fair value from June 30, 2010 through December 31, 2010 was $3.6 million and $552 thousand and $407 thousand for the three months ended March 31, 2011 and June 30, 2011, respectively and were recorded as other income in the Consolidated Statements of Operations for same periods. 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 quarterly financial statements have been restated to report the following Warrants as derivative liabilities measured at estimated fair value, calculated using the Monte Carlo Simulation approach:

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 Since Issuance			Fair Value of Warrants at June 30, 2011

April 27, 2010	2,000,000	$	5.00	April 27, 2015	$	3,422,000	$	(1,797,800	)	$	1,624,200
June 15, 2010	3,000,000	$	5.00	June 15, 2015		5,180,100		(2,734,500	)		2,445,600
				Total Fair Value	$	8,602,100	$	(4,532,300	)	$	4,069,800

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.

The following assumptions were used in the Black-Scholes Simulation model to determine the fair value of the warrant liability at June 30, 2011 and December 31, 2010:

	June 30, 2011						December 31, 2010
Warrants issued in:	Apr-10			Jun-10			Apr-10			Jun-10
Risk-free interest rate		1.29	%		1.29	%		1.52	%		2.10	%
Expected volatility		43.51	%		42.78	%		41.44	%		41.05	%
Expected life (in years)		3.82			3.96			4.32			4.45
Expected dividend yield		0.00	%		0.00	%		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 securities in a private placement in the second quarter of 2010 at a price below the conversion price set for the in the Certificates of Determination for the Series A and C Preferred Stock. The Company properly reflected the impact on earnings/(loss) per common share . There was no impact on the Company’s loss for the three and six months ended June 30, 2011, however, the impact for the three and six months ended June 30, 2010 is reflected in Note 6, Shareholders’ Equity and Loss Per Share 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 have been removed from stockholders’ equity and are now presented as mezzanine at their redemption value.

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 Quarterly Report for the three and six months ended June 30, 2011 and June 30, 2010 and the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010:

Consolidated Balance Sheet
	June 30, 2011						December 31, 2010						June 30, 2010
(in thousands)	(As previously reported)			(As restated)			(As previously reported)			(As restated)			(As previously reported)			(As restated)
Warrant Liability, previously classified as equity	$	-		$	4,070		$	-		$	5,029		$	-		$	8,602
Total Liabilities	$	186,741		$	190,811		$	178,657		$	183,686		$	170,968		$	179,570
Redeemable Preferred Stock (Series A, B and C), previously classified as equity	$	-		$	1,205		$	-		$	1,205		$	-		$	1,205

Shareholders' Equity:
Preferred stock:
Series A	$	392		$	-		$	392		$	-		$	392		$	-
Series B		192			-			192			-			192			-
Series C		500			-			500			-			500			-
Series D		5,068			5,068			5,068			5,068			5,068			5,068
Common stock		46,387			37,785			46,426			37,824			42,889			34,287
Additional paid-in capital		396			1,278			327			1,209			261			1,143
Retained deficit		(14,789	)		(11,260	)		(13,220	)		(10,650	)		(12,458	)		(13,461	)
Accumulated Other Comprehensive (Loss) Income		382			382			(542	)		(542	)		970			970
Total Shareholders' Equity	$	38,528		$	33,253		$	39,143		$	32,909		$	37,814		$	28,007

Consolidated Statements of Operations

	For the three Months Ended						For the six Months Ended
	June 30, 2011						June 30, 2011
(in thousands, except loss per share)	(As previously reported)			(As restated)			(As previously reported)			(As restated)
Change in fair value of warrant liability	$	-		$	407		$	-		$	959
Net Loss	$	(974	)	$	(567	)	$	(1,441	)	$	(482	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		(14	)		-			(22	)		-
Non-convertible preferred (Series B)		(3	)		-			(4	)		-
Accretion of discount on preferred (Series A and C) resulting from beneficial conversion feature		-			-			-			-
Dividends on Non-convertible TARP preferred (Series D)		64			64			128			128
Total income (loss) allocated to preferred stock		47			64			102			128
Net loss allocated to common stock	$	(1,021	)	$	(631	)	$	(1,543	)	$	(610	)

Basic loss per common share	$	(0.14	)	$	(0.09	)	$	(0.22	)	$	(0.09	)

Consolidated Statements of Operations

	For the three Months Ended						For the six Months Ended
	June 30, 2010						June 30, 2010
(in thousands, except loss per share)	(As previously reported)			(As restated)			(As previously reported)			(As restated)
Change in fair value of warrant liability	$	-		$	-		$	-		$	-
Net Loss	$	(5,665	)	$	(5,665	)	$	(6,051	)	$	(6,051	)
Less loss and dividends allocated to preferred stock:
Convertible preferred (Series A and C)		(223	)		-			(253	)		-
Non-convertible preferred (Series B)		(46	)		-			(53	)		-
Accretion of discount on preferred (Series A and C) resulting from beneficial conversion feature		-			882			-			882
Dividends on Non-convertible TARP preferred (Series D)		64			64			128			128
Total loss allocated to preferred stock		(205	)		946			(178	)		1,010
Net loss allocated to common stock	$	(5,460	)	$	(6,611	)	$	(5,873	)	$	(7,061	)

Basic loss per common share	$	(1.65	)	$	(2.00	)	$	(2.52	)	$	(3.03	)

Consolidated Statements of Cash Flows

	For the three Months Ended						For the six Months Ended
	June 30, 2011						June 30, 2011
(in thousand)	(As previously reported)			(As restated)			(As previously reported)			(As restated)
Net (loss)	$	(974	)	$	(567	)	$	(1,441	)	$	(482	)
Change in fair value of warrant liability		-			407			-			959
Net cash provided by operating activities	$	(489	)	$	(489	)	$	(1,500	)	$	(1,500	)

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

Forward-Looking Statements

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

Restatement of Previously Issued Consolidated Financial Statements

In this Amendment No. 2 we have restated our previously issued management’s discussion and analysis of financial condition and result of operations, consolidated financial statements and related disclosures as of and for the three and six months ended June 30, 2011 for the following:

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 we now present as mezzanine at their redemption value.

Overview of Results of Operations and Financial Condition

The Company incurred a net loss of $(567) thousand for the second quarter of 2011, as compared with a net loss of $(5.665) million for the second quarter of 2010. For the six-month period ended June 30, 2011, the net loss was $(482) thousand, as compared to a net loss of $(6.051) million for the comparable period in 2010.

No provision for loan losses was recorded in the second quarter of 2011, a decrease of $5.250 million from the second quarter of 2010. For the first six months of 2011, no provision was recognized, as compared with $5.450 million in the first half of 2010.

Net interest income for the three-month period ended June 30, 2011, was $1.806 million, an increase of $58 thousand from the same period in 2010. For the first half of 2011, net interest income was $3.632 million, up $66 thousand from the comparable 2010 period. The increases in net interest income were primarily due to continued decreases in deposit rates as well as a $4.9 million decrease in the average balance of borrowed funds.

The net interest margin (net interest income as a percentage of average interest earning assets) decreased by 35 basis points, to 3.41%, for the three-month period ended June 30, 2011, as compared to the same period in 2010. For the six months, net interest margin decreased by 42 basis points, to 3.46%.

For the three months ended June 30, 2011, non-interest income increased by $709 thousand from the same period in 2010. The six-month results reflect a $1.4 million improvement in non-interest income. The improvement was due to a reduction in losses on other real estate combined with the change in fair value for warrant liability.

Non-interest expense increased by $914 thousand for the second quarter of 2011, as compared to the same quarter in 2010. For the six months, the increase in non-interest expense was $1.368 million. Principal factors relating to the increase were salaries and benefits for newly hired officers and increased professional fees related to the pending bank acquisition.

Total assets increased by $7.5 million (3.4%) from December 31, 2010 to June 30, 2011.

Non-performing assets decreased from $14.6 million as of December 31, 2010 to $10.3 million on June 30, 2011.

Income Summary

For the three months ended June 30, 2011, the Company incurred a net loss of $(567) thousand. This compares with a net loss of $(5.7) million for the comparable period of 2010. For the six-month period ended June 30, 2011, the net loss was $(482) thousand, as compared to a net loss of $(6.1) million for the comparable period in 2010. The improvement was primarily attributable to changes in fair value of warrant liability and the absence of loan loss provision that were slightly offset by increases in non-interest expense.

The Company incurred a net loss applicable to common shareholders of $(631) thousand for the three months ended June 30, 2011 compared to a net loss of $(6.6) million for the same period in 2010. The Company incurred a net loss applicable to common shareholders of $(610) thousand for the six months ended June 30, 2011 compared to a net loss of $(7.1) million for the same period in 2010. This represents a net loss of $(.09) and $(2.00) per shares for the three months ended June 30, 2011 and 2010, respectively and a net loss of $(.09) and $(3.03) for the six months ended June 30, 2011 and 2010, respectively. Loss applicable to common shareholders is calculated by adding dividends accrued and discounts accreted on preferred stock to net losses.

Loss on average assets (annualized) was (1.02)% for the second quarter of 2011, as compared with (11.29)% for the second quarter of 2010. For the six months, annualized loss on average assets was (0.44)%, as compared with (6.17)% for the same period in 2010. Annualized loss on average equity was (6.59)% for the second quarter of 2011 as compared with (92.51)% for the comparable 2010 period. Loss on equity for the first six months was (2.86)% as compared with (57.83)% for the first half of 2010.

Net Interest Income

Net interest income is the largest source of the Bank’s operating income. For the three-month period ended June 30, 2011, net interest income was $1.806 million, an increase of $58 thousand from the same period in 2010, primarily due to continued decreases in deposit rates as well as a $4.9 million decrease in the average balance of borrowed funds. The beneficial impact of the reduction in interest expense was largely offset, however, as increased liquidity was invested in lower-earning investment securities rather than loans, due to weak loan demand.

The net interest margin (net interest income as a percentage of average interest earning assets) was 3.41% for the three-month period ended June 30, 2011, a decrease of 35 basis points as compared to the same period in 2010. Short-term interest rates dropped steeply in 2008, stabilized in 2009 and have remained at the current very low level. The initial drop placed severe pressure on our interest margin throughout 2008 and into 2009, but as rates stabilized higher-rate liabilities have rolled off or repriced downward, significantly reducing our interest cost. Offsetting the beneficial impact of lower interest expense has been a reduction in interest income on loans, as demand for quality credits has significantly declined and the balance of non-accrual loans, though declining, has remained at an historically high level.

The following tables show the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three- and six-month periods ended June 30, 2011 and 2010:

Net Interest Analysis
(Dollars in thousands)
	For the Three Months Ended
	June 30, 2011								June 30, 2010
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	117,587		$	1,697		5.79	% *	$	130,975		$	1,929		5.91	% *
Investment securities*		82,931			461		2.23	% *		39,945			304		3.05	% *
Other interest income		12,052			6		0.21	%		15,621			10		0.25	%
Total interest-earning assets / interest income		212,570			2,164		4.08	%		186,541			2,243		4.82	%
Non-interest-earning assets:
Allowance for loan losses		(3,250	)							(4,361	)
Cash and due from banks		1,728								5,636
Premises and equipment		3,173								3,331
Other assets		8,353								10,114
Total assets	$	222,574							$	201,261

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	11,590		$	18		0.62	%	$	19,229		$	37		0.78	%
Savings and Money Market deposit accounts		54,497			86		0.63	%		35,189			79		0.90	%
Certificates of deposit		87,577			229		1.05	%		83,923			293		1.40	%
Total interest-bearing deposits		153,664			333		0.87	%		138,341			409		1.19	%
Other short-tems borrowings		-			-		-			119			2		6.04	%
Federal Home Loan Bank advances		-			-		-			4,747			59		5.02	%
Trust preferred securities		3,093			25		3.27	%		3,093			25		3.30	%
Total borrowed funds		3,093			25		3.27	%		7,959			86		4.36	%
Total interest-bearing liabilities / interest expense		156,757			358		0.92	%		146,300			495		1.36	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		25,761								24,276
Other liabilities		5,556								6,122
Total liabilities		188,074								176,698
Shareholders' equity		34,501								24,563
Total liabilities and shareholders' equity	$	222,574							$	201,261
Net interest-rate spread							3.16	%							3.46	%
Impact of non-interest-bearing sources and other changes in balance sheet composition							0.25	%							0.30	%
Net interest income / margin on earning assets				$	1,806		3.41	% **				$	1,748		3.76	% **

*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Net loan fees (costs) included in loan interest income for the three-month periods ended June 30, 2011 and 2010, were $(16) thousand and $76 thousand, respectively.

** Net interest income as a % of earning assets

Net Interest Analysis
(Dollars in thousands)
	For the Six Months Ended
	June 30, 2011								June 30, 2010
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	118,594		$	3,486		5.93	% *	$	133,478		$	3,988		6.02	% *
Investment securities*		79,120			880		2.24	% *		39,811			613		3.10	% *
Other interest income		13,686			16		0.24	%		11,884			17		0.28	%
Total interest-earning assets / interest income		211,400			4,382		4.18	%		185,173			4,618		5.03	%
Non-interest-earning assets:
Allowance for loan losses		(3,238	)							(4,953	)
Cash and due from banks		1,578								4,166
Premises and equipment		3,191								3,356
Other assets		7,978								9,920
Total assets	$	220,909							$	197,662

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	11,401		$	38		0.67	%	$	19,988		$	78		0.79	%
Savings and Money Market deposit accounts		53,243			181		0.68	%		35,143			157		0.90	%
Certificates of deposit		86,987			476		1.11	%		84,816			631		1.50	%
Total interest-bearing deposits		151,631			695		0.92	%		139,947			866		1.25	%
Other short-tems borrowings		191			5		4.75	%		60			2		6.04	%
Federal Home Loan Bank advances		-			-		-			5,370			134		5.01	%
Trust preferred securities		3,093			50		3.29	%		3,093			50		3.27	%
Total borrowed funds		3,284			55		3.37	%		8,523			186		4.39	%
Total interest-bearing liabilities / interest expense		154,915			750		0.98	%		148,470			1,052		1.43	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		26,181								23,461
Other liabilities		5,843								4,630
Total liabilities		186,939								176,561
Shareholders' equity		33,970								21,101
Total liabilities and shareholders' equity	$	220,909							$	197,662
Net interest-rate spread							3.20	%							3.60	%
Impact of non-interest-bearing sources and other changes in balance sheet composition							0.26	%							0.28	%
Net interest income / margin on earning assets				$	3,632		3.46	% **				$	3,566		3.88	% **

*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company. Net loan fees (costs) included in loan interest income for the six-month periods ended June 30, 2011 and 2010, were $(14) thousand and $76 thousand, respectively.

** Net interest income as a % of earning assets

Shown in the following tables are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities, together with changes in the rates earned and paid by the Bank and the Company on those assets and liabilities, for the three-and six-month periods ended June 30, 2011 and 2010. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.

Rate / Volume Variance Analysis
(In thousands)	Three Months Ended June 30, 2011
	Compared to 2010
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(194	)	$	(38	)	$	(232	)
Investment securities		257			(100	)		157
Other interest income		(2	)		(2	)		(4	)
Total increase (decrease) in interest income		61			(140	)		(79	)

Interest-bearing liabilities:
Transaction accounts		(13	)		(6	)		(19	)
Savings deposits		36			(29	)		7
Certificates of deposit		12			(76	)		(64	)
Total interest-bearing deposits		35			(111	)		(76	)

Other short-term borrowings		(2	)		-			(2	)
FHLB advances		(59	)		-			(59	)
Trust preferred securities		-			-			-
Total borrowed funds		(61	)		-			(61	)
Total increase (decrease) in interest expense		(26	)		(111	)		(137	)

Increase (decrease) in net interest income	$	87		$	(29	)	$	58

Rate / Volume Variance Analysis
(In thousands)	Six Months Ended June 30, 2011
	Compared to 2010
	Increase (Decrease)
	in interest income and expense
	due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	(438	)	$	(64	)	$	(502	)
Investment securities		474			(207	)		267
Other interest income		2			(3	)		(1	)
Total increase (decrease) in interest income		38			(274	)		(236	)

Interest-bearing liabilities:
Transaction accounts		(30	)		(10	)		(40	)
Savings deposits		68			(44	)		24
Certificates of deposit		16			(171	)		(155	)
Total interest-bearing deposits		54			(225	)		(171	)

Other short-term borrowings		3			-			3
FHLB advances		(134	)		-			(134	)
Trust preferred securities		-			-			-
Total borrowed funds		(131	)		-			(131	)
Total increase (decrease) in interest expense		(77	)		(225	)		(302	)

Increase (decrease) in net interest income	$	115		$	(49	)	$	66

The tables above reflect the impact of lower rates paid on deposit accounts, the payoff of all remaining FHLB borrowings, the $12 million increase in average interest-bearing deposits over the past year ($15 million increase for the three-month periods), and a significant shift in the earning asset mix. The overall rate decline on CD’s resulted from maturing CD’s repricing downward in the current low rate environment.

Based on current economic forecasts, the Bank anticipates that short-term interest rates will remain at a very low level through the remainder of 2011. If so, we expect to see certificate of deposit rates continue to decline (by an additional 3 to 10 basis points this year, as the portfolio continues to reprice), with loan rates remaining relatively stable, which should result in improvement in our net interest margin. In the early stage of the next cycle of rising interest rates we would expect to see deposits reprice slightly faster than loans, as “floors” (minimum rates) have been implemented on approximately 58% of the variable rate loan portfolio, or approximately $36 million in loans. Many of those floor rates are currently higher than the rate would be without the imposition of the floor. As a result, that portion of the variable rate loan portfolio will not generate a material increase in interest income until the prime rate increases by at least two percentage points from its current level. The remaining 42% of variable rate loans will respond to rising rates much more quickly, however. A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months. Additional non-accrual loans would put downward pressure on the net interest margin.

Provision for Loan Losses

The Bank recorded no provision for loan losses for the six months ended June 30, 2011, as compared with a $5,450,000 provision for the first half of 2010 and $5,250,000 for the second quarter of 2010.

Loan charge-offs totaled $92 thousand (with $29 thousand in recoveries) for the second quarter of 2011, as compared with $6,599,000 of charge-offs and no recoveries for the same period in 2010. For the first six months of 2011 loan charge-offs totaled $100 thousand (with $84 thousand of recoveries), as compared with $7,288,000 of charge-offs and $32 thousand of recoveries in the first half of 2010. The ratio of allowance for loan losses to total loans was 2.74% at June 30, 2011, as compared with 2.96% a year ago and 2.66% as of December 31, 2010.

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

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

Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including gains and servicing fees from the sale of loans and gains or losses on sales of securities and other real estate owned and changes in fair value of warrant liability. For the three-month period ended June 30, 2011, non-interest income was $724 thousand, an increase of $709 thousand from the same period in 2010. For the first six months of 2011, non-interest income increased $1.4 million to $1.5 million from the comparable period in 2010.

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

Non-Interest Income
(In thousands)	For the Three Months Ended June 30,											For the Six Months Ended June 30,
	$ Amount						Change					$ Amount					Change
	2011			2010			$			%		2011		2010			$			%
Service charges on deposit accounts	$	121		$	92		$	29		32	%	$	198	$	174		$	24		14	%
Gain on sale of loans		35			181			(146	)	-81	%		141		181			(40	)	-22	%
Loan servicing fees, net of amortization		35			39			(4	)	-10	%		59		73			(14	)	-19	%
Gain on sale of available-for-sale securities		-			-			-		nm			-		58			(58	)	-100	%
Change in fair value of warrant liability		407			-			407		100	%		959		-			959		100	%
Other real estate income		18			-			18		nm			38		-			38		nm
Net gains(losses) or writedowns of fixed assets or other real estate		70			(344	)		414		nm			23		(450	)		473		nm
Gain on disposition of loans held for sale		(4	)		-			(4	)	nm			46		-			46		nm
Other income and fees		42			47			(5	)	-11	%		84		86			(2	)	-2	%
Total non-interest income	$	724		$	15		$	709		4727	%	$	1,548	$	122		$	1,426		1169	%

nm - not meaningful

The improvement in non-interest income was due to reduced losses on other real estate owned, partially offset by reduced gains on sales of SBA loans. No gains on sales of SBA loans were recognized in the first quarter of 2010 due to the 90-day limited recourse period (see Note 4 to the condensed consolidated financial statements). The change in fair value of warrant liability accounts for $407 thousand and $959 thousand of the increase in non-interest income for the three and six months ended June 30, 2011, respectively, compared to the same period in 2010. 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. See Note 11, Restatement of the Consolidated Financial Statements for more detailed information on this calculation.

Non-Interest Expense

Non-interest expense represents salaries and benefits, occupancy expenses, professional fees, outside services, and other miscellaneous expenses necessary to conduct business. Non-interest expenses increased by $914 thousand, or 42%, for the three months ended June 30, 2011, as compared to the second quarter of 2010. For the first six months of 2011, non-interest expense increased by $1.368 million, or 32%, from the comparable period in 2010.

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

Non-Interest Expense
(In thousands)	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	$ Amount				Change						$ Amount				Change
	2011		2010		$			%			2011		2010		$			%
Salaries and employee benefits	$	1,448	$	921	$	527			57	%	$	2,763	$	1,844	$	919			50	%
Occupancy expenses		331		315		16			5	%		652		615		37			6	%
Furniture and equipment		112		112		-			0	%		226		236		(10	)		-4	%
Data processing		262		176		86			49	%		463		364		99			27	%
Professional fees		403		184		219			119	%		533		318		215			68	%
Marketing and business development		56		33		23			70	%		93		70		23			33	%
Office supplies and expenses		67		61		6			10	%		126		118		8			7	%
Insurance and regulatory assessments		81		192		(111	)		-58	%		226		396		(170	)		-43	%
Loan and lease expenses		123		29		94			324	%		160		57		103			181	%
Other real estate expenses		42		29		13			45	%		98		39		59			151	%
Other		167		126		41			33	%		317		232		85			37	%
Total non-interest expense	$	3,092	$	2,178	$	914			42	%	$	5,657	$	4,289	$	1,368			32	%

nm = not meaningful

The increase in non-interest expense was principally from:

An increase in salaries and benefits due to additional officers hired in the second half of 2010 and the first half of 2011 in preparation for planned future growth,

Stock option compensation for recently-hired officers (an increase of $25 thousand for the second quarter and $50 thousand for the six months),

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

Expenses of operating additional other real estate, and

Professional fees related to the pending acquisition, which totaled $254 thousand for the second quarter and first six months of 2011 (see Note 10 to the condensed consolidated financial statements).

These increased expenses were partially offset by a significant decrease in our FDIC insurance assessment (a $114 thousand decrease for the second quarter of 2011 vs. 2010, and a $172 thousand decrease for the first half of 2011 as compared to the comparable 2010 period).

Income Taxes

Due to a limitation on the Company’s ability to recognize deferred tax assets, no federal income tax expense or benefit was recognized for the three- and six-month periods ended June 30, 2011, other than $5 thousand in minimum state franchise tax expense. For the first six months of 2010, no federal or state income tax expense or benefit was recognized, due to the deferred tax asset limitation.

Balance Sheet Analysis

At June 30, 2011, consolidated assets totaled $225.3 million, as compared with $217.8 million at December 31, 2010, and $208.8 million at the end of 2010’s second quarter. This represents an increase of $16.5 million (8%) over the past twelve months. Total loans decreased $9.6 million (8%) over that period, while securities and cash equivalents increased $24.4 million (33%), deposits increased $21.2 million (13%), borrowed funds decreased $4.1 million (100%) and shareholders’ equity increased $0.7 million (2%). The increases in securities, cash equivalents and shareholders’ equity were due to the growth in deposits, as well as the issuance of 748,672 shares of common stock in the fourth quarter of 2010, for net proceeds of $3.5 million. The Company’s net losses over the past year, combined with a decrease in the unrealized gain on available-for-sale securities, largely offset the increase in capital from the stock issuance. See also the Capital section of this report.

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

Balance Sheet Growth
(dollars in thousands)	Increase(Decrease) From Previous Quarter End*
	June 30, 2011						March 31, 2011						December 31, 2010						September 30, 2010						June 30, 2010
	$			%			$			%			$			%			$			%			$			%
Total Assets	$	7,650			14.1	%	$	(182	)		-0.3	%	$	5,596			10.5	%	$	3,423			6.5	%	$	13,821			28.4	%
Earning Assets		10,801			21.2	%		(1,384	)		-2.7	%		5,348			10.6	%		2,889			5.8	%		12,337			26.7	%
Loans		(1,426	)		-4.9	%		(2,474	)		-8.3	%		(2,638	)		-8.5	%		(3,033	)		-9.6	%		(6,589	)		-19.9	%
Deposits		7,622			17.5	%		1,418			3.3	%		7,619			18.3	%		4,495			11.1	%		(4,225	)		-10.2	%
Borrowings		-			-			(349	)		-405.6	%		(4,121	)		-365.8	%		328			31.4	%		(1,858	)		-124.2	%
Warrant Liability		(407	)		-36.5	%		(552	)		-44.5	%		(3,362	)		-159.0	%		(211	)		-9.7	%		8,602			100.0	%
Shareholders' Equity		105			1.1	%		(720	)		-7.5	%		1,891			20.1	%		(562	)		-5.9	%		19,531			428.5	%

*Percentages shown as annualized rates

Loans

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

Loan Composition
(Dollars in thousands)
	June 30, 2011					December 31, 2010					June 30, 2010
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	9,866		8.5	%	$	8,972		7.4	%	$	9,659		7.7	%
Commercial real estate - owner-occupied		31,572		27.2	%		35,135		29.2	%		34,977		27.8	%
Commercial real estate - non-owner-occupied		32,717		28.1	%		32,240		26.8	%		35,374		28.1	%
Residential real estate		15,338		13.2	%		16,641		13.9	%		17,414		13.8	%
All other real estate loans		2,951		2.5	%		2,989		2.5	%		3,100		2.5	%
Commercial and industrial loans		16,659		14.3	%		17,701		14.7	%		18,725		14.9	%
Agricultural loans		2,596		2.2	%		1,022		0.9	%		390		0.3	%
Municipal loans		2,429		2.1	%		2,987		2.5	%		3,589		2.8	%
Leases, net of unearned income		815		0.7	%		1,047		0.9	%		1,097		0.9	%
Consumer loans		1,382		1.2	%		1,491		1.2	%		1,571		1.2	%
Total loans	$	116,325		100.0	%	$	120,225		100.0	%	$	125,896		100.0	%

The table shows a net decrease in loans outstanding over the past twelve months—primarily in real estate and commercial loans. Of the total real estate and construction loans as of June 30, 2011, 74% are commercial real estate loans, and 46% of those are owner-occupied properties. Approximately 2% of the owner-occupied commercial real estate loans are SBA-guaranteed.

Asset Quality

Non-accrual loans (including loans held for sale) totaled $8.0 million at June 30, 2011, as compared to $12.0 million at December 31, 2010 and $9.4 million at June 30, 2010.

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

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

The following table presents information about the Company’s non-performing loans, including quality ratios as of June 30, 2011, December 31, 2010 and June 30, 2010:

Non-Performing Assets*
(in thousands)	June 30			December 31			June 30
	2011			2010			2010
Loans in nonaccrual status:
Nonaccrual loans held for investment	$	3,275		$	1,993		$	2,989
Nonaccrual loans held for sale**		4,762			10,011			6,431
Loans past due 90 days or more and accruing		-			-			-
Restructured loans in accruing status		7			-			276
Total nonperforming loans		8,044			12,004			9,696
Foreclosed real estate		2,268			2,572			963
Total nonperforming assets	$	10,312		$	14,576		$	10,659

Real estate held for possible future branch office		565			565			565
Total nonperforming loans and other real estate owned	$	10,877		$	15,141		$	11,224

Allowance for loan and lease losses allocated to impaired loans	$	202		$	9		$	223
Allowance for loan and lease losses allocated to loans held for sale**		-			-			-
Allowance for loan and lease losses allocated to all other loans		2,980			3,189			3,508
Total allowance for loan and lease losses	$	3,182		$	3,198		$	3,731

Asset quality ratios:
Non-performing assets to total assets		4.58	%		6.69	%		5.11	%
Excluding loans held for sale**		2.58	%		2.25	%		2.20	%

Non-performing loans to total loans		6.92	%		9.98	%		7.70	%
Excluding loans held for sale**		3.09	%		1.90	%		3.00	%

Allowance for loan and lease losses to total loans		2.74	%		2.66	%		2.96	%
Excluding loans held for sale**		2.99	%		3.04	%		3.43	%

Allowance for loan and lease losses to total non-performing loans		40	%		27	%		38	%
Excluding non-performing loans held for sale**		97	%		160	%		114	%

* Table combines both bank and non-bank subsidiaries
** Loans held for sale are carried at fair value

For comparison, ratios in the table above are presented both with and without loans held for sale. The high level of non-performing loans has been due to the significant downturn in the economy and reduction in real estate collateral values over the past three years. The $8.0 million of non-performing loans as of June 30, 2011, includes $1.4 million of SBA-guaranteed loans, which are supported by $1.1 million of SBA loan guarantees. The remaining $6.6 million of non-performing loans are loans which management has determined to be impaired. A determination of impairment is one of expected payment nonperformance, but not necessarily probability of loss. Based on a loan-by-loan analysis of collateral values or the present value of estimated cash flows, the extent of the impairment of those impaired loans in excess of amounts already charged off is estimated to be $202 thousand, and has been provided in the allowance for loan and lease losses.

Nonperforming assets (which are comprised of nonperforming loans and foreclosed real estate) at June 30, 2011 were $10.3 million, a decrease of $4.3 million from the $14.6 million balance at December 31, 2010. Foreclosed real estate represents real property taken by the Bank from the borrower either through foreclosure or through a deed in lieu of foreclosure, and is carried at the lesser of cost or fair market value, less estimated selling costs.

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

Other Real Estate Owned
(dollars in thousands)	Six Months Ended
	June 30, 2011
Balance of foreclosed real estate at beginning of year	$	2,572
Real estate held for possible future branch office		565
Total other real estate owned at beginning of year	$	3,137
Foreclosures during the period		1,069
Additional investments in other real estate		111
Sales of other real estate		(1,507	)
Gains on sales of other real estate, net of writedowns		23
Balance of other real estate owned at end of period	$	2,833

Potential Problem Loans

At June 30, 2011, the Bank had approximately $8.6 million of loans that were not categorized as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrower to comply with the repayment terms of the loan. The $8.6 million of potential problem loans includes $503 thousand of SBA-guaranteed loans, which are supported by $402 thousand of SBA loan guarantees, and $7.5 million of the potential problem loans are secured by real estate.

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

While credit quality, as measured by loan delinquencies and by the Bank’s internal risk rating system, appears to be manageable as of June 30, 2011, there can be no assurances that new problem loans will not develop in future periods. A continuing decline in economic conditions in the Bank’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general. The Bank has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) at June 30, 2011 totaled $3.2 million, a decrease of $16 thousand from December 31, 2010. The ratio of ALLL to total loans at June 30, 2011, was 2.74%, as compared with 2.66% at December 31, 2010, and 2.96% at June 30, 2010. At June 30, 2011 and 2010, the ratio of ALLL to total non-performing loans was 40% and 39%, respectively.

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

Allowance for Loan and Lease Losses
(dollars in thousands)	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	3,245		$	5,080		$	3,198		$	5,537
Provision for loan losses		-			5,250			-			5,450
Loans charged off		(92	)		(6,599	)		(100	)		(7,288	)
Recoveries of previous charge-offs		29			-			84			32
Net recoveries (charge-offs)		(63	)		(6,599	)		(16	)		(7,256	)
Balance at end of period	$	3,182		$	3,731		$	3,182		$	3,731

Allowance for loan losses as a percentage of:
Period end loans		2.74	%		2.96	%		2.74	%		2.96	%
Period end loans excluding loans held for sale*		2.99	%		3.43	%		2.99	%		3.43	%
Total non-performing loans		40	%		38	%		40	%		38	%
Non-performing loans excluding loans held for sale*		97	%		114	%		97	%		114	%
As a percentage of average loans (annualized):
Net charge-offs (recoveries)		0.21	%		20.21	%		0.03	%		10.96	%
Provision for loan losses		0.00	%		16.08	%		0.00	%		8.23	%

* Loans held for sale are carried at fair value

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

Based on its quarterly review, management believes that the allowance for loan losses at June 30, 2011, is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involve uncertainty and matters of judgment. Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.

In addition, management has established a reserve for undisbursed loan commitments. As of June 30, 2011 and December 31, 2010, this reserve totaled $105 thousand, and is included in other liabilities in the consolidated balance sheet.

Investments

All securities in the Bank’s investment portfolio are considered to be investment grade. The portfolio consists of a mixture of fixed-rate US agency securities (31%), fixed-rate mortgage-backed securities (30%), floating-rate mortgage-backed securities (34%), fixed-rate tax-exempt municipal securities (3%), and other fixed-rate securities (2%). The Bank has no investments in FannieMae or FreddieMac equity securities (common or preferred) and none of the mortgage-backed securities are backed by “sub-prime” mortgages. The weighted average life of the portfolio is 2.9 years, with a projected duration of 2.7 years.

Deposits

Deposits are the primary source of funding for lending and investing needs. Total deposits were $182.3 million as of June 30, 2011, as compared with $173.2 million at December 31, 2010, and $161.1 million at June 30, 2010.

The Bank generally prices interest-bearing deposits at or above the median rate by classification based on periodic interest rate surveys in the local market. Deposit rates are then adjusted, using a deposit pricing model, to balance the cost of funds, funding needs and other asset and liability considerations. The Net Interest Analysis and Rate/Volume Analysis earlier in this Discussion contain information regarding the average rates paid on deposits for the first six months of 2011 and 2010.

The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) program. This program permits the Bank’s customers to place their certificates of deposit at one institution—Mission Community Bank—and have those deposits fully-insured by the FDIC. The CDARS program acts as a clearinghouse, matching deposits from one institution in the CDARS network of more than 3,000 banks with other network banks (in increments of less than the per-depositor FDIC insurance limit), so funds that a customer places with the Bank essentially remain on the Bank’s balance sheet. The CDARS program has become very attractive since mid-year 2008 as local depositors sought out safety, with yield often a secondary concern. As of June 30, 2011, the Bank had issued $40.9 million of certificates of deposit to local customers through the CDARS program, as compared with $44.9 million as of June 30, 2010.

Borrowings

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

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

Capital

Total shareholders’ equity increased $5.2 million, or 18.7%, over the past twelve months. The increase was due to the issuance of 748,672 shares of common stock in the second half of 2010, for net proceeds of $3.5 million and the effect of the change in fair value of warrant liability that is processed to non-interest income.

The following table shows the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at June 30, 2011, December 31, 2010, and June 30, 2010:

Mission Community Bank
Capital Ratios						Amount of Capital Required
(dollars in thousands)						To Be					To Be Adequately
	Actual					Well-Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011:
Total Capital (to Risk-Weighted Assets)	$	21,163		16.97	%	$	12,468		10.0	%	$	9,974		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	19,583		15.71	%	$	7,481		6.0	%	$	4,987		4.0	%
Tier 1 Capital (to Average Assets)	$	19,583		9.45	%	$	10,358		5.0	%	$	8,286		4.0	%

As of December 31, 2010:
Total Capital (to Risk-Weighted Assets)	$	21,649		17.20	%	$	12,587		10.0	%	$	10,069		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	20,054		15.93	%	$	7,552		6.0	%	$	5,035		4.0	%
Tier 1 Capital (to Average Assets)	$	20,054		10.18	%	$	9,852		5.0	%	$	7,881		4.0	%

As of June 30, 2010:
Total Capital (to Risk-Weighted Assets)	$	21,388		17.08	%	$	12,524		10.0	%	$	10,020		8.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	19,794		15.80	%	$	7,515		6.0	%	$	5,010		4.0	%
Tier 1 Capital (to Average Assets)	$	19,794		10.06	%	$	9,836		5.0	%	$	7,869		4.0	%

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

Liquidity

The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded. The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit. Cash and cash equivalents (primarily federal funds sold) are the primary means for providing immediate liquidity. The Bank had $6.8 million in cash and cash equivalents on June 30, 2011, as compared with $10.8 million as of December 31, 2010, and $25.6 million on June 30, 2010.

In order to meet the Bank’s liquidity requirements, the Bank endeavors to maintain an appropriate ratio of loans to deposits, and to maintain sufficient off-balance-sheet sources of funds which may be drawn upon when needed. As of June 30, 2011, the Company’s loans-to-deposits ratio was 64%, as compared with 69% as of December 31, 2010, and 78% on June 30, 2010. This ratio has been declining over the past several quarters, as demand for quality credits has been weak through the economic downturn, while deposits have grown during this period. A low loan-to-deposit ratio indicates that the Bank has liquidity in place to meet potential needs for loan funding or deposit withdrawals. The Bank’s sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, was 53% as of June 30, 2011, as compared with 47% as of December 31, 2010, and 36% as of June 30, 2010.

One of the off-balance-sheet sources of funds is potential borrowing capacity through the FHLB. FHLB borrowings are collateralized by loans and/or investments and can be structured over various terms ranging from overnight to ten years. As of June 30, 2011, the Bank had no outstanding borrowings from the FHLB. Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased. The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets. Based on this limitation and loans and securities pledged as of June 30, 2011, up to $50.2 million could be borrowed from the FHLB if needed. FHLB borrowings may be used from time to time when needed as part of the Bank’s normal liquidity management to fund asset growth on a cost-effective basis. The Bank has adequate loans and securities to pledge as collateral should it need additional liquidity that cannot be funded by deposits.

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

Off-Balance-Sheet Arrangements

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

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

Loan Commitments
(in thousands)	June 30		December 31		June 30
	2011		2010		2010
Commitments to Extend Credit	$	22,255	$	19,832	$	18,444
Standby Letters of Credit		761		901		401
	$	23,016	$	20,733	$	18,845

The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. Management has established a reserve for undisbursed loan commitments. As of June 30, 2011, and December 31, 2010, this reserve totaled $105 thousand and is included in other liabilities in the consolidated balance sheets.

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

Effects of Inflation and Economic Issues

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

San Luis Obispo and Santa Barbara Counties continue to have unemployment rates (10.0% and 8.9%, respectively, as of June 2011), significantly below the California statewide seasonally-adjusted rate of 11.8%, but San Luis Obispo remains above the nationwide seasonally-adjusted rate of 9.2%. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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

In connection with the revision to the consolidated financial statements as described in Note 11, Restatement of the Notes to the Consolidated Financial Statements of this Amendment No. 2, Management reevaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011. 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 issued in 2010 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 June 30, 2011. In light of the material weakness described above, Management revised its consolidated financial statements in this Form 10-Q/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-Q/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.

Changes in Internal Control Over Financial Reporting

Other than as noted above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Index:

Exhibit #
2.1	Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)
3.1	Restated Articles of Incorporation (I)
3.2	Certificate of Amendment to Articles of Incorporation (L)
3.3	Certificate of Amendment to Articles of Incorporation (Y)
3.4	Bylaws, as amended (B),(S)
4.1	Certificate of Determination for Series A Non-Voting Preferred Stock (B)
4.2	Certificate of Determination for Series B Non-Voting Preferred Stock (B)
4.3	Certificate of Determination for Series C Non-Voting Preferred Stock (D)
4.4	Purchase Agreement dated October 10, 2003, by and among Registrant, Mission Community Capital Trust I, and Bear Stearns & Co., Inc. (E)
4.5	Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (E)
4.6	Declaration of Trust of Mission Community Capital Trust I dated October 10, 2003 (E)
4.7	Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (E)
4.8	Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (E)
4.9	Fee Agreement dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Co., Bear Stearns & Co., Inc. and Mission Community 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 CA (C)
10.9	Intentionally omitted
10.10	Lease Agreement – 3480 S. Higuera, San Luis Obispo (F)
10.11	Salary Protection Agreement — Mr. Pigeon (G)
10.12	Intentionally omitted
10.13	Second Amended and Restated Employment Agreement dated August 28, 2006 between Anita M. Robinson and Mission Community Bank (J)

Exhibit #
10.14	Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (J)
10.15	Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (K)
10.16	Common Stock Repurchase Agreement dated August 10, 2007 between Fannie Mae and the Company (M)
10.17	Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (N)
10.18	Lease Agreement – 1670 South Broadway, Santa Maria (O)
10.19	Mission Community Bancorp 2008 Stock Incentive Plan (P)
10.20	Amendment No. 1 to Second Amended and Restated Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Anita M. Robinson (Q)
10.21	Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (Q)
10.22	Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (Q)
10.23	Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which includes the Securities Purchase Agreement—Standard Terms attached thereto, with respect to the issuance and sale of the Series D Preferred Stock (R)
10.24	Side Letter Agreement dated January 9, 2009 amending the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (R)
10.25	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (R)
10.26	Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (R)
10.27	Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (U)
10.28	Form of Warrant to be issued in connection with the Securities Purchase Agreement (U)
10.29	Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (V)
10.30	Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (W)
10.31	Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (X)
10.32	Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (Y)
10.33	Agreement and Plan of Merger dated as of June 24, 2011 by and among Carpenter Fund Manager GP, LLC; Mission Community Bancorp; Mission Community Bank; Santa Lucia Bancorp and Santa Lucia Bank (BB)
31.1	Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act
31.2	Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act
32.1	Certification of CEO pursuant to Section 906 of Sarbanes Oxley Act
32.2	Certification of CFO pursuant to Section 906 of Sarbanes Oxley Act
101	Interactive Data Files

(A)	Included in the Company’s Form 8-K filed on December 18, 2000, and incorporated by reference herein.
(B)	Included in the Company’s Form 10-KSB filed on April 2, 2001, and incorporated by reference herein.
(C)	Included in the Company’s Form 10-QSB filed August 12, 2002, and incorporated by reference herein.
(D)	Included in the Company’s Form 10-QSB filed on November 12, 2002, and incorporated by reference herein.
(E)	Included in the Company’s Form 8-K filed on October 21, 2003, and incorporated by reference herein.

(F)	Included in the Company’s Form 10-QSB filed on August 10, 2004, and incorporated by reference herein.
(G)	Included in the Company’s Form 8-K filed on January 19, 2005, and incorporated by reference herein.
(H)	Intentionally omitted
(I)	Included in the Company’s Form 10-QSB filed on August 14, 2006, and incorporated by reference herein.
(J)	Included in the Company’s Form 8-K filed on June 13, 2007, and incorporated by reference herein.
(K)	Included in the Form SB-2 Registration Statement of the Company filed on June 13, 2007, and incorporated by reference herein.
(L)	Included in Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement of the Company filed on July 24, 2007, and incorporated by reference herein.
(M)	Included in the Company’s Form 8-K filed on August 14, 2007, and incorporated by reference herein.
(N)	Included in the Company’s Form 8-K filed on October 23, 2007, and incorporated by reference herein.
(O)	Included in the Company’s Form 10-KSB filed on March 28, 2008, and incorporated by reference herein.
(P)	Included in the Company’s Form 10-Q filed on May 15, 2008, and incorporated by reference herein.
(Q)	Included in the Company’s Form 8-K filed on December 30, 2008, and incorporated by reference herein.
(R)	Included in the Company’s Form 8-K filed on January 14, 2009, and incorporated by reference herein.
(S)	Included in the Company’s Form 10-Q filed on August 14, 2009, and incorporated by reference herein.
(T)	Included in the Company’s Form 10-K filed on March 16, 2009, and incorporated by reference herein.
(U)	Included in the Company’s From 8-K filed on December 24, 2009, and incorporated by reference herein.
(V)	Included in the Company’s Form 8-K filed on March 22, 2010, and incorporated by reference herein.
(W)	Included in the Company’s Form 8-K filed on March 26, 2010, and incorporated by reference herein.
(X)	Included in the Company’s Form 8-K filed on June 1, 2010, and incorporated by reference herein.
(Y)	Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein.
(Z)	Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010, and incorporated by reference herein.
(AA)	Included in Amendment No. 1 to the Company’s Form S-1 Registration Statement filed on October 1, 2010, and incorporated by reference herein.
(BB)	Included in the Company’s Form 8-K filed on June 27, 2011, and incorporated by reference herein.

Signatures

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

MISSION COMMUNITY BANCORP

By: /s/ James W. Lokey____________

JAMES W. LOKEY

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