UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

For the quarterly period ended September 30, 2009

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

For the transition period from

Commission File Number: 001-33890

1ST PACIFIC BANCORP

(Exact name of registrant as specified in its charter)

State of California		No. 20-5738252
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

9333 Genesee Ave., #300, San Diego, California		92121
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 875-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller Reporting Company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

On February 24, 2010, there were 4,980,481 shares of 1st Pacific Bancorp common stock outstanding.

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1st Pacific Bancorp

Quarterly Report on Form 10-Q/A for the period ended September 30, 2009

INDEX

		Page

Explanatory Note		3

Forward-Looking Statements		4

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008		6

Unaudited Condensed Consolidated Income Statements for the three months and nine months ended September 30, 2009 and 2008		7

Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity from December 31, 2007 through September 30, 2009		8

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008		9

Notes to Unaudited Condensed Consolidated Financial Statements		10

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3 - Quantitative and Qualitative Disclosures About Market Risk		31

Item 4T - Controls and Procedures		32

PART II - OTHER INFORMATION

Item 1- Legal Proceedings		34

Item 1A- Risk Factors		34

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3 — Defaults Upon Senior Securities		37

Item 4 — Submission of Matters to a Vote of Security Holders		37

Item 5 — Other Information		37

Item 6 - Exhibits		38

Signatures		39

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EXPLANATORY NOTE

1st Pacific Bancorp (“we,” “our,” “us” or the “Company”), parent of 1st Pacific Bank of California (the “Bank”), has restated its previously reported results for the third quarter and nine months ended September 30, 2009. The restatement is necessary for the following reasons: to increase expense for the provision for loan losses, to increase impairment charge-offs on two loans, and to reflect the reassessment of its valuation allowance on deferred tax assets.

The increase in the provision for loan losses for the quarter ended September 30, 2009, resulting from this restatement, amounts to approximately $8.8 million and is the consequence of two significant factors:

1) to enhance the Bank’s process for determining, documenting and recording an adequate allowance for loan losses (the “ALLL”), the Bank adopted a new model and, working closely with the Bank’s regulators, determined that the new methodology should be adopted and reflected in the quarterly results for September 30, 2009, resulting in an increase of approximately $3.4 million to the ALLL, and

2) as a result of the determination to restate the September results, the Bank reassessed its evaluation of potential impairment losses as required by Financial Accounting Standards Board (“FASB”)-Accounting Standards Codification (“ASC”) Topic 310, “Receivables,” on two specific loans in accordance with ASC Topic 855, “Subsequent Events,” and determined that an additional impairment allocation of approximately $5.3 million was necessary due to current information obtained regarding the valuation of the underlying loan collateral.

Furthermore, as a result of the increase in the Bank’s reported losses, we determined that the Bank should increase the valuation allowance on its deferred tax assets, which resulted in an increase in deferred tax expense of approximately $5.3 million.

As a result of the changes noted above and as reflected in this restatement, the Company recognized a net loss of $15.9 million (or $3.19 diluted loss per share) for the quarter ended September 30, 2009 rather than net loss of $1.9 million (or $0.37 diluted loss per share), and net loss for the first nine months of 2009 of $17.2 million (or $3.45 diluted loss per share) rather than a net loss of $3.1 million (or $0.63 diluted loss per share) as originally reported.

Finally, in regards to the two impaired loans mentioned above, the Company increased reported impairment write downs, or charge-offs, by approximately $6.9 million for the quarter ended September 30, 2009, approximately $1.6 million of which had been previously recognized as impairment reserves in the allowance for credit losses at September 30, 2009.

Further discussion regarding the Bank’s ALLL methodology, the impairment losses recognized, and the assessment of the valuation allowance for deferred tax assets can be found in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. While we are amending only certain portions of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, for convenience and ease of reference, we are filing the entire Quarterly Report for the quarter ended September 30, 2009, on this Form 10-Q/A.

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FORWARD-LOOKING STATEMENTS

We may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (the “SEC”) (including this Quarterly Report on Form 10-Q/A and the exhibits hereto), in our reports to shareholders and in other communications by us, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements concerning our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “will,” “shall,” “anticipate,” “estimate,” “propose,” “continue,” “predict,” “intend,” “plan” and similar expressions. These forward-looking statements are based upon current expectations and are subject to risk, uncertainties and assumptions, including those described in this quarterly report and the other documents that are incorporated by reference herein. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

In connection with the safe harbors created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors (some of which are beyond our control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include, but are not limited to, the following:

· The factors described in Item 1A-Risk Factors of the Company’s Annual Report on Form 10-K for the 2008 fiscal year filed on March 31, 2009 as amended and filed on April 29, 2009, and of the Company’s subsequent Quarterly Reports on Form 10-Q.

· Potential losses of businesses and population in the County of San Diego.

· The effects of trade, monetary and fiscal policies and laws.

· Stock, bond market and monetary fluctuations.

· Risks of loss of funding of Small Business Administration (“SBA”) loan programs, or changes in those programs.

· Credit risks of commercial, SBA, real estate, consumer and other lending activities, including risks related to changes in the values of real estate and other security for loans.

· Risks associated with concentrations, including commercial real estate loans, in the loan portfolio.

· The questionable availability of take-out financing or problems with sales or lease-up with respect to commercial and residential projects, due to the current economic environment.

· Competitors in our market area of similar size, with similar business plans and/or offering similar services.

· Our ability to develop competitive new products and services and the acceptance of those products and services by targeted customers and, when required, regulators.

· Our ability to securely and effectively implement new technology (including Internet services) for both the delivery of services and internal operations.

· The willingness of customers to substitute competitors’ products and services for our products and services and vice versa.

· Changes in consumer and business spending and savings habits.

· Unanticipated regulatory or judicial proceedings.

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· The loss of significant customers.

· Increased regulation of the securities markets, including the securities of 1st Pacific Bancorp, whether pursuant to the Sarbanes-Oxley Act of 2002 or otherwise.

· Changes in critical accounting policies and judgments.

· Other internal and external developments that could materially impact our operational and financial performance.

Investors and other readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date of the statement. Actual results may differ materially from what is expected. The Company undertakes no obligation, unless required by law, to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART 1 — FINANCIAL INFORMATION

Item 1 - Financial Statements

1st Pacific Bancorp

Unaudited Condensed Consolidated Balance Sheets

	September 30, 2009			December 31, 2008
	Restated
Cash and Due From Banks	$	6,933,965		$	6,482,152
Federal Funds Sold	2,085,000			18,010,000
TOTAL CASH AND CASH EQUIVALENTS	9,018,965			24,492,152

Investment Securities Available for Sale	18,382,853			25,052,874

Construction & Land Development	96,657,000			109,592,264
Real Estate - Comm’l & Residential	150,787,450			147,965,134
SBA 7a & 504	10,753,429			8,820,177
Commercial & Consumer	85,267,514			85,521,204
Allowance for Loan Losses	(8,132,656		)	(5,058,837		)
NET LOANS	335,332,737			346,839,942

Premises and Equipment	3,085,219			3,611,224
Federal Reserve, FHLB and Bankers’ Bank Stock, at Cost	4,014,300			4,611,400
Other Real Estate Owned	2,572,000			1,390,000
Core Deposit Intangible	1,075,647			1,312,544
Accrued Interest and Other Assets	5,938,235			13,599,879

TOTAL ASSETS	$	379,419,956		$	420,910,015


Noninterest-Bearing Deposits	$	85,844,377		$	62,534,488
Interest-Bearing Deposits	231,947,382			271,301,605
TOTAL DEPOSITS	317,791,759			333,836,093

Subordinated Debt and Other Borrowings	50,155,000			60,155,000
Accrued Interest and Other Liabilities	5,045,114			4,337,719
TOTAL LIABILITIES	372,991,873			398,328,812

Common Stock	37,232,651			37,232,651
Additional Paid-in Capital	753,341			555,094
Retained Earnings (Deficit)	(31,406,963		)	(14,210,945		)
Accumulated Other Comprehensive Income (Loss), net of tax	(150,946		)	(995,597		)
TOTAL SHAREHOLDERS’ EQUITY	6,428,083			22,581,203


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	379,419,956		$	420,910,015

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

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1st Pacific Bancorp

Unaudited Condensed Consolidated Income Statements

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
	Restated						Restated
INTEREST INCOME
Interest and Fees on Loans	$	5,308,678		$	6,311,978		$	16,289,757		$	19,369,779
Interest on Investment Securities	274,591			508,472			947,816			1,445,475
Interest on Federal Funds Sold and Other	10,264			98,834			47,600			297,549
TOTAL INTEREST INCOME	5,593,533			6,919,284			17,285,173			21,112,803
INTEREST EXPENSE
Interest on NOW, Savings & Money Market Accounts	166,388			555,671			466,352			1,902,777
Interest on Time Deposits	1,176,228			1,554,287			4,202,985			4,747,851
Interest on Borrowings	381,645			530,601			1,211,777			1,291,711
TOTAL INTEREST EXPENSE	1,724,261			2,640,559			5,881,114			7,942,339
NET INTEREST INCOME	3,869,272			4,278,725			11,404,059			13,170,464

Provision for Loan Losses	10,224,263			250,000			11,040,263			3,800,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	(6,354,991		)	4,028,725			363,796			9,370,464

NONINTEREST INCOME
Service Charges, Fees and Other Income	173,828			243,326			632,456			721,619
Gain on Early Prepayment of FHLB Advances	—			151,557			—			151,557
Gain on Sales of OREO	28,450			—			28,450			—
Recoveries of Prior Expenses	284,632			—			284,632			—
Gain on Sale of Investment Securities	—			—			228,750			19,198
Broker Loan Fees and Gain on Loan Sales	37,844			36,874			37,844			97,824
	524,754			431,757			1,212,132			990,198
NONINTEREST EXPENSE
Salaries and Employee Benefits	2,035,040			2,187,461			6,224,370			6,907,663
Occupancy and Equipment Expense	723,985			768,051			2,231,649			2,275,552
Marketing and Business Promotion	52,254			116,075			159,253			358,812
Data Processing	325,218			299,333			1,017,200			897,863
Professional Fees	239,361			271,582			966,881			608,557
Regulatory Fees	14,758			14,156			42,914			37,892
FDIC Insurance Assessments	258,482			75,739			918,996			197,738
Office and Administrative Expenses	198,021			223,962			620,411			684,997
Merger Related Expenses	289,356			—			289,356			—
Loss on Sublease	—			—			165,000			—
Loss on Foreclosed Real Estate (OREO)	617,752			—			1,059,505			—
Loss on Investment Securities	—			500,000			—			500,000
Other Miscellaneous Expenses	50,993			9,292			119,436			22,641
	4,805,220			4,465,651			13,814,971			12,491,715
INCOME (LOSS) BEFORE TAXES	(10,635,457		)	(5,169		)	(12,239,043		)	(2,131,053		)

Income Tax Expense (Benefit)	5,276,674			(14,700		)	4,956,974			(881,800		)
NET INCOME (LOSS)	$	(15,912,131	)	$	9,531		$	(17,196,017	)	$	(1,249,253	)

Per Share Data:
Net Income (Loss) - Basic	$	(3.19	)	$	0.00		$	(3.45	)	$	(0.25	)
Net Income (Loss) - Diluted	$	(3.19	)	$	0.00		$	(3.45	)	$	(0.25	)

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

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1st Pacific Bancorp

Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity

	Shares	Common Stock		Paid In Capital		Retained Earnings (Deficit)			Comprehensive Income (Loss)			Accum Other Comprehensive Income (Loss)

Balance, December 31, 2007	4,944,443	$	37,028,186	$	350,511	$	7,649,040					$	(53,790	)

Stock-based Compensation				204,583
Exercise of Stock Options, Including Tax Benefits	36,038	204,465

Comprehensive Loss:
Net Loss for the Period						(21,859,985		)	$	(21,859,985	)
Unrecognized Loss in Investment Securities Available for Sale, net									(1,402,480		)	(1,402,480		)

Reclassification of Net Losses included in Net Loss, net									460,673			460,673
Total Comprehensive Loss									$	(22,801,792	)

Balance, December 31, 2008	4,980,481	37,232,651		555,094		(14,210,945		)				(995,597		)

Stock-based Compensation				198,247

Comprehensive Loss:
Net Loss for the Period						(17,196,017		)	$	(17,196,017	)
Unrecognized Gain in Investment Securities Available for Sale, net									976,252			976,252

Reclassification of Net Gains included in Net Loss, net									(131,601		)	(131,601		)
Total Comprehensive Loss									$	(16,351,366	)

Balance, September 30, 2009, as restated	4,980,481	$	37,232,651	$	753,341	$	(31,406,963	)				$	(150,946	)

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

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1st Pacific Bancorp

Unaudited Condensed Consolidated Statements of Cash Flows

	For the Nine Months
	Ended September 30,
	2009			2008
	Restated
OPERATING ACTIVITIES
Net Income (Loss)	$	(17,196,017	)	$	(1,249,253	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization	616,708			615,975
Provision for Loan Losses	11,040,263			3,800,000
Stock-based Compensation Expense	198,247			181,100
Decrease (Increase) in Tax Assets - Net	6,269,445			(1,810,056		)
Decrease (Increase) in Accrued Interest Receivable	20,599			265,853
Gain on Sale of Investment Securities	(228,750		)	—
Net Loss on Other Real Estate Owned	1,031,055			—
Loss on Sale of Fixed Assets	—			5,061
Loss on Sublease	165,000			—
Impairment Loss on Investment Securities	—			500,000
Other Items - Net	539,929			(105,224		)

NET CASH PROVIDED BY OPERATING ACTIVITIES	2,456,479			2,203,456

INVESTING ACTIVITIES
Purchases of Investment Securities	—			(21,537,218		)
Maturities and Sales of Investment Securities	8,330,383			18,385,303
Change in Equity Securities	597,100			(1,758,650		)
Net Change in Loans	(1,393,808		)	(20,120,323		)
Proceeds from Sale of Other Real Estate Owned	836,696			—
Purchases of Premises and Equipment	(255,703		)	(279,975		)

NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES	8,114,668			(25,310,863		)

FINANCING ACTIVITIES
Stock Options Exercised	—			128,065
Increase (Decrease) in Borrowings	(10,000,000		)	20,000,000
Increase (Decrease) in Deposits	(16,044,334		)	12,237,788

NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES	(26,044,334		)	32,365,853


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(15,473,187		)	9,258,446

Cash and Cash Equivalents at Beginning of Period	24,492,152			17,557,189


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,018,965		$	26,815,635

Supplemental disclosure of noncash items:
Transfers of loans to other real estate owned	$	3,049,751		$	—

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

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1st Pacific Bancorp

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Consolidation and Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements include the accounts of 1st Pacific Bancorp (the “Company”) and the consolidated accounts of its wholly-owned subsidiary, 1st Pacific Bank of California (the “Bank”). All significant intercompany balances and transactions have been eliminated. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting.

The preparation of these unaudited consolidated financial statements, prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), required management to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Operating results for the three month and nine month periods ended September 30, 2009, are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2009.

Aside from its ownership of the Bank, the Company is inactive except for interest expense associated with junior subordinated debentures and certain other corporate expenses. The Company formed a Delaware trust affiliate, FPBN Trust I (the “Trust”) for the purpose of issuing trust preferred securities. For financial reporting purposes, the Company accounts for its investment in the Trust using the equity method under which the subsidiary’s net earnings are recognized in the Company’s statement of income, pursuant to an accounting standard which was subsequently codified into Financial Accounting Standards Board (“FASB”) - Accounting Standards Codification (the “Codification” or “ASC”) Topic 810, “Consolidation.” Pursuant to this accounting standard, the Trust is not consolidated into the Company’s financial statements. The Federal Reserve Board has ruled that subordinated notes payable to unconsolidated special purpose entities (“SPE’s”) such as the Trust, net of the bank holding company’s investment in the SPE, qualify as Tier 1 Capital, subject to certain limits. See the “Borrowings” section of Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations below for further details regarding the trust preferred securities.

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments and accruals necessary to fairly present the financial position of the Company for the interim period ended September 30, 2009. These financial statements do not include all of the disclosures required by GAAP and have been condensed or omitted pursuant to such SEC rules and regulations and, accordingly, should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. There were no significant changes in accounting principles since the last report.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. In the opinion of management, the unaudited financial information for the three month and nine month periods ended September 30, 2009, reflect all adjustments consisting only of normal recurring accruals and provisions, necessary for a fair presentation thereof.

Note 2 — Stock-Based Compensation Plans

During the three month periods ended September 30, 2008 and September 30, 2009, the Company recognized pre-tax stock-based compensation expense of $37,300 and $58,313, respectively, pursuant to an accounting standard which was subsequently codified into ASC Topic 718, “Compensation — Stock Compensation.” For the nine month period ended, September 30, 2008, the Company recognized pre-tax compensation expense of $181,100 compared to $198,247 for the same period of 2009. The stock-based compensation expense is calculated based upon the original grant date fair value as allowed under ASC Topic 718. The valuation variables utilized at the grant dates are discussed in the Company’s Annual Report on Form 10-K for the 2008 fiscal year filed on March 31, 2009 in the respective years of the original grants. There were no grants of performance based

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options or stock during the first nine months of 2009. The following table is a summary of non-performance based stock option activity for the nine months ended September 30, 2009:

Non-Performance Based Options	For the Nine Months Ended September 30, 2009

Outstanding at Beginning of Period	922,148
Granted	15,500
Exercised	—
Forfeited and Expired	(44,500	)

Outstanding at End of Period	893,148

As of September 30, 2009, the Company expects to realize approximately $615,141 of unrecognized compensation expense for non-performance based stock options which will be expensed over the remaining vesting period. Non-performance based options generally vest over five years and have a weighted average remaining vesting period of approximately 1.99 years. Unrecognized compensation expense related to performance based options of $196,384 will be recognized only when the performance and vesting criteria are met. The Company has not recognized any pre-tax compensation expense related to performance based options in 2009 because the performance and vesting criteria are not expected to be met.

Note 3 — Recent Accounting Changes

In June 2009, the FASB issued an accounting standard which established the Accounting Standards Codification (the “Codification” or “ASC”) which became the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics. The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended September 30, 2009. The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Company’s statements of income and condition.

In June 2009, the FASB issued an accounting standard which amends current GAAP related to the accounting for transfers and servicing of financial assets and extinguishments of liabilities, including the removal of the concept of a qualifying special-purpose entity from GAAP. This new accounting standard also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. This accounting standard is effective for financial asset transfers occurring after December 31, 2009. The adoption of this accounting standard will have no impact on the Company’s statements of income and condition.

In May 2009, FASB issued an accounting standard that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued which was effective for interim or annual periods ending after June 15, 2009. The standard states that public companies are required to assess subsequent events through the date of issuance. The statement also requires disclosure of the date through which an entity has evaluated subsequent events. The financial statements of the entity should reflect the effects of all subsequent events that are considered “recognized.” Recognized subsequent events are those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. “Nonrecognized” subsequent events, which the entity is not required to recognize in the financial statements, are those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet and before the financial statements are issued (widely distributed to shareholders and other financial statement users for general use) or are available to be issued (when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained). If a

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nonrecognized subsequent event is of such a nature that, if not disclosed, will cause the financial statements to be misleading, management should disclose the nature of the event and an estimate of is financial effect, or a statement that such an estimate cannot be made. See Note 8 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 855, “Subsequent Events.”

In April 2009, the FASB issued an accounting standard which is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This standard requires, among other things, that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. The adoption of this accounting standard, which was subsequently codified into ASC Topic 805, “Business Combinations,” will not affect the Company’s consolidated financial position or results of operations as of this filing.

In April 2009, the FASB issued an accounting standard which provided guidance on estimating fair value when the volume and level of trading activity for an asset or liability have significantly decreased and guidance on identifying transactions that are not orderly. In such instances, the accounting standard provides that management may determine that further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with GAAP. This issue is effective for reporting periods ending after June 15, 2009. The provisions in this accounting standard were applied prospectively and did not result in significant changes to the Company’s valuation techniques. Furthermore, the adoption of this accounting standard, which was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures,” is not expected to have a material impact on the Company’s statements of income and condition.

In April 2009, the FASB issued an accounting standard related to disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended June 30, 2009. As this accounting standard amended only the disclosure requirements about the fair value of financial instruments in interim periods, the adoption had no impact on the Company’s statements of income and condition. See Note 7 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 825, “Financial Instruments.”

In April 2009, the FASB issued an accounting standard which amended other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not that the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. This accounting standard does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This accounting standard also extends disclosure requirements related to debt and equity securities to interim reporting periods. The provisions of this standard were effective for the company’s interim period ending on June 30, 2009. The adoption of this accounting standard had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition. See Note 4 for the disclosures required under this accounting standard, which was subsequently codified into ASC Topic 320, “Investments - Debt and Equity Securities.”

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Note 4 — Investment Securities

As reported in Note 3, ASC Topic 320, “Investments - Debt and Equity Securities” requires companies to record other-than-temporary impairment charges, through earnings, if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, this standard requires companies to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or requirement to sell an impaired security before a recovery of amortized cost basis. Finally, the standard requires companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption. This standard was effective and was adopted by the Company for interim and annual reporting periods ending after June 15, 2009. Since the Company did not have any other-than-temporary impairment as of March 31, 2009, no cumulative effect adjustments were required at adoption.

At September 30, 2009, certain investment securities included in available-for-sale categories had a fair value that was below their amortized cost. The Company conducts a regular assessment of its investment portfolio to determine whether any securities are other-than-temporarily impaired. This assessment is based on the nature of the securities, the financial condition of the issuer and the extent and duration of the loss. Also, as required by ASC Topic 320, the Company assesses whether it intends to sell a security or whether it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis less any current period credit losses. As of September 30, 2009, based on the nature of these investments and as the Company does not have the intent to sell the securities that are temporarily impaired and it is more likely than not that the Company will not have to sell those securities before recovery of the cost basis, these unrealized losses were not considered other-than-temporary. Also see Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Investment section below.

The tables below set forth the composition of the Company’s portfolio of available for sale securities for the periods ended September 30, 2009 and December 31, 2008:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value		Total Percent
September 30, 2009
Bank-Qualified Municipals	$	4,911,643	$	198,130	$	(7,226	)	$	5,102,547	27.76	%
Government-Sponsored Agency - MBS	4,906,336		192,729		0			5,099,065		27.74	%
Collateralized Mortgage Obilgations	7,932,151		—		(648,724		)	7,283,427		39.62	%
U.S. Agency MBS	888,564		9,250		—			897,814		4.88	%
	$	18,638,694	$	400,109	$	(655,950	)	$	18,382,853	100.00	%

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value		Total Percent
December 31, 2008
Corporate Debt Securities	$	5,736,787	$	60,000	$	(218,867	)	$	5,577,920	22.26	%
Bank-Qualified Municipals	4,826,452		5		(465,867		)	4,360,590		17.41	%
Government-Sponsored Agency - MBS	5,729,350		101,902		(15,406		)	5,815,846		23.21	%
Collateralized Mortgage Obilgations	9,451,374		—		(1,102,430		)	8,348,944		33.33	%
U.S. Agency MBS	996,363		—		(46,789		)	949,574		3.79	%
	$	26,740,326	$	161,907	$	(1,849,359	)	$	25,052,874	100.00	%

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Investment Securities in a temporary unrealized loss position as of September 30, 2009 and December 31, 2008 are shown in the following table, based on the length of time they have been continuously in an unrealized loss position:

	Less than 12 months				12 months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses

September 30, 2009
Bank-Qualified Municipals	$	—	$	—	$	477,344	$	7,226	$	477,344	$	7,226
Collateralized Mortgage Obligations	2,096,173		197,437		5,187,254		451,287		7,283,427		648,724

	$	2,096,173	$	197,437	$	5,664,598	$	458,513	$	7,760,771	$	655,950

December 31, 2008
Corporate Debt Securities	$	4,317,920	$	218,867	$	—	$	—	$	4,317,920	$	218,867
Bank-Qualified Municipals	3,820,584		465,867						3,820,584		465,867
Government-Sponsored Agency - MBS	1,739,291		15,406		—		—		1,739,291		15,406
Collateralized Mortgage Obligations	8,348,944		1,102,430						8,348,944		1,102,430
U.S. Agency - MBS	949,574		46,789		—		—		949,574		46,789

	$	19,176,313	$	1,849,359	$	—	$	—	$	19,176,313	$	1,849,359

Unrealized losses at September 30, 2009, are concentrated in four private-label collateralized mortgage obligations which were purchased during 2008 and have been affected by the dislocation in the securities market. Management monitors these bonds on a monthly basis and evaluates underlying data for indications of any OTTI.

The scheduled maturities of securities available for sale at September 30, 2009 are shown below. 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.

	Amortized		Fair
	Cost		Value

Due within One Year	$	—	$	—
After One Year through Five Years	—		—
After Five Years through Ten Years	497,438		501,162
After Ten Years	4,414,205		4,601,385
Mortgaged-Backed Securities	5,794,900		5,996,879
Collateralized Mortgage Obligations	7,932,151		7,283,427

	$	18,638,694	$	18,382,853

Note 5 — Earnings (Loss) Per Share and Dividends

The earnings (loss) per common share of the Company is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which share in the Company’s earnings (loss). Common stock equivalents for 2009 and 2008 have been excluded from the calculation of diluted earnings (loss) per share since their effect was anti-dilutive.

To date, the Company has not paid any cash dividends. Payment of stock or cash dividends in the future will depend upon the Company’s earnings and financial condition and other factors deemed relevant by the Company’s Board of Directors, as well as the Company’s legal ability to pay dividends.

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Note 6 — Fair Values Measurement

As reported in Note 3, ASC Topic 820, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This statement describes methods used to appropriately measure fair value in accordance with GAAP, expands fair value disclosure requirements and applies whenever other accounting pronouncements require or permit fair value measurements.

Financial assets and financial liabilities measured at fair value for ASC Topic 820 are grouped in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This standard establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value at times other than the purchase or sale of an asset or liability. These tiers include:

·	Level 1:	Quoted prices in active exchange markets for identical assets or liabilities.

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

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

The valuation methodologies used for assets and liabilities recorded at fair value are described below:

Securities The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Other Real Estate Owned The fair value of foreclosed real estate is generally based on estimated market prices from independently prepared appraisals and adjusted for current market conditions, as necessary, on a nonrecurring basis. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, management assumptions are used to adjust fair value, if necessary (Level 3).

Collateral-Dependent Impaired Loans The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants (Level 3).

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The tables below present the balances of assets and liabilities measured at fair value, as restated (in thousands):

	September 30, 2009
	Total		Level 1		Level 2		Level 3
Assets measured at fair value on a recurring basis
Securities available for sale	$	18,383	$	—	$	18,383	$	—
	$	18,383	$	—	$	18,383	$	—

Assets measured at fair value on a non-recurring basis
Foreclosed Assets (OREO) (1)	$	2,572	$	—	$	—	$	2,572
Non-Accrual/Impaired Loans, as restated (2)	15,532		—		—		15,532
	$	18,104	$	—	$	—	$	18,104


(1)		Represents Other Real Estate Owned net of cost to sell of $258,000 (excludes OREO assets with a fair value greater than cost).

(2)		Represents current loan balance less related charge-offs previously recognized and any specific reserves.

As a result of this restatement, the Company reassessed its impaired loans and added one additional construction loan for approximately $3.0 million, which was not previously on non-accrual, to the balance of impaired loans above and also took an impairment charge-off of $6.9 million related to impaired loans.

Note 7 — Fair Value of Financial Instruments

As reported in Note 3, ASC Topic 825, “Financial Instruments” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The Company’s estimated fair value amounts below have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

Financial Assets The carrying amounts of cash, short-term investments, and due from customers on acceptances and bank acceptances outstanding are considered to approximate fair value. Short-term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with banks. The fair values of investment securities, including available for sale, are based on quoted market prices of similar securities, if available, or other model-based valuation techniques, also known as matrix pricing (See Note 6 - Fair Value Measurement above). The fair value of loans is estimated using a combination of techniques, including discounting estimated future cash flows.

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

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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.

	September 30, 2009
	Carrying		Fair
	Value		Value
	Restated		Restated
Financial Assets:
Cash and Due from Banks	$	6,934	$	6,934
Federal Funds Sold	2,085		2,085
Investment Securities	18,383		18,383
Loans	335,333		335,493
Federal Reserve, FHLB and Bankers’ Bank Stock, at Cost	4,014		4,014
Accrued Interest Receivable	1,395		1,395

Financial Liabilities:
Deposits	$	317,792	$	319,605
Borrowings and Notes Payable	50,155		50,258
Accrued Interest and Other Liabilities	5,045		5,045

Note 8 — Subsequent Events

The Company has evaluated subsequent events through February 24, 2010, which is the date the financial statements were available to be issued.

On October 28, 2009, the Company, its wholly-owned subsidiary, the Bank, FB Bancorp and First Business Bank, National Association (“First Business Bank”), entered into a Termination Agreement (“Termination Agreement”), pursuant to which the parties terminated the Agreement and Plan of Merger dated July 16, 2009, between such parties (the “Merger Agreement”). The Merger Agreement was terminated by the mutual consent of the parties in part because the current economic and regulatory environment presented unanticipated complications that could not be overcome given the structure of the transaction. No early termination penalties were incurred by any of the parties to the Merger Agreement in connection with its termination. Along with the termination of the Merger Agreement, the Termination Agreement also provides for the mutual release of claims by the parties against each other arising out of the Merger Agreement. Details regarding the Termination Agreement were included in the Company’s Current Report on Form 8-K which was filed with SEC on October 29, 2009. All of the Company’s required SEC Filings are posted on its web site at www.1stpacbank.com.

On November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 (H.R. 3548) (the “Act”) was signed into law. The Act expands and extends the net operating loss (“NOL”) carryback provision for small businesses that was in the American Recovery and Reinvestment Act (“Recovery Act”), enacted in February 2009. The Act allows all businesses (except those that received funds under the Troubled Asset Relief Program (“TARP”) with a loss in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. Under the previous law, NOLs were only allowed to be carried back two years. See Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Income Taxes below for details regarding the impact of this Act on the tax position of the Company.

On December 10, 2009, the Company formally acknowledged several actions required to strengthen the Bank by entering into agreements with the California Department of Financial Institutions (the “DFI”) and the Federal Reserve Bank of San Francisco (the “FRB”). Many of the actions referenced in these agreements are currently being acted upon and the Company intends to continue to meet reporting requirements as requested. The DFI issued a Final Order (“Final Order”) and, the same date, the Company and the Bank voluntarily entered into a Written Agreement (“Written Agreement”) with the FRB.

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Subsequently and pursuant to the Final Order issued by the DFI, the Bank has agreed to increase its adjusted tangible shareholder’s equity by the greater of $15,000,000 or the amount necessary to make its adjustable tangible shareholder’s equity equal to at least 10.0 percent of tangible assets, by March 31, 2010. The Bank’s two-pronged approach to meeting this capital requirement is to decrease its tangible assets while seeking to raise new capital. The amount of new capital necessary to meet the capital requirement is approximately $20 million based on the Call Report filed for the period ending December 31, 2009.

The Company believes that making the improvements in our operations required by the Final Order and Written Agreement will enhance our financial performance. The Company also believes that the January 1, 2010 appointment of John McGrath as President, Chief Executive Officer and a member of the Board of Directors will help us both comply with these agreements and strengthen our financial performance (further details regarding this appointment were included in the Company’s Current Report on Form 8-K filed on December 15, 2009). However, there can be no assurance that the desired results will follow as a consequence of our actions, or that the Company will be able to make the changes required by the Final Order or Written Agreement. Among other things, compliance with the Final Order and Written Agreement may be more time consuming or expensive than anticipated, the objectives set forth in those agreements may take longer to achieve than the Company would hope or expect and the Company may not be able to increase our capital within the time required by the Final Order. The Company’s efforts to comply with the agreements may have adverse effects on our operations and financial condition for reasons that cannot currently be anticipated. Also, the conditions of the economy nationally and in California, the capital markets and the real estate markets may impair the likelihood of success of the remedial actions the Company is attempting to take.

The description of the Written Agreement above is a summary and is qualified in its entirety by the full text of such document which is filed as Exhibit 10.1 to Current Report on Form 8-K filed December 15, 2009. A further description of the Final Order is filed as Exhibit 99.2 to the same Current Report on Form 8-K filed December 15, 2009.

On February 8, 2010, the Company filed a Form 25 with the SEC to delist its Common Stock, no par value, from the Nasdaq Stock Market (“Nasdaq”). The delisting became effective on February 18, 2010. The Company decided to voluntarily delist from Nasdaq as part of an overall strategy of conserving resources and improving cost effectiveness. The Company is currently quoted and traded through a platform on Pink OTC Markets Inc., a non-exclusive securities information processor for registered broker-dealers. The Company will continue to file periodic reports with the Securities and Exchange Commission pursuant to the requirements of Section 12(g) of the Securities and Exchange Act of 1934, as amended.

At the Company’s 2009 Annual Meeting of Shareholders held on December 16, 2009 (“Annual Meeting”), Amended and Restated Bylaws were approved by the affirmative vote of a majority of the shares of our Common Stock outstanding on the record date for the Annual Meeting and immediately became effective. The only provision of the Company’s old Bylaws changed by the Amended and Restated Bylaws is to decrease the number of authorized directors from no less than seven (7) or more than thirteen (13), to no less than six (6) or more than eleven (11).

At the Annual Meeting, the Company’s shareholders also approved Amended and Restated Articles of Incorporation to increase the number of the Company’s authorized shares of Common Stock from 10,000,000 to 30,000,000, and re-elected our six existing directors. The Company’s directors will continue to serve until the next annual meeting of shareholders and until their successors are qualified and elected. The Amended and Restated Articles of Incorporation became effective upon their certification filing with the California Secretary of State on December 28, 2009.

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ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Basis of Presentation

The Company is a California corporation incorporated on August 4, 2006 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Bank is a wholly-owned bank subsidiary of the Company and was incorporated in California on April 17, 2000. The Bank is a California corporation licensed to operate as a commercial bank under the California Banking Law by the California Department of Financial Institutions (the “DFI”). In accordance with the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation (the “FDIC”) insures the deposits of the Bank. The Bank is a member of the Federal Reserve System.

The reorganization to form a holding company was completed on January 16, 2007, whereby all outstanding shares of the Bank were converted into an equal number of shares of the Company. Prior to the reorganization, the Company had minimal activity, which was primarily related to preparing for the reorganization. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

The following management’s discussion and analysis should be read in conjunction with our Annual Report for the 2008 fiscal year as filed on Form 10-K and with the unaudited financial statements and notes set forth in this report. Our 2008 Annual Report on Form 10-K also includes a discussion of critical accounting policies considered material to this presentation of the Company’s financial statements. At present time, the holding company does not engage in any material business activities other than ownership of the Bank; therefore, financial information is primarily reflective of the Bank.

Certain statements contained in this quarterly report on Form 10-Q are forward-looking in nature and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results. For a discussion of some of the factors that might cause such a difference, see the Forward-Looking Statements section above or Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008, and Item 1A-Risk Factors in our subsequent Quarterly Reports on form 10-Q.

Nature of Operations

The Company is organized as a single operating unit and, through the Bank, operates seven full-service offices in southern California, three in San Diego, one in Oceanside, one in El Cajon, one in Solana Beach and one in La Jolla. A limited service branch office which was opened in downtown San Diego in February 2008 was consolidated into the Mission Valley branch office during the first quarter of 2010. Also, the Tri Cities branch (in Oceanside) is scheduled to close and be consolidated into the Solana Beach branch on April 15, 2010.

The Company’s primary source of revenue is dividends from the Bank. The Bank’s primary source of revenue is interest earned on loans it provides to customers. The Bank funds its lending activities primarily through providing deposit products and services to customers, but also through borrowings, including advances from the Federal Home Loan Bank (“FHLB”). The Bank’s customers are predominately small and medium-sized businesses and professionals in San Diego County.

Financial Overview

For all banks and bank holding companies, asset quality and asset growth have a significant impact on overall financial condition and results of operations. Asset quality is measured in terms of percentage of total loans and total assets, and is a key element in estimating future performance. The Company reassessed its evaluation of potential impairment losses as required by ASC Topic 310 - “Receivables” and in accordance with ASC Topic 855- “Subsequent Events.” As a result of this reassessment, nonperforming loans as a percent of total loans was 4.21%, an increase of 73 basis points since December 31, 2008, compared to 5.28% of total loans and an increase of 179 basis points as previously reported. The Company’s quality of assets has been affected by the difficult economic conditions in California, especially weaknesses in the real estate market. In addition, both the fiscal and regulatory policies of the federal and state government regulatory authorities that govern financial institutions and market interest rates impact our financial condition and results of operations.

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The Company has implemented strategies and initiatives to improve its asset quality and operating results and increase the Bank’s capital ratios back to the “well capitalized” level. While the Company, under normal circumstances, considers asset growth important, the current strategy is to reduce the total assets of the Bank to improve capital ratios. As part of this strategy, the Bank is committed to reducing its concentration of commercial real estate loans and has continued to carefully track nonaccrual and potential problem loans (see the “Loan Quality and Allowance for Loan Losses” section below).

Along with the strategy noted above and in an effort to reduce controllable expenses, the Company implemented a reduction in force of eleven employees in October 2009 and an additional six employees in December 2009. This difficult decision was made in an effort to reduce expenses so that the Company would have an opportunity to return to a profitable financial condition. In addition, the limited service downtown San Diego branch office was consolidated into the Mission Valley branch office and the branch office in Oceanside, California will be closed in April 2010.

As described in the Explanatory Note for this Amended Form 10-Q, after working closely with the Bank’s regulators, it was determined that the results from a new model and methodology for determining, documenting and recording an adequate allowance for loan losses should be reflected in the quarterly results for September 30, 2009. Therefore, a restatement of these third quarter results was necessary to increase expense for the provision for loan losses, to increase impairment charge-offs on two loans, and to reflect the reassessment of the valuation allowance on deferred tax assets.

As restated, total assets at September 30, 2009, were $379.4 million (previously reported total assets were $393.5 million). Total assets in prior periods were: $419.9 million at June 30, 2009, $420.9 million at December 31, 2008 and $445.6 million at September 30, 2008. Between second quarter and third quarter of 2009, assets declined by $40.5 million (as restated) and deposits decreased by $20.5 million, which includes a $19.3 million reduction in Certificate of Deposit Account Registry Service (“CDARs”) deposits. The company also retired FHLB borrowings of $5.0 million during the third quarter.

As restated, total loans decreased $8.4 million to $343.5 million by September 30, 2009. Total loans at December 31, 2008 were $351.9 million. At December 31, 2008 deposits totaled approximately $333.8 compared to $317.8 million at September 30, 2009, a decrease of approximately $16.0 million.

As restated, at September 30, 2009, the Bank’s total risk-based capital ratio was 5.7% and the Bank was considered “significantly undercapitalized” (the previously reported total risk-based capital ratio was 8.4%). Total Risk-Based capital ratio was 8.7% at December 31, 2008. Also see the “Capital Resources” section below.

For the restated quarter ended September 30, 2009, the Company recorded a loss before taxes of $10.6 million (compared to the previously reported $1.8 million loss before taxes). For the quarter ended September 30, 2008, the Company reported a loss before taxes of $5,169. For the nine months ended September 30, 2009, as restated, the Company recorded a loss before taxes of $12.2 million (compared to the previously reported loss of $3.5 million). For the nine months ended September 30, 2008, a loss before taxes of $2.1 million was reported.

After tax, the Company realized restated net losses for both the three month and nine month periods ended September 30, 2009 totaling $15.9 million and $17.2 million, respectively (compared to net losses of $1.9 million and $3.1 million as reported previously). For the same periods of 2008, the Company reported net income of $9,531 and a net loss of $1.2 million. As a result of the restatement for the quarter ended September 30, 2009 and the increase in reported losses, the Company determined that the valuation allowance on deferred on tax assets should be increased, which resulted in an increase in deferred tax expense of approximately $5.3 million for the third quarter.

Compared to the three month period ended September 2008, the Company’s restated 2009 results include an increase in provision for loan losses from $250,000 to $10.2 million, respectively. The provision for loan losses for the restated nine months ended September 30, 2009 was $11.0 million compared to $3.8 million for the first nine months of 2008.

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Net interest margin was 3.74% for the nine months ended September 30, 2009, compared with 4.26% for the same period of the previous year. The Company has an asset sensitive balance sheet and continues to be effected by significant rate cuts of the Federal Reserve during 2008. Net interest income for the nine months ended September 30, 2009 was $11.4 million compared to $13.2 million for the same period of the previous year.

Several other items had a significant impact on the operating results for the nine months ended September 2009 compared to those of the same period of the prior year. Increases in income included approximately $229,000 for the realization of a gain upon sale of a Washington Mutual, Inc. corporate bond and $285,000 for recoveries of prior expenses. These income items were offset by several large increases in expenses including approximately $1.1 million for losses on other real estate owned (“OREO”) properties, $721,000 for FDIC special assessments and insurance increases, $301,000 for professional fees related to loan collection and review, $289,000 in merger related costs, $165,000 for recognition of a loss on the sublease of a portion of the Solana Beach branch office and $147,000 in costs related to carrying OREO. Also see the Noninterest Income and Noninterest Expense sections below.

Liquidity Management and Cash Flows

The Company’s balance sheet liquidity, which is a measure of its 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 being gathered and the assets being funded. Liquidity primarily relies on funds from short-term liabilities such as demand deposits, certificates of deposit, and short-term borrowings and is augmented by payments of principal and interest on loans. Access to short-term investments, primarily Federal funds sold, is the primary means for providing immediate liquidity.

To augment immediate balance sheet liquidity, the Company maintains various credit and borrowing facilities. In general, credit and borrowing facilities may be reduced or withdrawn at any time and may include provisions for pledging of collateral. Following is a summary of the total borrowing capacity available under these facilities and amounts outstanding at September 30, 2009:

Source of Borrowing Facility	Capacity		Outstanding at September 30, 2009
Secured line based on pledged loan collateral at:
Federal Home Loan Bank	$	45,172,007	$	40,000,000
Federal Reserve Bank	$	35,046,050	$	—

In the second quarter, the FRB and FHLB requested physical delivery of loan collateral to secure the Company’s borrowing lines. Additionally, the FRB limited the Company’s borrowing to terms under the Secondary Credit Program. The rate on Secondary Credit is 50 basis points higher and maturities are generally limited to overnight. The Bank has fulfilled and expects to continue to fulfill all collateral requirements of the FRB and FHLB.

The strategy of the Company’s management regarding its liquidity position is to manage and monitor liquidity proactively to ensure the safety and soundness of the Company’s capital base, while maintaining adequate net interest margins and spreads to provide an appropriate return to shareholders. The Company has procedures in place to manage its liquidity on a daily basis and maintains “contingency” sources of liquidity, whereby a certain level of liquidity sources are reserved to be used for unforeseen contingency purposes.

As a result of the Bank being considered less than well capitalized, the Bank is not able to accept, renew or rollover brokered deposits unless and until such time as it receives a waiver from the FDIC. As the brokered deposits mature, the Bank anticipates funding these maturities primarily from loan payoffs as it shrinks its loan portfolio. If the Bank is unable to reduce its loan portfolio to fund maturing brokered deposits, it will need to seek other alternatives, which may be more costly for funding purposes, as these brokered deposits mature. These other sources may include local deposit campaigns or institutional time deposits. As of September 30, 2009, the Bank had total brokered deposits of $52.0 million, including $7.4 million in CDARs, a program offered to its customers seeking additional deposit insurance. Total brokered deposits at March 31, 2009 were $110.8 million, including $37.0 million in CDARs deposits.

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In order to manage liquidity, the Company’s management monitors a number of liquidity ratios, including the level of liquid assets to funding sources (both on and off the balance sheet), the level of dependence on non-core funding sources, the level of loans to funding sources, the level of short-term investments to total assets, contingent sources to total deposits, available liquidity to total funding and the level of unfunded loan commitments. Because of the Bank’s strategy to improve capital ratios by reducing total assets, the Bank has been managing its balance sheet liquidity very closely and replacing maturing brokered deposits only as needed. Preferably, the Bank will continue to see reductions in loan assets to offset maturing brokered deposits. As of September 30, 2009, management of the Company considers its liquidity sufficient to meet the Company’s liquidity needs.

Despite recording a net loss for the nine months ended September 30, 2009, the Company had positive cash flow from operating activities because the net loss generally resulted from non cash charges, including provision for loan losses, loss on sublease, depreciation and other non-cash expenses. The Company’s net cash provided by investing activities of $8.1 million consisted mainly of an increase of approximately $1.4 million in loans offset by maturities and sales of investment securities totaling $8.3 million, a $597,000 change in equity securities and $837,000 in proceeds from sale of OREO. Net cash used by financing activities of $26.0 million was due to a $10.0 million decrease in FHLB borrowings and a decrease in deposits of $16.0 million.

Borrowings

The Company’s total amount of FHLB borrowings decreased $5.0 million to $40.0 million during the third quarter of 2009 compared to $45.0 million at June 30, 2009 and $50.0 million at December 31, 2008. A holding of subordinated debt of $10.2 million has not changed since December 31, 2007. The following is a schedule of FHLB advances at September 30, 2009, in order of final maturity date:

Date of Advance	Final Maturity Date	Rate		Principal Balance
December 17, 2008	December 17, 2009	1.060	%	$	5,000,000
May 12, 2008	May 12, 2010	2.965	%	10,000,000
July 8, 2008	July 8, 2010	3.360	%	10,000,000
December 17, 2008	December 17, 2010	1.760	%	5,000,000
December 17, 2008	December 17, 2011	2.006	%	5,000,000
September 13, 2007	September 13, 2012	4.310	%	5,000,000
		Total		$	40,000,000

The Company maintains $5.0 million in Floating Rate Junior Subordinated Debentures issued in March, 2005, with a final maturity of June 15, 2020, a right on behalf of the Bank for early redemptions beginning in March, 2010, and an interest rate which floats quarterly based on 3 Month LIBOR plus a spread of 178 basis points. The coupon interest rate on the subordinated debt as of September 30, 2009 was 2.08% (3 month LIBOR plus 1.78%).

In June 2007, the Company issued $5.0 million in floating rate preferred securities (the “Trust Preferred Securities”) through a Delaware trust affiliate, FPBN Trust I (the “Trust”). The Trust used the proceeds from the sale of the Trust Preferred Securities together with the proceeds from the sale of common securities to purchase $5,155,000 in aggregate principal amount of the Company’s unsecured floating rate junior subordinated debt securities due September 1, 2037 issued by the Company (the “Junior Subordinated Debt Securities”). As of September 30, 2009, the coupon interest rate was 1.76% (3 month LIBOR plus 1.40%) and floats quarterly.

Due to the current financial condition of the Bank, the Federal Reserve Bank of San Francisco has requested certain limits on our paying of dividends, making payments on trust preferred securities or any other capital distributions. In this regard, the Company has resolved not to declare or pay any dividends without prior approval of the FRB and the Bank has agreed not to declare or pay any dividends without prior approval of the FRB and the DFI. The Company has deferred payment on the trust preferred securities in accordance with and allowable under the indenture agreement and does not anticipate resuming those payments in the near term. The Company’s inability to receive dividends from the Bank could adversely affect our business, financial condition and results of operations. See also the Liquidity Management, Interest Rate Risk, Financing and Capital Resources section of the Company’s on Form 10-K for the year ended December 31, 2008.

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Capital Resources

As restated, shareholders’ equity at September 30, 2009, totaled $6.4 million compared to $22.6 million at December 31, 2008. Tangible book value per share totaled $1.07 at September 30, 2009, compared to $4.26 as of December 31, 2008 and $6.38 at September 30, 2008.

Regulatory capital adequacy requirements state that the Bank must maintain minimum ratios to be categorized as “well capitalized” or “adequately capitalized.” The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $500 million, the minimum asset size criteria for bank holding companies subject to those requirements. The Bank’s actual consolidated capital ratios and the required ratios for a “well capitalized” and “adequately capitalized” bank are as follows:

	Required Ratios				Actual Ratios
	Well		Adequately		Restated
	Capitalized		Capitalized		September 30, 2009		December 31, 2008

Tier 1 Leverage Capital (to Average Assets)	5.00	%	4.00	%	2.53	%	5.39	%
Tier 1 Capital (to Risk Weighted Assets)	6.00	%	4.00	%	2.98	%	6.17	%
Total Capital (to Risk Weighted Assets)	10.00	%	8.00	%	5.67	%	8.73	%

As a result of restating the Bank’s September 30, 2009 results, the Bank was considered “significantly undercapitalized.” The Bank has implemented a number of initiatives to improve its operating results and increase its capital ratios including strategies to reduce total assets and initiatives to improve core operating earnings. Furthermore, in the Bank’s Call Report filed on January 27, 2010, the Bank reported capital ratios as follows: Tier 1 Leverage of 3.2 %, Risk-based capital of 3.8% and Total Risk-based capital of 6.6% and the Bank was considered “undercapitalized.”

The primary source of our funds from which the Company services its debt and pays its obligations and dividends is through the receipt of dividends from the Bank. Based on the financial condition of the Bank, various statutes and regulations have limited the availability of dividends to the Company from the Bank. In this regard, the Bank has agreed with the DFI and the FRB to seek their approval before paying dividends to the Company. As a result, if the Bank continues to be unable to pay dividends to the Company, the Company may not be able to service its debt, pay its obligations or pay dividends on its outstanding equity securities. The Bank’s continued inability to pay dividends to the Company has and will continue to adversely affect business operations, financial condition, results of operations and prospects.

Investments

The main objective of the Company’s investment portfolio is to provide secondary liquidity sources to meet fluctuations in loan demand and deposit structure. The investment portfolio is also used to meet pledging requirements of public or other depositors, minimize tax liability, accomplish strategic goals and assist various local public entities with their financing needs. The Company actively manages its investment portfolio and coordinates borrowings with the goal of achieving a positive, stable net interest spread.

The Company’s investment portfolio consisted of $18.4 million in available for sale securities as of September 30, 2009, a decrease of $8.0 million since September 30, 2008 and a decrease of $6.7 million since December 31, 2008. During the first nine months of 2009, $2.7 million of the Company’s corporate bonds were sold and $3.0 million matured. See also Note 4 — Investment Securities above.

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Loan Portfolio

As discussed in the Explanatory Note to this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the periods ending September 30, 2009. These adjustments to restate September results affected the loan portfolio because of the increase to impairment write-downs, or charge-offs, of $6.9 million, which was necessary because of current information received about the valuation of underlying collateral for two impaired loans. Further discussion of the loan portfolio considers these adjustments to September results, as restated.

As restated, total loans decreased by $8.4 million from $351.9 million at December 31, 2008 to $343.5 million at September 30, 2009. Residential and commercial real estate loans, consumer loans and SBA loans increased by approximately $2.8 million, $1.0 million and $1.9 million, respectively. Construction and land loans and commercial loans decreased by $12.9 million and $1.2 million, respectively. As restated, total loans decreased 6.1% when compared to $365.7 million at the end of the same quarter of 2008. At September 30, 2009 the portfolio consisted of approximately: 44% residential and commercial real estate, 28% construction and land, 20% commercial loans, 5% consumer loans and 3% SBA type loans. The Bank does not engage in traditional long-term mortgage lending, and consequently, has no sub-prime mortgages in its loan portfolio.

Loan Quality and the Allowance for Loan Losses

As discussed in the Explanatory Note to this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the periods ending September 30, 2009. The adjustments to restate September results affected the disclosures about loan quality categories and the allowance for loan losses because:

· the Bank increased the level of its allowance for loan losses by $3.4 million as a result of adopting a new methodology to determine, document and record the allowance for loan losses, see further discussion below under “Allowance for Loan Losses”,

· as a result of the determination to restate the September results to adopt the new ALLL methodology, the Bank reassessed its evaluation of potential impairment losses as required by Financial Accounting Standards Board (“FASB”)-Accounting Standards Codification (“ASC”) Topic 310, “Receivables,” on two impaired loans in accordance with ASC Topic 855, “Subsequent Events,” and determined that an additional impairment allocation of approximately $5.3 million was necessary due to current information obtained regarding the valuation of the underlying loan collateral, and

· related to the two impaired loans noted above, the Bank increased impairment write-downs, or charge-offs, by $6.9 million.

Further discussion of the Company’s loan quality and allowance for loan losses, below, considers these adjustments to September results, as restated.

Trends in Certain Loan Quality Categories

The following information is provided to show relevant trends related to various components of our loan portfolio since December 31, 2008.

Nonperforming Loans — Nonperforming loans decreased from $12.3 million at December 31, 2008, to $9.4 million at June 30, 2009 and then increased to $14.5 million at September 30, 2009 (as restated). The year to date net increase of $2.2 million, as restated, is primarily the result of the following:

· During the first quarter, three loans were paid off, including two construction loans and one land loan, totaling approximately $4.6 million.

· During the first quarter, we foreclosed on four properties reducing nonaccrual loans by approximately $3.4 million. These properties included three land loans and one commercial real estate loan.

· During the second quarter, a total of $738,400 in reductions in nonaccrual loans occurred including a $314,000 land loan payoff, a $350,000 construction loan pay down and two commercial loan charge offs totaling $74,400.

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· During the second quarter, a total of $3.8 million in increases in nonaccrual loans occurred. Five loans were added to nonaccrual status including two land loans totaling $3.4 million, two commercial loans totaling $193,300 and one commercial real estate term loan for $210,000.

· During the third quarter, $1.3 million in reductions in nonaccrual loans occurred including $555,000 in payoffs for one real estate loan and two commercial loans, a $257,000 commercial loan was charged off and there were $463,000 in partial charge offs.

· During the third quarter, $6.3 million in additions occurred in nonaccrual loans, as restated. Six loans were added to nonaccrual status including a construction loan for $3.7 million, two land loans for $1.9 million, one real estate loan for $1.7 million and two commercial loans for $283,000.

· Between June 30, 2009 and September 30, 2009 loans 90 days past due but still accruing, which are considered nonperforming loans, decreased $961,000. At June 30, 2009, there were two commercial loans greater than 90 days past due but still accruing for the same borrower totaling $2.7 million. Both of these loans were subsequently paid current. As of September 30, 2009, one land loan totaling $1.8 million was 90 days past due but still accruing.

Special Mention Loans - Loans internally graded and categorized as special mention increased from $32.9 million at December 31, 2008, to $39.0 at June 30, 2009 and then decreased to $31.2 million as of September 30, 2009 (as restated). The year to date net decrease of $1.7 million is primarily the result of the following:

· During the first quarter, one construction loan totaling $5.2 million was upgraded from substandard due to resolution of lien issues and virtual completion of the project.

· During the first quarter, six special mention loans totaling $10.6 million were downgraded to substandard, including three land and construction loans, one real estate secured term loans and two commercial loans — one guaranteed by the SBA.

· During February and March, nine additional loans totaling $20.5 million were internally downgraded to special mention. These loans included five construction loans and four commercial loans — one guaranteed by the SBA.

· During the second quarter, a total of $15.0 million in reductions of special mention loans occurred including $3.7 million in payoffs or pay downs (three commercial loans and one construction loans), $9.3 million in downgrades to substandard (two construction loans and one commercial loan) and $2.0 million in internal upgrades for one commercial loan and one construction loan.

· During the second quarter, $4.4 million in increases to special mention loans occurred from internal upgrades for four commercial loans and two construction loans.

· During the third quarter, a total of $25.5 million in reductions of special mention loans occurred including $10.5 million in downgrades to substandard (two construction loans, two land loans, one commercial loan and one real estate loan), $14.7 million in internal upgrades (two construction loans, two real estate loans and one commercial loan) and $275,000 in payoffs (one real estate loan).

· During the third quarter, $18.0 million in additions to special mention loans occurred including $16.8 million in internal downgrades (two real estate loans and two construction loans), $1.2 million in internal upgrades (one commercial loan).

Substandard Loans - Total loans in this category increased from $22.7 million at the end of the fourth quarter of 2008 to $25.5 million at June 30, 2009 and then to $29.1 million at September 30, 2009 (as restated). The year to date net increase of $6.3 million in this category was concentrated as follows:

· Approximately $7.8 million and $457,400 of the payoffs, charge offs and foreclosures in nonperforming loans outlined above reduced substandard loans for the first and second quarters, respectively.

· During the first quarter, one construction loan totaling $5.2 million was upgraded to special mention due to resolution of lien issues and virtual completion of the project.

· During the first quarter, six special mention loans totaling $10.6 million were downgraded to substandard, including three land and construction loans, one real estate secured term loan and two commercial loans — one guaranteed by the SBA.

· During the second quarter, a total of $3.5 million in reductions of substandard loans occurred, including $412,000 for three commercial loans that were charged off, $2.7 million in loans upgraded (two commercial and one real estate) and $315,000 for a land loan pay off.

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· During the second quarter, a total of $9.7 million in increases in substandard loans occurred including $9.3 million for loans that were downgraded from special mention status (two construction loans and one commercial loan) and $434,000 for four commercial loans that were downgraded.

· During the third quarter, a total of $13.4 million in reductions of substandard loans occurred, including $7.4 million partial charge offs, $5.2 million in internal upgrades (one construction loan and one commercial loan), $555,000 in payoffs (two commercial and one real estate loan) and $270,000 in charge offs (two commercial loans).

· During the third quarter, a total of $17.5 million in additions to the substandard loan category occurred, including $17.4 million in internal downgrades (two construction loans, two land loans, one commercial loan and one real estate loan).

Nonperforming assets

The Company’s nonperforming assets consist of loans which have (i) been placed on nonaccrual status, (ii) been subject to troubled debt restructurings, or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status. Generally, loans are placed in nonaccrual status when they are past due 90 days or more and management has determined that they may not be fully collectible as to principal and interest. Nonperforming loans may be internally graded and categorized as either special mention or substandard.

As restated, nonperforming assets were approximately $17.0 million, or 4.49% of total assets, at September 30, 2009, compared with $14.9 million, or 3.54% of total assets, at December 31, 2008 and $13.8 million, or 3.10% of total assets at September 30, 2008. The Company’s nonperforming assets as of September 30, 2009 consisted of $14.5 million in nonperforming loans and $2.6 million in other real estate owned. Nonaccrual loans, as well as other potential problem loans, are subject to continuing management attention and are considered in the determination of the allowance for loan losses.

Nonperforming assets at the end of September 2009 include loan balances of approximately $612,246 with an SBA guaranty amount of $459,184. Other nonperforming loans at the end of September 2009 included six construction and land loans, two real estate loans and two single family residence loans totaling approximately $8.7 million, $2.4 million and $988,000, respectively.

The Company also had one land loan totaling approximately $1.8 million that was considered nonperforming because it was past due more than 90 days at September 30, 2009. All nonperforming loans are independently evaluated in connection with assessing the adequacy of the allowance for loan losses. Below is a summary of nonperforming assets at September 30, 2009 and December 31, 2008.

(In thousands)	September 30, 2009			December 31, 2008
	Restated
Loans 90 Days Past Due and Still Accruing	$	1,761		$	—
Loans on Nonaccrual	12,692			12,264
Total Nonperforming Loans	14,453			12,264
Non-Accrual Debt Securities	—			1,260
Other Real Estate Owned	2,572			1,390
Total Nonperforming Assets	$	17,025		$	14,914

Loans 90 Days Past Due as a Percentage of Total Loans	0.51		%	0.00		%
Nonaccrual Loans as Percentage of Total Loans	3.70		%	3.49		%
Nonperforming Loans as a Percent of Total Loans	4.21		%	3.49		%

Allowance for Loan Losses as a Percent of Nonperforming Loans	56.27		%	33.92		%
Nonperforming Assets as a Percent of Total Assets	4.49		%	3.54		%

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Other Potential Problem Loans

As described in the Explanatory Note to the Form 10-Q/A, the Company reassessed its impaired loans. As a result, one additional construction loan for approximately $3.0 million is now considered impaired and a potential problem loan. Previously, the Company identified two potential problem loans totaling approximately $8.4 million, which were being evaluated for collateral values and operating cash flows. The loans identified as potential problem loans are in addition to loans disclosed above as nonperforming. Estimated potential problem loans as of June 30, 2009 and December 31, 2008 totaled approximately $1.9 million and $1.0 million, respectively.

Loans are considered potential problem loans when the borrower’s ability to comply with the present loan payment terms in the future is questionable. The inability of the borrower to comply with repayment terms was not sufficiently probable to place these loans on nonaccrual status at September 30, 2009. Although these loans are currently continuing to accrue interest, no assurance can be given that they will continue to do so. Estimated possible losses from these potential problem loans have been provided for in determining the allowance for loan losses at September 30, 2009. See additional loan portfolio information in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Allowance for Loan Losses

The Company maintains an allowance for loan losses (the “ALLL”) that is increased by a provision for loan losses charged against operating results. The provision for loan losses is determined by management as the amount to be added to the allowance for probable loan losses after net charge-offs have been deducted to bring the allowance to an adequate level to absorb probable loan losses within the existing portfolio.

During the third quarter of 2009, the provision for loan losses was $10.2 million compared to $250,000 in provision for the same period of the prior year. The significant increase in the provision expense is primarily attributable to adopting a new ALLL methodology, which is further discussed below, and allocating an additional $6.9 million for impairment write-downs on two loans. Net loan charge-offs for the third quarter of 2009 were $7.6 million, including $6.9 million on two loans, compared with net charge-offs of $161,734 for the previous quarter. The total allowance for loan losses was $8.1 million, or 2.37% of total loans, at September 30, 2009, compared to $5.1 million, or 1.44% of total loans at December 31, 2008, and $4.1 million, or 1.11% of total loans at September 30, 2008.

As noted above and in the Explanatory Note to this Form 10-Q/A, the Company adopted a new methodology to enhance its process for determining, documenting and recording an adequate allowance for loan losses and this new methodology has been incorporated into these restated September results. Although the Bank had for many years maintained an ALLL methodology which met all accounting and regulatory requirements, as the condition of the economy deteriorated and the Bank began experiencing increased levels of problem assets and related loan charge-offs, management began evaluating how to improve its methodology to be more responsive to qualitative trends in the portfolio and better incorporate the Bank’s historical loss experience to ensure the ALLL remained directionally consistent and appropriately funded. After significant research and assessment, management concluded to adopt a model provided by a third party service which was considered to be an improvement over the prior methodology and, after working closely with our banking regulators, the Company concluded to adopt this new methodology effective with the 3rd quarter of 2009 to better reflect the underlying trends in the loan portfolio.

The new methodology adopted by the Company is consistent with GAAP and the Interagency Policy Statements on the Allowance for Loan and Lease Losses, dated July 2, 2001 (SR 01-17) and December 13, 2006 (SR 06-17). The methodology calculates expected loss rates utilizing two factors: the probability of default (the actual payment default rate) and the loss given default (the rate of loss expected on defaulted loans). For the loss given default factor, the model incorporates industry loss experience since 1992 by type of loan and location. For the probability of default factor, industry experience since the year 2000 is utilized and modified based on management’s qualitative assessment of such factors as: policies and procedures, underwriting standards, collections, levels and trends of charge-offs, past dues, and classified loans, economic conditions, and changes in collateral values. Management believes that the allowance at September 30, 2009, is adequate to provide for risks inherent in the loan portfolio.

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Determining the appropriate level for the ALLL is inevitably imprecise and requires a high degree of management judgment. No assurance can be given that economic conditions, which could adversely affect the Company’s service areas or other circumstances, will not result in increased provisions for loan losses in the future. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing ALLL is adequate or that a substantial increase will not be necessary if the quality of any loans in the portfolio deteriorate. Any material increase in the ALLL may adversely affect the Company’s financial condition and results of operations. The table below summarizes the changes in ALLL for the periods presented:

	Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
	Restated						Restated
Allowance, Beginning of Period	$	5,513,826		$	7,818,471		$	5,058,837		$	4,516,625
Provision for Loan Losses	10,224,262			250,000			11,040,263			3,800,000
Recoveries on Loans Charged Off	155,670			—			675,747			—
Loans Charged Off	(7,761,102		)	(3,995,842		)	(8,642,191		)	(4,243,996		)
Allowance, End of Period	$	8,132,656		$	4,072,629		$	8,132,656		$	4,072,629

Deposits

As of September 30, 2009, total deposits have decreased approximately $16.0 million to $317.8 million from $333.8 million at December 31, 2008. This net decrease in deposits is mostly attributable to a $28.8 million decrease in CDARs deposits and a $12.1 million decrease in money market deposits offset by increases in demand deposit accounts and NOW accounts of $23.3 million and approximately $778,500, respectively. The decrease in money market deposits includes a $6.0 million brokered account that was closed when the Bank became adequately capitalized.

Total time deposits include funds that are considered brokered deposits, which totaled $52.5 million at September 30, 2009 and included approximately $7.4 million in funds associated with customers using the CDARs reciprocal program. See also the Liquidity Management and Cash Flows section above for additional information regarding the Company’s CDARs restrictions. Brokered deposits totaled $84.9 million at December 31, 2008.

Income Statement Review

Net Interest Income/Net Interest Margin

The principal component of the Company’s revenues is net interest income. Net interest income is the difference between the interest earned on loans and investments and the interest paid on deposits and other interest-bearing liabilities. The following table sets forth the components of net interest income, average earning assets and net interest margin:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
	Restated						Restated
Interest Income	$	5,593,533		$	6,919,284		$	17,285,173		$	21,112,803
Interest Expense	1,724,261			2,640,559			5,881,114			7,942,339

Net Interest Income	$	3,869,272		$	4,278,725		$	11,404,059		$	13,170,464

Average Earning Assets	$	394,756,645		$	435,326,915		$	407,483,069		$	412,083,151
Net Interest Margin (1)	3.89		%	3.90		%	3.74		%	4.26		%


(1) Interim periods are presented on an annualized basis.

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The Company experienced decreases in net interest income of approximately 10% and 13%, respectively, for the three month and nine month periods ended September 30, 2009, compared to the same periods of the previous year. Average earning assets decreased approximately 9% and 1% between the three and nine month periods ended September 30, 2009, respectively, compared to the same periods of 2008.

The net interest margin was 3.90% for third quarter of 2008, compared to 3.89% for the third quarter of 2009. For the nine month periods ended September 30, 2008 and September 30, 2009, net interest margin was 4.26% and 3.74%, respectively. The decline in net interest margin for the nine month periods is due to the cost of interest-bearing liabilities falling slower than the decrease in yields on earning assets. Between these two nine month periods, the cost of interest-bearing deposits decreased 88 basis points to 2.39% compared to 3.27% in 2008. However, yield on loans declined more rapidly, decreasing 105 basis points to 6.10% for the nine months of 2009, compared to 7.15% for the same period of 2008. The quarterly net interest margin shows improvement primarily as a result of the Bank’s continued ability to reduce its liability costs.

The Company’s net interest margin tends to expand in a rising interest rate environment and decline in a falling interest rate environment. The majority of earning assets are tied to market rates, such as the prime rate, and therefore rates on our earning assets generally reprice along with a movement in market rates while interest bearing liabilities, mainly deposits, typically reprice more slowly and usually incorporate only a portion of the movement in market rates. This asset sensitivity causes the Bank’s yields on assets to reprice faster than its cost of funds which causes improvements in the net interest margin to materialize more slowly. The decline in net interest margin from the same periods of the prior year can be attributed to many factors including a decrease in loan yields and the cumulative effects of changes in monetary policy. As of September 30, 2009, the target Federal Funds rate was 0.25% compared to 2.00% at September 30, 2008. This 175 basis point drop during a one year period continues to put pressure on the Company’s net interest margin.

On a sequential quarter basis, net interest margin increased from 3.66% at June 30, 2009 to 3.89% at September 30, 2009. Between the two periods, the Company’s yield on loans decreased from 6.13% to 5.91%, or 22 basis points. Due to a runoff in higher cost deposits, the cost of interest bearing deposits decreased from 2.45% to 2.15%, or 30 basis points between the second and third quarter of 2009, partially explaining the increase in net interest margin.

Interest rate sensitivity is closely monitored and managed; however, management anticipates continued volatility in the Company’s net interest margin due to changes in earning asset mix, the level of non-earning assets, including nonaccrual loans and OREO, changes in cost of funds, and changes in the level of interest rates, the direction of interest rates as determined by rate policies of the Federal Reserve Board and the possibility of losing the ability to participate in the CDARs program due to the Company’s current designation as an adequately capitalized institution.

Noninterest Income

Noninterest income represents deposit account service charges, fees from the sale or brokering of loans, gains on sales of securities and other types of fee income.

For the quarter ended September 30, 2009, the Company realized $524,754 in noninterest income compared to $431,757 for the quarter ended September 30, 2008, an increase of $92,997. The income for these two periods includes two extraordinary items; 1) the third quarter of 2008 includes $152,000 related to a non-recurring gain on early prepayment of $20.0 million in FHLB advances, and 2) the third quarter of 2009 includes $284,632 in recoveries on prior expenses. If these two non-recurring items are deducted from total noninterest income for these two periods, the difference is a decrease of $39,635. This decrease can partially be attributed to a significant reduction in total deposits between the two periods curtailing the analysis and NSF fees by $51,427 offset by a gain on sale of OREO of approximately $28,450.

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For the nine months ended September 30, 2009, the Company realized $1,212,132 in noninterest income compared to $990,198 for the nine months ended September 30, 2008, an increase of $221,934. However, the variance between these two periods includes non-recurring items including a gain on the sale of a debt obligation in Washington Mutual, Inc. for $228,750 during the first quarter of 2009 and $284,632 in recoveries on prior expenses during the third quarter of 2009. These non-recurring increases in noninterest income were offset by an increase of $152,000 in the third quarter of 2008 for a gain on early prepayment of $20.0 million in FHLB advances. If these items are deducted from total noninterest income for the two periods, the difference between these two nine periods is a decrease of $139,448 which can partially be attributed to a $82,007 decrease in analysis fees due to a significant reduction in total deposits and a $47,017 decrease in gains on sale of loans.

Noninterest Expense

Noninterest expense represents salaries and benefits costs, occupancy and equipment expenses, professional expenses, outside services and other miscellaneous expenses necessary to conduct business.

Three month analysis

Total noninterest expenses were $4,805,221 for the third quarter of 2009, an increase of $339,570, or 8%, compared to the third quarter of the prior year. Below is a summary of significant operating expense variances between these two periods.

Increases in other operating expenses:

· $617,752 in losses on valuation of OREO;

· $289,356 in acquisition related expenses;

· $182,346 in FDIC insurance assessment charges related to a general increase in the level of FDIC insurance;

· $63,387 in professional fees associated with loan collection and OREO costs incurred;

· $46,144 in provision for unused commitments;

· $25,886 in data processing expenses primarily related to an increase in activity based processing charges;

· $17,346 in amortization expense for core deposit intangible.

Decreases in certain other operating expense due to concerted efforts to reduce controllable costs:

· $500,000 decrease for an OTTI charge recorded in September 2008;

· $152,422 for salary and benefits expenses mainly due to a reductions in full-time equivalent employees (“FTEs”), commissions and incentives;

· $111,607 in professional fees including reductions in legal expenses and operations and compliance review costs;

· $63,822 in marketing expenses;

· $41,857 in premises, occupancy and equipment expenses;

· $31,965 in training and human resources related.

Nine month analysis

Total noninterest expenses were $13,814,972 for the first nine months of 2009, an increase of $1,323,257, or 11%, compared to the first nine months of the prior year. Below is a summary of significant operating expense variances between these two periods.

Increases in other operating expenses:

· $721,258 in FDIC insurance assessment charges related to a general increase in the level of FDIC insurance costs plus special assessments;

· $447,837 in professional fees associated with loan collection and OREO carrying costs;

· $1,059,505 in losses on valuation of OREO;

· $289,356 in acquisition related expenses;

· $165,000 for a one-time sublease loss;

· $119,338 in data processing expenses primarily related to CDARs account opening charges and an increase in activity based processing charges;

· $88,844 in amortization expense for core deposit intangible;

· $83,729 in provision for unused commitments;

· $23,413 in net losses on sale of loans, securities and fixed assets.

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Decreases in certain other operating expense due to concerted efforts to reduce controllable costs:

· $683,294 for salary and benefits expenses including $279,000 in severance related charges in June 2008 and also reduced FTEs and reductions in commissions and incentives;

· $500,000 decrease for an OTTI charge recorded in September 2008;

· $199,559 in marketing expenses;

· $94,060 in legal and other professional fees;

· $54,382 in training and human resources related;

· $44,636 in premises, occupancy and equipment expenses;

· $44,634 in board fees and expenses;

· $32,152 for postage, stationery and supplies.

Income Taxes

For the periods ended September 30, 2009, as a result of the increase in the Bank’s reported losses, we determined that the Bank should increase the valuation allowance on its deferred tax assets, which resulted in an increase in deferred tax expense of approximately $5.3 million for the quarter ended September 30, 2009, and year-to-date tax expense of $5.0 million.

On November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 (H.R. 3548) (the “Act”) was signed into law. The Act expands and extends the net operating loss (“NOL”) carryback provision for small businesses that was in the American Recovery and Reinvestment Act (“Recovery Act”), enacted in February 2009. The Act allows all businesses (except those that received funds under the Troubled Asset Relief Program (“TARP”) with a loss in either 2008 or 2009 to claim refunds of taxes paid within the prior five years. Under the previous law, NOLs were only allowed to be carried back two years. As a result of the Act, the Bank has filed amended Federal returns and recorded a tax benefit for these tentative refunds in the fourth quarter of 2009 totaling $1.6 million.

Contractual Obligations

Our significant contractual obligations and significant commitments at December 31, 2008 are included in our Annual Report on Form 10-K for the year ended December 31, 2008. Management believes that the Company’s present facilities are in good physical condition and are adequately covered by insurance. Certain of the leases contain options to extend the term of the lease. The Company is confident that, if necessary, it would be able to secure suitable alternative space on similar terms without having a substantial effect on operations.

The Company secured a tenant for sublease at its Solana Beach branch office for $4,500 per month. The sublease began May 1, 2009 and will end August 31, 2011. A portion of the La Jolla branch office is also being evaluated for sublease.

Off Balance Sheet Arrangements

The Company, in its ordinary course of business, has commitments to disburse loan proceeds both under revolving and non-revolving arrangements. As of September 30, 2009, the total of these commitments approximated $70.2 million compared to $112.1 million as of December 31, 2008 and $118.6 million as of September 30, 2008. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. For discussion about the Company’s borrowing facilities see Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity Management and Cash Flows section above.

ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

Market risk at the Company is primarily derived from the exposure to interest rate risk. Other types of market risk, such as foreign currency exchange risk, commodity price risk and equity price risk, are not significant in the normal course of the Company’s operations.

Additional information regarding the Company’s market risk may be found in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes in the Company’s market risk exposure during the first nine months of 2009.

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ITEM 4T - Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We are responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer) of our disclosure controls and procedures as required by Rule 13a-15 under the Exchange Act, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2009, the end of the fiscal quarter covered by this report.

Our principal executive officer and principal financial officer’s conclusions about the effectiveness of the Company’s disclosure controls and procedures have not changed due to or in connection with the company restating its financial results. The officers’ conclusion that the disclosure controls and procedures were effective, despite this restatement, is based on the fact that the primary reason for the restatement of the financial results is due to adopting a new methodology for documenting, substantiating and recording the ALLL. Due to the significant changes in the economy, including changes in the local real estate market and the related effects on our real estate loan portfolio, the Company evaluated new methodologies to capture underlying trends in the industry and in the Company’s loan portfolio in order to estimate probability of default rates and estimate losses given default. In the fourth quarter of 2009, after working closely with our banking regulators, the Company decided to adopt a methodology which was considered to be an improvement over the prior methodology for estimating the level of the ALLL. Furthermore, we concluded, after consultation with our banking regulators, that this new methodology should be applied to the 3rd quarter of 2009 to better reflect the underlying trends in the loan portfolio. The affects of adopting this new methodology for estimating the level of the ALLL amounted to an increase of approximately $3.4 million to the provision for loan losses expense and, given the inherent amount of judgment involved in any such methodology for estimating the ALLL, is considered to be a change in estimate and not the result of any accounting errors or irregularities.

After concluding to restate the third quarter financial results to increase the ALLL as described above, the Company performed a review of subsequent events in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events”. Accordingly, the Company reassessed its evaluation of potential impairment losses required by ASC Topic 310, “Receivables,” on two specific loans and determined that an additional impairment allocation of approximately $5.3 million was necessary due to more recent information obtained from appraisals regarding the valuation of the underlying loan collateral. Furthermore, as a result of the increase in the Company’s reported losses, we increased the valuation allowance on deferred tax assets, which resulted in an increase in deferred tax expense of approximately $5.3 million.

In summary, the primary reason for the restatement of our financial results for the 3rd quarter of 2009 is due to the adoption of a new methodology for estimating the ALLL. Other issues addressed in this restatement were the result of a subsequent events review necessary in connection with the restatement.

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(b) Changes in Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

· pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company,

· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1 — Legal Proceedings

The Company is not a party to any material, pending legal proceedings, other than ordinary, routine litigation incidental to its business. On December 10, 2009, the Company entered into agreements with both the DFI and FRB. Under these agreements, the Company will prepare various specific plans, and improve the management of commercial real estate loans, allowance for loan and lease losses, liquidity and capital. The Company also agreed to seek approval from the regulators of important corporate and business changes. The Company’s commitment to undertake these changes is underscored by the fact that failure to comply with these agreements could trigger enforcement actions of various types by our respective regulators. See Note 8 — Subsequent Events above for additional information.

Item 1A — Risk Factors

In addition to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2008, filed on March 31, 2009, as amended and filed on April 29, 2009, the Company has the following additional risk factors.

There are potential risks associated with the termination of the proposed merger agreement with First Business Bank and FB Bancorp.

Our proposed merger with First Business Bank and FB Bancorp was terminated on October 28, 2009. Since the merger will not be consummated, there is a risk that our stock price may decline because certain costs related to the proposed merger, such as legal, accounting and a portion of financial advisory fees, must be paid even though the merger will not be completed. In addition, now that the merger has been terminated, our stock price may decline to the extent that the current market price reflects the assumption by investors that the merger will be completed.

Since the merger has been terminated, there may be uncertainty regarding the Company’s viability which may result in the loss of the employees and customers.

Our employees may experience uncertainty about the future viability of the Company, and their role going forward, since the termination of the merger agreement. This may adversely affect our ability to retain and attract key management and other personnel. Similarly, uncertainty may cause our customers to withdraw their business. Any loss of customers could have a material adverse affect on our business.

Recent changes in our senior management may cause uncertainty in, or be disruptive to, our business.

We have recently experienced changes in our senior management and our board of directors. On October 14, 2009, Mr. Richard H. Revier, our Executive Vice President and Chief Credit Officer, informed us of his resignation. On October 24, 2009, James G. Knight, MD, resigned from our board of directors. These changes in our senior management may be disruptive to our business, and, during the transition period, there may be uncertainty among investors, vendors, employees and others concerning our future direction and performance.

Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance further.

Despite our underwriting criteria, we may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. We may be required to increase our allowance for loan losses for any of several reasons, including those reasons discussed in this Form 10-Q/A, which led to the restatement of our financial results for the quarter ended September 30, 2009. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may also require an increase in our allowances. In addition, actual charge-offs in future periods, if not adequately reserved for, will require additional increases in our allowances for loan losses. Any increases in our allowances for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our results of operations in the period in which the allowance is increased.

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The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control and losses may exceed current estimates. Although management believes the level of our loan loss allowance is adequate to absorb probable losses in our loan portfolio, management cannot predict losses or whether the allowance will be adequate or whether regulators will require us to increase this allowance further. Any of these occurrences could adversely affect our business, financial condition, prospects and profitability.

We voluntarily delisted our common stock from the NASDAQ Stock Market and as a result, it may become more volatile and less liquid.

As part of an overall strategy of conserving resources and improving cost effectiveness, we voluntarily delisted our common stock from the NASDAQ Stock Market. Shares of our common stock continue to trade on the “over-the-counter” (OTC) market, but such transactions involve risks in addition to those associated with transactions on a stock exchange. Many OTC stocks trade less frequently and in smaller volumes than stocks listed on an exchange. Accordingly, OTC-traded shares are less liquid and are likely to be more volatile than exchange-traded stocks.

We are subject to the terms and conditions of the Final Order issued by the California Department of Financial Institutions and the Written Agreement entered into with the Federal Reserve Bank of San Francisco as well as additional requirements while the Bank is considered “undercapitalized”.

The financial services industry is heavily regulated, and the regulatory burden on financial institutions is increasing. Federal and state regulation is designed to protect the deposits of consumers, not to benefit shareholders. On December 10, 2009, we formally acknowledged several actions required to strengthen the Bank by entering into agreements with the California Department of Financial Institutions and the Federal Reserve Bank of San Francisco. The Bank voluntarily entered into a Waiver and Consent, under which we consented to the issuance of a Final Order by the California Department of Financial Institutions (the “Final Order”). On the same date, we and the Bank voluntarily entered into a Written Agreement (“Written Agreement”) with the Federal Reserve Bank of San Francisco.

The Final Order and the Written Agreement are substantially similar. Each establishes timeframes for the completion of remedial measures which have been previously identified by us and the regulators as important to improve our financial performance. Under these agreements, we will prepare various specific plans, and improve our management of commercial real estate loans, allowance for loan and lease losses, liquidity and capital. We also agree to seek approval from our regulators of important corporate and business changes. Some of the specific provisions in the Final Order and/or Written Agreement include our agreeing: (1) to submit various plans to our regulators to (a) strengthen board oversight of our management and operations, (b) strengthen our management of commercial real estate, (c) improve the Bank’s position through collecting repayment of past due loans, (d) maintain an adequate allowance for loan and lease losses, (e) improve earnings within a budget for 2010, (f) improve the management of the Bank’s liquidity and funds management practices, and (g) account for adverse scenario planning and identify and quantify available sources of liquidity for each scenario; (2) to revise the Bank’s appraisal review program; (3) to not extend or renew credit in certain circumstances; (4) to charge-off certain assets deemed by the regulators to be a loss; (5) to maintain a sound process for determining, documenting and recording an adequate allowance for loan and lease losses; (6) to increase the Bank’s adjusted tangible shareholder’s equity by the greater of $15,000,000 or the amount necessary to make its adjustable tangible shareholder’s equity equal to at least 10.0 percent of tangible assets, by March 31, 2010; (7) to suspend the payment of dividends without regulatory approval; (8) to not incur any debt or redeem any shares of stock without regulatory approval; (9) to comply with certain notice provisions to our regulators before changing directors or officers or the responsibilities of any of the same; (10) to not establish any new branches; and (11) to submit quarterly reports.

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The Company has also been informed by the Federal Reserve Bank of San Francisco that as of January 30, 2010, the Bank is deemed to be “undercapitalized” for purposes of Section 38 of the Federal Deposit Insurance Act and Subpart D of Regulation H (12 C.F.R. 208.43(b)(3)), and consequently, the Bank may not make any capital distributions, grow its total assets, expand through acquisitions, branching or new lines of business or pay certain management fees without prior approval from our regulators. The Bank was also required to submit a capital restoration plan that specifies the steps that the Bank will take to become adequately capitalized.

The Company recognizes that the current challenging economic environment requires a disciplined focus to achieve quality earnings with a reduced risk profile. The requirements of the Final Order and the Written Agreement will assist the Company in this focus. The Bank expects to continue to provide to its customers the services previously provided including deposit and lending services, as well as processing banking transactions. Any material failure to comply with the provisions of the Final Order or Written Agreement or failure to submit an acceptable capital restoration plan could result in enforcement actions by our regulators, including, in some cases, the assessment of civil money penalties against us, enforcement of the agreements through court proceedings, or in the worse case, placing us into receivership with the Federal Deposit Insurance Corporation. If we are placed into Federal Deposit Insurance Corporation receivership, we would be required to cease operations and you could lose your entire investment. While we intend to take such actions as may be necessary to enable us to comply with the requirements of the Final Order and Written Agreement, there can be no assurance that we will be able to comply fully with their provisions, or to do so within the timeframes required, that compliance with the Final Order and Written Agreement will not be more time consuming or more expensive than anticipated, that compliance with the Final Order and Written Agreement will enable us to resume profitable operations, or that efforts to comply with the Final Order and Written Agreement will not have adverse effects on our operations and financial condition.

We are required to raise additional capital, but that capital may not be available and without additional capital other courses such as selling assets and looking for merger partners will need to be pursued.

Under the terms of the Final Order, the Bank is required to increase its adjusted tangible shareholder’s equity by the greater of $15,000,000 or the amount necessary to make its adjustable tangible shareholder’s equity equal to at least 10.0 percent of tangible assets, by March 31, 2010. Due to being considered “undercapitalized”, the Bank was also required to submit a capital restoration plan that specifies the steps that the Bank will take to become adequately capitalized. This plan is to address current and future capital requirements. Our ability to raise additional capital is contingent on the current capital markets and on our financial performance. Available capital markets are not currently favorable and we do not anticipate any material improvement in these markets in the near term. Accordingly, we cannot be certain of our ability to raise additional capital on any terms. If we cannot raise additional capital and/or continue to down-size operations and our size or engage a strategic merger or sale, we may not be able to sustain further deterioration in our financial condition and other regulatory actions may be taken.

We can issue common stock and preferred stock without your approval, diluting your proportional ownership interest.

Our articles of incorporation authorize us to issue 30,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of February 24, 2010, we had no shares of preferred stock outstanding and had 4,980,481 shares of common stock issued and outstanding. We also have shares reserved under our stock option plans covering our directors, officers, employees and consultants. Consequently, any shares of common stock or preferred stock that we issue subsequent to your purchase of our stock will dilute your proportional ownership interest in us.

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

There were no matters reportable under this item during the quarter covered by this Quarterly Report on Form 10-Q/A.

Item 3 — Defaults Upon Senior Securities

There were no matters reportable under this item during the quarter covered by this Quarterly Report on Form 10-Q/A.

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

There were no matters reportable under this item during the quarter covered by this Quarterly Report on Form 10-Q/A.

Item 5 — Other Information

(a) There were no matters reportable under this item during the quarter covered by this Quarterly Report on Form 10-Q/A.

(b) There were no matters reportable under this item during the quarter covered by this Quarterly Report on Form 10-Q/A.

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Item 6 — Exhibits

Those exhibits marked with a (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list.

Exhibit No.	Description	Page

2.1	Agreement and Plan of Reorganization and Merger by and between 1st Pacific Bancorp, PBC Merger Company and 1st Pacific Bank of California dated as of November 7, 2006, incorporated by reference to Exhibit 2 to 1st Pacific Bancorp’s Registration Statement on Form S-4EF filed on November 9, 2006.

2.2	Agreement and Plan of Merger with FB Bancorp and First Business Bank National Association dated July 16, 2009, incorporated by reference to Exhibit 10.1 to 1st Pacific Bancorp’s Current Report on Form 8-K filed July 17, 2009.

2.3	Termination Agreement, dated October 28, 2009, pursuant to which the parties terminated the Agreement and Plan of Merger dated July 16, 2009, by and among FB Bancorp, First Business Bank, 1st Pacific Bancorp and 1st Pacific Bank of California, incorporated by reference to 1st Pacific Bancorp’s Current Report on Form 8-K filed October 29, 2009.

3.1	Amended and Restated Articles of Incorporation of 1st Pacific Bancorp incorporated by reference to Exhibit 3.1 to 1st Pacific Bancorp’s Current Report on Form 8-K filed on January 4, 2010.

3.2	Amended and Restated Bylaws of 1st Pacific Bancorp incorporated by reference to Exhibit 3.1 to 1st Pacific Bancorp’s Current Report on Form 8-K filed on December 16, 2009.

10.1	Form of Shareholder Agreement dated July 16, 2009, by and between 1st Pacific Bancorp and 1st Pacific Bank of California, on the one hand, and Ernest Auerbach, incorporated by reference to Exhibit 10.2 to 1st Pacific Bancorp’s report on Form 8-K filed July 17, 2009.

10.2	First Amendment to Shareholder Agreement, dated as of July 16, 2009, by and between 1st Pacific Bancorp and 1st Pacific Bank of California, on the one hand, and Ernest Auerbach, an individual, and Lisa D. Auerbach, an individual, on the other hand incorporated by reference to Exhibit 10.3 to 1st Pacific Bancorp’s Quarterly Report on Form 10-Q filed August 12, 2009.

10.3	Form of Directors Agreement, each dated July 16, 2009, by and between 1st Pacific Bancorp and 1st Pacific Bank of California on the one hand, and each of the following individuals: (a) Thomas H. Blair, Jr., (b) William V. Ehlen, (c) John Farkash, (d) Lester Machado, (e) John F. McGrath, (f) Nathan L. Rogge, incorporated by reference to Exhibit 10.3 to 1st Pacific Bancorp’s report on Form 8-K filed July 17, 2009.

10.4	Form of Voting Agreement, each dated July 16, 2009, by and between First Business Bank, National Association and each of the following individuals: (a) Ronald J. Carlson, (b) Christopher S. McKellar, (c) James G. Knight, M.D., (d) Susan Lew, (e) Albert Colucci, (f) Albert Logan, (g) Robert Cange, incorporated by reference to Exhibit 10.4 to 1st Pacific Bancorp’s report on Form 8-K filed July 17, 2009.

10.5	Form of Termination of Employment Agreement dated July 16, 2009, by and between 1st Pacific Bancorp and 1st Pacific Bank of California on the one hand, and each of the following individuals: (a) Richard H. Revier, (b) James H. Burgess, incorporated by reference to Exhibit 10.5 to 1st Pacific Bancorp’s report on Form 8-K filed July 17, 2009.

10.6	Form of Termination of Employment Agreement dated August 31, 2009, by and between 1st Pacific Bancorp and 1st Pacific Bank of California on the one hand, and Larry Prosi, incorporated by reference to Exhibit 10.1 to 1st Pacific Bancorp’s report on Form 8-K filed September 2, 2009.

10.7	Termination Agreement dated October 28, 2009, by and among FB Bancorp, First Business Bank, National Association, 1st Pacific Bancorp, and 1st Pacific Bank of California, incorporated by reference to Exhibit 10.1 to 1st Pacific Bancorp’s report on Form 8-K filed October 29, 2009.

10.8	Written Agreement between 1st Pacific Bank of California, 1st Pacific Bancorp and the Federal Reserve Bank of San Francisco dated December 10, 2009, incorporated by reference to Exhibit 10.1 to 1st Pacific Bancorp’s report on Form 8-K filed December 15, 2009.

31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)	40

31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)	41

32.1*	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	42

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SIGNATURES

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

		1st Pacific Bancorp

Date:	February 24, 2010	/s/ John F. McGrath
		John F. McGrath
		President and Chief Executive Officer
		(duly authorized officer)

Date:	February 24, 2010	/s/ James H. Burgess
		James H. Burgess
		Executive Vice President and
		Chief Financial Officer
		(principal financial officer)

1st Pacific Bancorp 10-Q/A