SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended ~~March~~June 3130, 2013

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

Commission file number 333-12892

MISSION COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

California

77-0559736

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices)

(805) 782-5000

Issuer’s telephone number

Not applicable

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

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

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

þ Yes o No

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

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

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

Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 8,~~305~~755,066 shares of common stock outstanding as of ~~May~~August 18, 2013.

Page 1 of 53

Mission Community Bancorp

~~March~~June 3130, 2013

Index

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at March 31, 2013, December 31, 2012, and March 31, 2012 Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2013 and 2012 Consolidated Statements of Comprehensive Income (Loss) for the Three-Month Periods Ended March 31, 2013 and 2012 Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Three-Month Period Ended March 31, 2013 Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2013 and 2012 Notes to Consolidated Financial Statements Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures PART II – OTHER INFORMATION Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		3

	Condensed Consolidated Balance Sheets at June 30, 2013, December 31, 2012, and June 30, 2012	3

	Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012	5

	Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Six-Month Period Ended June 30, 2013	5

	Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2013 and 2012	6

	Notes to Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures About Market Risk		49

Item 4. Controls and Procedures		49


PART II – OTHER INFORMATION

Item 1. Legal Proceedings		50
Item 1A. Risk Factors		50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3. Defaults Upon Senior Securities		50
Item 4. Mine Safety Disclosures		50
Item 5. Other Information		50
Item 6. Exhibits		50

Page 2 of 53

PART I

Item 1. Financial Statements

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Balance Sheets

Unaudited

(dollars in thousands)

	March 31, 2013			December 31, 2012			March 31, 2012
	June 30, 2013			December 31, 2012			June 30, 2012
Assets
Cash and due from banks	$	1012,~~063~~125		$	25,635		$	6727,~~093~~256
Total cash and cash equivalents		1012,~~063~~125			25,635			6727,~~093~~256
Certificates of deposit in other banks		32,~~210~~224			3,706			35,~~492~~176
Investment securities available for sale		~~142~~149,~~918~~941			127,822			~~128~~171,~~622~~472
Loans held for sale		12,~~426~~885			1,548			54,~~874~~280
Loans, net of unearned income		~~244~~247,~~064~~954			243,741			~~220~~219,~~096~~351
Less allowance for loan and lease losses		(4,~~237~~232	)		(4,242	)		(3,~~562~~781	)
Net loans		~~239~~243,~~827~~722			239,499			~~216~~215,~~534~~570
Federal Home Loan Bank stock and other investments		6,~~868~~927			6,822			3,~~801~~800
Premises and equipment		15,~~950~~736			16,131			16,~~293~~027
Other real estate owned		~~818~~790			818			2,~~224~~299
Company owned life insurance		8,~~069~~123			8,015			7,~~844~~901
Core deposit intangible asset, net of accumulated amortization		2,~~664~~563			2,765			32,~~068~~967
Accrued interest and other assets		1,~~850~~920			2,446			2,~~929~~228
Total Assets	$	~~433~~446,~~663~~956		$	435,207		$	~~457~~458,~~774~~976
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	~~123~~134,~~956~~666		$	130,694		$	~~113~~126,~~388~~003
Money market, NOW and savings		~~161~~155,~~861~~524			154,074			~~156~~159,~~911~~483
Time certificates of deposit		~~100~~107,~~530~~485			102,500			~~134~~123,~~981~~159
Total deposits		~~386~~397,~~347~~675			387,268			~~405~~408,~~280~~645
Junior subordinated debt securities		5,632			5,604			5,519
Other borrowings		3,000			-			-
Accrued interest and other liabilities		1,850			2,063			4,709
Junior subordinated debt securities		5,660			5,604			5,548
Warrant liability		-			-			200
Accrued interest and other liabilities		1,956			2,063			2,130
Total liabilities		393,829			394,935			415,708
Warrant liability		-			-			150
Total liabilities		408,291			394,935			416,473
Mezzanine financing:
Redeemable Bancorp-issued preferred stock, Series A, B and C; liquidation value of $1,000 at March 31, 2013 and December 31, 2012, and $1,205 at March 31, 2012		1,000			1,000			1,205
Redeemable Bancorp-issued preferred stock, Series A, B and C; liquidation value of $1,000 at June 30, 2013 and December 31, 2012, and $1,205 at June 30, 2012		1,000			1,000			1,205
Redeemable subsidiary-issued preferred stock; liquidation value of $1,250 at March 31, 2013, $2,000 at December 31, 2012, and $7,000 at March 31, 2012		1,250			2,000			7,000
Redeemable subsidiary-issued preferred stock; liquidation value of $650 at June 30, 2013, $2,000 at December 31, 2012, and $6,400 at June 30, 2012		650			2,000			6,400
Shareholders' equity:
Common stock - 50,000,000 shares authorized; issued and outstanding: 8,155,066 at March 31, 2013 and December 31, 2012, and 7,755,066 at March 31, 2012		42,825			42,825			40,825
Common stock - 50,000,000 shares authorized; issued and outstanding: 8,755,066 at June 30, 2013, 8,155,066 at December 31, 2012, and 7,855,066 at June 30, 2012
Additional paid-in capital		8,812			8,768			8,497
Accumulated deficit		(15,236	)		(16,122	)		(17,444	)
Accumulated other comprehensive income		1,183			1,801			1,983
Total shareholders' equity		37,584			37,272			33,861
Total Liabilities and Shareholders' Equity	$	433,663		$	435,207		$	457,774

45,825 42,825 41,325

Additional paid-in capital

8,856 8,768 8,533

Accumulated deficit

(14,668 ) (16,122 ) (17,096 )

Accumulated other comprehensive income (loss)

(2,998 ) 1,801 2,136

Total shareholders' equity

37,015 37,272 34,898

Total Liabilities and Shareholders' Equity

$ 446,956 $ 435,207 $ 458,976

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

Page 3 of 53

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statements of Operations

Unaudited

(dollars in thousands, except per share data)

	For theThree Months Ended March 31,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Interest Income
Interest and fees on loans	$	43,~~083~~845		$	4,~~299~~351		$	7,928		$	8,650
Interest on investment securities		~~573~~663			~~632~~707			1,236			1,339
Other interest income		1211			4424			23			68
Total interest income		4,~~668~~519			45,~~975~~082			9,187			10,057
Interest Expense
Interest on money market, NOW and savings deposits		67			7269			134			141
Interest on time certificates of deposit		9997			~~256~~196			196			452
Other interest expense		7781			82			158			164
Total interest expense		~~243~~245			~~410~~347			488			757
Net interest income		4,~~425~~274			4,~~565~~735			8,699			9,300
Provision for loan and lease losses		~~100~~-			225			100			450
Net interest income after provision for loan and lease losses		4,~~325~~274			4,~~340~~510			8,599			8,850
Non-interest income
Service charges on deposit accounts		~~261~~296			~~207~~248			557			455
Gain on sale of SBA-guaranteed loans		-			8-			-			8
Net gains (losses) on disposition of other loans held for sale		414			12
Net gains on disposition of other loans held for sale		195			14			609			26
Loan servicing fees, net of amortization		4335			3844			78			82
Gain on sale or call of available-for-sale securities		~~153~~21			1526			174			527
Loss or writedown of fixed assets and other real estate owned		-			(358	)
Gain (loss) or (writedown) of other real estate owned		(28	)		70			(28	)		(288	)
Change in fair value of warrant liability		-			3049			-			79
Increase in cash surrender value of life insurance		54			5956			108			115
Other income and fees		~~102~~155			4157			257			98
Total non-interest income		~~1,027~~728			381,064			1,755			1,102
Non-interest expense
Salaries and employee benefits		2,~~395~~338			2,~~483~~370			4,733			4,853
Occupancy expenses		~~423~~399			~~455~~467			818			922
Furniture and equipment		~~220~~196			~~179~~256			420			435
Data processing		~~390~~438			~~792~~549			828			1,341
Professional fees		~~157~~178			~~409~~326			335			735
Marketing and business development		7297			~~125~~91			169			216
Office supplies and expenses		~~152~~149			~~210~~182			301			392
Insurance and regulatory assessments		~~138~~146			~~153~~170			284			323
Loan and lease expenses		92121			64126			213			190
Other real estate expenses		72			46103			9			149
Provision for unfunded loan commitments		25-			-			25			-
Amortization of core deposit intangible asset		101			101			202			202
Other expenses		~~226~~228			~~192~~308			454			500
Total non-interest expense		4,~~398~~393			5,~~209~~049			8,791			10,258
Income (loss) before income taxes		~~954~~609			~~(831~~525	)		1,563			(306	)
Income tax expense		1920			-3			39			3
Net income (loss)	$	~~935~~589		$	~~(831~~522	)	$	1,524		$	(309	)
Less earnings and dividends attributable to preferred stock		6027			~~175~~174			87			349
Net income (loss) attributable to common stock	$	~~875~~562		$	~~(1,006~~348	)	$	1,437		$	(658	)
Per Common Share Data:
Net income (loss) - basic	$	0.1107		$	(0.1304	)	$	0.17		$	(0.08	)
Net income (loss) - diluted	$	0.1107		$	(0.1304	)	$	0.17		$	(0.08	)
Average common shares outstanding - basic		8,~~155~~340,066			7,~~755~~766,~~066~~055			8,247,055			7,760,561
Average common shares outstanding - diluted		8,~~155~~357,~~066~~475			7,~~755~~766,~~066~~055			8,274,031		N/A

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

Page 4 of 53

Mission Community Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited - dollars in thousands)

	For the Three Months Ended March 31,
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Net income (loss)	$	~~935~~589		$	~~(831~~522	)	$	1,524		$	(309	)
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities, net of taxes of $-0-		(~~465~~4,159	)		~~289~~678			(4,625	)		967
Less reclassification adjustment for securities gains included in net income, net of taxes of $-0-		(~~153~~21	)		(1526	)		(174	)		(527	)
Other comprehensive income (loss)		(~~618~~4,180	)		~~288~~152			(4,799	)		440
Comprehensive income (loss)	$	~~317~~(3,591	)	$	~~(543~~674	)	$	(3,275	)	$	131

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statement of Changes in Shareholders' Equity

(Unaudited - dollars in thousands)

	Common Stock				Additional Paid-In		Accumulated			Accumulated Other Comprehensive
										Accumulated
					Additional					Other
	Common Stock				Paid-In		Accumulated			Comprehensive
	Shares		Amount		Capital		Deficit			Income (Loss)			Total
Balance at January 1, 2013		8,155,066	$	42,825	$	8,768	$	(16,122	)	$	1,801		$	37,272
Dividends declared on subsidiary-issued preferred stock								(49	)					(49	)
Exercise of common stock warrants		600,000		3,000										3,000
Stock-based compensation						44								44
Dividends declared on subsidiary-issued preferred stock								(70	)					(70	)
Net income								935						935
Stock-based compensation						88								88
Other comprehensive loss		-		-		-		-			(618	)		(618	)
Net income								1,524						1,524
Balance at March 31, 2013		8,155,066	$	42,825	$	8,812	$	(15,236	)	$	1,183		$	37,584
Other comprehensive loss		-		-		-		-			(4,799	)		(4,799	)
Balance at June 30, 2013		8,755,066	$	45,825	$	8,856	$	(14,668	)	$	(2,998	)	$	37,015

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

Page 5 of 53

Mission Community Bancorp and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited - dollars in thousands)

	For the Three Months Ended
	For the Six Months Ended
	March 31, 2013			March 31, 2012
	June 30, 2013			June 30, 2012
Operating Activities
Net income (loss)	$	~~935~~1,524		$	(~~831~~309	)
Adjustments to reconcile net income (loss) income to net cash provided by (used in) operating activities:
Depreciation		~~239~~486			~~222~~479
Accretion of discount on securities and loans, net		~~358~~686			~~334~~684
Amortization of core deposit intangible asset		~~101~~202			~~101~~202
Accretion of discount on assets acquired in merger		(~~997~~1,607	)		(~~753~~1,670	)
Amortization of discount on liabilities assumed in merger		2856			2856
Provision for loan and lease losses		100			~~225~~450
Provision for losses on unfunded loan commitments		25			-
Stock-based compensation		4488			3773
Gain on sale or call of available-for-sale securities		(~~153~~174	)		(1527	)
Gain on sale of loans		-			(8	)
Gains on disposition of loans held for sale		(~~414~~609	)		(1226	)
Change in the fair value of warrant liability		-			(3079	)
Net losses and writedowns of fixed assets or other real estate owned		-28			~~358~~288
Increase in company-owned life insurance		(54108	)		(59115	)
Reinvested earnings from FHLB stock and other investments		(46124	)		-
Net increase in accrued taxes receivable		19(11	)		-
Other, net		~~371~~439			(~~459~~145	)
Proceeds from loan sales		-			~~183~~101
Loans originated for sale		-(927	)		~~(154~~-	)
Net cash provided by (used in) operating activities		~~556~~74			(~~819~~546	)
Investing Activities
Net (increase) decrease in deposits in other banks		496			100
Net decrease (increase) in deposits in other banks		1,482			(1,584	)
Purchase of available-for-sale securities		(5577,~~200~~768	)		(787,~~717~~337	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		1320,~~545~~766			919,~~122~~557
Proceeds from sales of available-for-sale securities		2529,~~725~~552			~~223~~24,873
Net increase in loans held for investment		579			4,897
Net (increase) decrease in loans held for investment		(1,781	)		6,582
Net decrease in loans held for sale		536			2,429
Net (increase) decrease in loans held for sale		(728	)		3,456
Net (increase) decrease in Federal Home Loan Bank and other stock		-			125
Net decrease in FHLB stock and other investments		20			126
Purchases of premises and equipment		(5791	)		(~~232~~247	)
Proceeds from sale of other real estate owned		-			2,638
Proceeds from sale of premises and equipment		-			17
Net cash (used in) provided by investing activities		(14,376	)		11,585
Proceeds from sale of other real estate owned		-			3,132
Net cash (used in) investing activities		(28,548	)		(31,425	)
Financing Activities
Net increase in demand deposits and savings accounts		15,~~049~~422			824,~~922~~108
Net (decrease) increase in time deposits		(1,970	)		(14,216	)
Net increase (decrease) increase in time deposits		4,985			(26,037	)
Net Increase (decrease) in other borrowings		(750	)		-
Net increase (decrease) in other borrowings and mezzanine financing		1,650			(600	)
Payment of dividends on preferred stock		(81	)		-
Proceeds from exercise of common stock warrants		3,000			500
Net cash used in financing activities		(1,752	)		(5,294	)
Payment of dividends on preferred stock		(93	)		(365	)
Net (decrease) increase in cash and cash equivalents		(15,572	)		5,472
Net cash provided by (used in) financing activities		14,964			(2,394	)
Net (decrease) in cash and cash equivalents		(13,510	)		(34,365	)
Cash and cash equivalents at beginning of period		25,635			61,621
Cash and cash equivalents at end of period	$	1012,~~063~~125		$	6727,~~093~~256
Non-cash changes:
Change in unrealized gains on available-for-sale securities	$	(618	)	$	288
Change in unrealized gains (losses) on available-for-sale securities	$	(4,799	)	$	440
Loans reclassified to held for sale		-			4,583
Real estate acquired by foreclosure		-			492
Adjustments to net contribution from shareholder recognized in additional paid-in capital for Santa Lucia merger		-			1,130
Cancellation of warrants accounted for as liabilities		-			(4,955	)
Supplemental disclosures of cash flow information:
Interest paid		~~244~~490			~~536~~933
Taxes paid		-50			-3

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

Page 6 of 53

Mission Community Bancorp and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 – Basis of Presentation and Management Representations

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

These financial statements have been prepared in accordance with the Securities and Exchange Commission’s rules and regulations for quarterly reporting and, therefore, do not necessarily include all information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. These financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2012, which was filed on March 27, 2013.

Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. In the opinion of management, the unaudited financial statements for the three-month and six-month periods ended ~~March~~June 3130, 2013 and 2012 reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations.

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

The Bank’s primary source of revenue is providing real estate, commercial and industrial (including SBA-guaranteed loans) and agricultural loans to customers, who are predominately small and middle-market businesses and individuals.

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.

Certain reclassifications have been made to prior period balances to conform to classifications in ~~2012~~2013, with no impact to previously reported net income (loss) or shareholders’ equity.

Note 2 – Stock Based Compensation Plans

The Company has three stock compensation plans—the 1998 Stock Option Plan, the 2008 Stock Incentive Plan and the 2011 Equity Incentive Plan (the “2011 Plan”)—which are more fully described in Note J to the consolidated financial statements in the Company’s Annual Report on Form 10-K.

Page 7 of 53

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

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

No options were granted in either of the ~~three~~six-month periods ended ~~March~~June 3130, 2013 and 2012.

During the ~~three~~six-month periods ended ~~March~~June 3130, 2013 and 2012, the Company recognized pre-tax stock-based compensation expense of $4488,000 and $3673,000, respectively. As of ~~March~~June 3130, 2013, the Company has unvested options outstanding with unrecognized compensation expense totaling $~~259~~216,000, which is scheduled to be recognized as follows (in thousands):

April 1 through December 31, 2013	$	74
2014		62
2015		62
2016		51
2017		10
Total unrecognized compensation cost	$	259

July 1 through December 31, 2013	$	31
2014		62
2015		62
2016		51
2017		10
Total unrecognized compensation cost	$	216

No options outstanding were “in the money” as of ~~March~~June 3130, 2013.

Page 8 of 53

The following table summarizes information about stock option activity for the ~~three~~six months ended ~~March~~June 3130, 2013:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (~~years~~Years)		Aggregate Intrinsic Value of In-the-Money Options
Outstanding at beginning of period		456,900		$	6.12
Options granted		-
Options exercised		-
Options expired unexercised		-
Options forfeited		( 4,000	)		5.00
Outstanding at end of period		452,900		$	6.13		8.42	$	-
Options exercisable at end of period		219,900		$	7.33		7.52	$	-
Options Vested or Expected to Vest		452,900		$	6.13		8.42	$	-

Page 9 of 53

Note 3 — Investment Securities

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

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2013:
June 30, 2013:
U.S. Government agencies	$	2125,~~643~~212	$	~~567~~201	$	(61690	)	$	2224,~~149~~723
Residential mortgage-backed securities		7987,~~686~~308		~~851~~415		(~~309~~2,344	)		8085,~~228~~379
Municipal securities		1917,~~377~~018		~~138~~57		(66228	)		1916,~~449~~847
Corporate debt securities		43,~~254~~250		188		-(22	)		43,~~272~~236
Asset-backed securities		1620,~~775~~151		82-		(37395	)		1619,~~820~~756
	$	~~141~~152,~~735~~939	$	~~1,656~~681	$	(~~473~~3,679	)	$	~~142~~149,~~918~~941
December 31, 2012:
U.S. Government agencies	$	30,007	$	589	$	(7	)	$	30,589
Residential mortgage-backed securities		60,550		1,159		(49	)		61,660
Municipal securities		19,247		132		(106	)		19,273
Corporate debt securities		3,015		2		(21	)		2,996
Asset-backed securities		13,202		112		(10	)		13,304
	$	126,021	$	1,994	$	(193	)	$	127,822
March 31, 2012:
June 30, 2012:
U.S. Government agencies	$	2664,~~650~~113	$	~~360~~617	$	(1213	)	$	2664,~~998~~717
Residential mortgage-backed securities		8582,~~474~~098		1,~~404~~285		-(48	)		8683,~~878~~335
Municipal securities		4,~~596~~593		~~219~~230		(2-	)		4,~~813~~823
Corporate debt securities		3,~~048~~037		32		(12	)		3,~~039~~027
Asset-backed securities		615,~~871~~495		3288		(913	)		615,~~894~~570
	$	~~126~~169,~~639~~336	$	2,~~018~~222	$	(3586	)	$	~~128~~171,~~622~~472

Page 10 of 53

The scheduled maturities of investment securities at ~~March~~June 3130, 2013, were as follows. Actual maturities may differ from contractual maturities because some investment securities may allow the right to call or prepay the obligation with or without call or prepayment penalties.

(in thousands)	Available-for-Sale Securities
	Amortized Cost		Fair Value
Within one year	$	~~2,363~~305	$	~~2,365~~305
Due in one year to five years		97,~~648~~876		97,~~677~~830
Due in five years to ten years		3336,~~948~~845		3436,~~186~~178
Due in greater than ten years		95107,~~776~~913		96105,~~690~~628
	$	~~141~~152,~~735~~939	$	~~142~~149,~~918~~941

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

(in thousands)	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2013:
June 30, 2013:
U.S. Government agencies	$	616,~~062~~934	$	61690	$	-	$	-	$	616,~~062~~934	$	61690
Residential mortgage-backed securities		3970,~~444~~659		~~309~~2,344		-		-		3970,~~444~~659		~~309~~2,344
Municipal securities		1213,~~584~~521		66228		-		-		1213,~~584~~521		66228
Asset-backed securities		3,022		37		-		-		3,022		37
Corporate debt securities		2,228		22		-		-		2,228		22
	$	61,112	$	473	$	-	$	-	$	61,112	$	473
Asset-backed securities		19,755		395		-		-		19,755		395
	$	123,097	$	3,679	$	-	$	-	$	123,097	$	3,679
December 31, 2012:
U.S. Government agencies	$	3,005	$	7	$	-	$	-	$	3,005	$	7
Residential mortgage-backed securities		7,605		49		-		-		7,605		49
Municipal securities		12,168		106		-		-		12,168		106
Corporate debt securities		1,979		21		-		-		1,979		21
Asset-backed securities		3,174		10		-		-		3,174		10
	$	27,931	$	193	$	-	$	-	$	27,931	$	193
March 31, 2012:
June 30, 2012:
U.S. Government agencies	$	26,~~988~~991	$	1213	$	-	$	-	$	26,~~988~~991	$	1213
Residential mortgage-backed securities		-18,392		-48		-		-		-18,392		-48
Municipal securities		~~240~~-		2-		-		-		~~240~~-		2-
Corporate debt securities		1,988		12		-		-		1,988		12
Asset-backed securities		32,~~221~~402		913		-		-		32,~~221~~402		913
	$	729,~~437~~773	$	3586	$	-	$	-	$	729,~~437~~773	$	3586

As of March 31, 2013, the Company held 53 securities that had been in an unrealized loss position for less than 12 months. No securities have been in an unrealized loss position for 12 months or longer as of March 31, 2013. The unrealized losses relate principally to changes in market interest rate conditions. All of the securities continue to pay as scheduled. When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery. As of March 31, 2013, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on the Bank’s evaluation of the above and other relevant factors, the Bank does not believe the securities that are in an unrealized loss position as of March 31, 2013, are other than temporarily impaired.

Page 11 of 53

As of June 30, 2013, the Company held 93 securities that had been in an unrealized loss position for less than 12 months. No securities ~~were~~have ~~sold~~been in ~~the~~an ~~first~~unrealized ~~three~~loss position for 12 months or longer as of ~~2012~~June 30, 2013. ~~Gains~~ ~~totaling~~The ~~$153,000~~unrealized ~~were~~losses ~~recognized~~relate principally to changes in market interest rate conditions. All of the ~~first~~securities ~~quarter~~continue to pay as scheduled. When analyzing the issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Bank’s intent and ability to hold the security to recovery. As of June 30, 2013, management did not have the intent to sell these securities nor did it believe it is more likely than not that it will be required to sell these securities before maturity or the recovery of amortized cost basis. Based on ~~sales~~the Bank’s evaluation of ~~$25~~the above and other relevant factors,~~725~~ the Bank does not believe the securities that are in an unrealized loss position as of June 30,~~000~~ 2013, are other than temporarily impaired. However, in light of continued declines in the fair values of these securities, as a result of recent increases in long- and immediate-term market interest rates, subsequent to June 30, 2013, management has begun reevaluating its intention to hold all of these securities until maturity or until recovery of its amortized cost basis.

AsGross ofgains ~~March~~totaling 31$179,000 ~~2013,~~and ~~investment~~losses ~~securities~~of ~~carried at~~ $225,~~322,~~000 were ~~pledged~~recognized toin ~~secure~~the ~~public~~first ~~deposits,~~six asmonths ~~required~~of by2013 ~~law. Investment~~on ~~securities~~sales ~~carried~~of at $1229,~~417~~374,000 as of ~~March~~securities. ~~31,~~During ~~2013, were pledged to secure potential borrowings from~~ the ~~Federal~~first ~~Home~~six ~~Loan~~months ~~Bank~~ of ~~San~~2012, ~~Francisco. Securities carried at~~ $224,~~006~~877,000 as of ~~March~~securities ~~31,~~were ~~2013~~sold, ~~were~~resulting ~~pledged~~in togains ~~secure potential intra-day overdrafts at the Federal Reserve Bank~~ of ~~San~~$527,000 ~~Francisco~~and ~~(“FRB”)~~no losses.

As of June 30, 2013, investment securities carried at $33,234,000 were pledged to secure public deposits, as required by law. Investment securities carried at $16,765,000 as of June 30, 2013, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco. Securities carried at $3,608,000 as of June 30, 2013, were pledged to secure potential intra-day overdrafts at the Federal Reserve Bank of San Francisco (“FRB”).

Note 4 — Loans

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

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

Loan Composition

Loan Composition
(Dollars in thousands)
	June 30, 2013					December 31, 2012					June 30, 2012
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	11,542		4.6	%	$	11,995		4.9	%	$	17,293		7.7	%
Commercial real estate - owner-occupied		70,251		28.0	%		72,036		29.4	%		68,264		30.5	%
Commercial real estate - non-owner-occupied		74,261		29.6	%		69,145		28.2	%		64,484		28.8	%
Residential real estate		29,057		11.6	%		31,501		12.8	%		34,224		15.3	%
Farnland and all other real estate loans		17,541		7.0	%		8,299		3.4	%		2,003		0.9	%
Commercial and industrial loans		32,709		13.1	%		33,580		13.7	%		28,780		12.9	%
Agricultural loans		7,455		3.0	%		14,252		5.8	%		3,119		1.4	%
Municipal loans		2,338		0.9	%		2,347		1.0	%		2,384		1.1	%
Leases, net of unearned income		841		0.3	%		1,057		0.4	%		1,722		0.8	%
Consumer loans		4,844		1.9	%		1,077		0.4	%		1,358		0.6	%
Total loans	$	250,839		100.0	%	$	245,289		100.0	%	$	223,631		100.0	%

(Dollars in thousands)

	March 31, 2013					December 31, 2012					March 31, 2012
Type of Loan	Amount		Percentage			Amount		Percentage			Amount		Percentage
Construction and land development	$	12,711		5.2	%	$	11,995		4.9	%	$	18,087		8.0	%
Commercial real estate - owner-occupied		67,824		27.6	%		72,036		29.4	%		70,894		31.4	%
Commercial real estate - non-owner-occupied		68,992		28.1	%		69,145		28.2	%		60,302		26.7	%
Residential real estate		30,795		12.4	%		31,501		12.8	%		33,012		14.6	%
All other real estate loans		12,686		5.2	%		8,299		3.4	%		2,014		0.9	%
Commercial and industrial loans		29,955		12.2	%		33,580		13.7	%		26,019		11.5	%
Agricultural loans		16,089		6.6	%		14,252		5.8	%		9,524		4.2	%
Municipal loans		2,342		1.0	%		2,347		1.0	%		2,388		1.1	%
Leases, net of unearned income		976		0.4	%		1,057		0.4	%		1,835		0.8	%
Consumer loans		3,120		1.3	%		1,077		0.4	%		1,895		0.8	%
Total loans	$	245,490		100.0	%	$	245,289		100.0	%	$	225,970		100.0	%

Page 12 of 53

The table above includes loans held for sale as follows:

Loans Held for Sale*

Loans Held for Sale*
(Dollars in thousands)
	June 30, 2013					December 31, 2012					June 30, 2012
Type of Loan	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Commercial and industrial	$	1,914		0.8	%	$	346		0.1	%	$	571		0.3	%
Real estate		971		0.4	%		1,202		0.5	%		1,955		0.9	%
Construction and land development		-		0.0	%		-		0.0	%		1,754		0.8	%
Total loans held for sale	$	2,885		1.2	%	$	1,548		0.6	%	$	4,280		1.9	%

* Consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

~~(Dollars~~Loans inand ~~thousands)~~leases, other than those held for sale, are carried at the principal amount outstanding, net of any deferred loan origination fee income and deferred direct loan origination costs, and net of any unearned interest on discounted loans. A separate allowance for loan and lease losses is provided for loans held for investment. Loans held for sale, including $633,000 of impaired loans, are carried at the lower of cost or fair value, with no allowance for loan losses.

	March 31, 2013					December 31, 2012					March 31, 2012
Type of Loan	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Commercial and industrial	$	239		0.1	%	$	346		0.1	%	$	721		0.3	%
Real estate		1,187		0.5	%		1,202		0.5	%		1,974		0.9	%
Total loans held for sale	$	1,426		0.6	%	$	1,548		0.6	%	$	5,874		2.6	%

As of June 30, 2013, and December 31, 2012, loans totaling $224,995,000 and $218,802,000, respectively, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco.

* Consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

Loans and leases, other than those held for sale, are carried at the principal amount outstanding, net of any deferred loan origination fee income and deferred direct loan origination costs, and net of any unearned interest on discounted loans. A separate allowance for loan and lease losses is provided for loans held for investment. Loans held for sale, including $1,082,000 of impaired loans, are carried at the lower of cost or fair value, with no allowance for loan losses.

As of March 31, 2013, and December 31, 2012, loans totaling $226,915,000 and $218,802,000, respectively, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco.

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

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

Following is a summary of the changes in the allowance for loan and lease losses for the three-month and six-month periods ended ~~March~~June 3130:

(in thousands)	Three Months Ended ~~March~~June 3130,						Six Months Ended June 30
	2013			2012			2013			2012
Balance at beginning of period	$	4,~~242~~237		$	3,~~326~~562		$	4,242		$	3,326
Provision for loan and lease losses charged to expense		~~100~~-			225			100			450
Loans charged off		(~~123~~71	)		(1121	)		(194	)		(122	)
Recoveries on loans previously charged off		1866			12115			84			127
Balance at end of period	$	4,~~237~~232		$	3,~~562~~781		$	4,232		$	3,781

Page 13 of 53

Changes in the allowance for loan and lease losses for the three-month periods ended ~~March~~June 3130, 2013 and 2012, are shown below disaggregated by portfolio segment:

	Threee Months Ended March 31, 2013
	Three Months Ended June 30, 2013
Loan Portfolio Segment	Balance at Beginning of Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	~~321~~372	$	5155		$	-		$	-	$	~~372~~427
Commercial real estate - owner-occupied		~~463~~357		(~~106~~12	)		-			-		~~357~~345
Commercial real estate - non-owner-occupied		~~730~~598		~~(131~~38	)		-			-		~~599~~636
Residential real estate		~~906~~989		~~197~~10			~~(117~~-	)		32		~~989~~1,001
All other real estate loans		3565		3024			-			-		6589
Commercial and industrial loans		1,~~735~~670		(80212	)		-(23	)		1564		1,~~670~~499
Consumer and all other loans and lease financing		5175		3076			(648	)		-		75103
Unallocated		1111		~~109~~21			-			-		~~110~~132
Totals	$	4,~~242~~237	$	~~100~~-		$	(~~123~~71	)	$	1866	$	4,~~237~~232

	Three Months Ended March 31, 2012
	Three Months Ended June 30, 2012
Loan Portfolio Segment	Balance at Beginning of ~~Year~~Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period
Construction and land development	$	~~157~~149	$	(8217	)	$	-		$	-	$	~~149~~366
Commercial real estate - owner-occupied		~~253~~256		3247			-			-1		~~256~~504
Commercial real estate - non-owner-occupied		~~675~~539		~~(136~~345	)		-			-		~~539~~884
Residential real estate		~~640~~711		71(53	)		-			-		~~711~~658
All other real estate loans		4		-3			-			-		47
Commercial and industrial loans		1,~~363~~562		~~190~~(330	)		(1100	)		1066		1,~~562~~198
Consumer and all other loans and lease financing		~~124~~185		59(79	)		-(21	)		248		~~185~~133
Unallocated		~~110~~156		46(125	)		-			-		~~156~~31
Totals	$	3,~~326~~562	$	225		$	(1121	)	$	12115	$	3,~~562~~781

	Six Months Ended June 30, 2013
Loan Portfolio Segment	Balance at Beginning of Period		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period

Construction and land development	$	321	$	106		$	-		$	-	$	427
Commercial real estate - owner-occupied		463		(118	)		-			-		345
Commercial real estate - non-owner-occupied		730		(93	)		-			-		637
Residential real estate		906		207			(117	)		5		1,001
All other real estate loans		35		54			-			-		89
Commercial and industrial loans		1,735		(294	)		(23	)		79		1,497
Consumer and all other loans and lease financing		51		107			(54	)		-		104
Unallocated		1		131			-			-		132
Totals	$	4,242	$	100		$	(194	)	$	84	$	4,232

	Six Months Ended June 30, 2012
Loan Portfolio Segment	Balance at Beginning of Year		Provision for Loan Losses Charged (Credited) to Expense			Less Loans Charged Off			Plus Recoveries on Loans Previously Charged Off		Balance at End of Period

Construction and land development	$	157	$	209		$	-		$	-	$	366
Commercial real estate - owner-occupied		253		250			-			1		504
Commercial real estate - non-owner-occupied		675		208			-			-		883
Residential real estate		640		18			-			-		658
All other real estate loans		4		3			-			-		7
Commercial and industrial loans		1,363		(140	)		(101	)		76		1,198
Consumer and all other loans and lease financing		124		(19	)		(21	)		50		134
Unallocated		110		(79	)		-			-		31
Totals	$	3,326	$	450		$	(122	)	$	127	$	3,781

Page 14 of 53

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

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

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

Page 14 of 53

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

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

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

Page 15 of 53

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

Loans by Asset Quality Rating (excluding loans held for sale*)	Asset Quality Ratings
(in thousands)			Special						Total
	Pass		Mention		Substandard		Doubtful		Loans
As of March 31, 2013:
As of June 30, 2013:
Construction and land development	$	1110,~~960~~577	$	-	$	~~751~~964	$	-	$	1211,~~711~~541
Commercial real estate - owner-occupied		6063,~~643~~404		-339		5,~~699~~155		-		6668,~~342~~898
Commercial real estate - non-owner-occupied		6873,~~501~~904		-		1,~~139~~111		-		6975,~~640~~015
Residential real estate		2827,~~197~~132		84		1,~~709~~082		~~186~~184		3028,~~176~~482
All other real estate		1217,~~661~~519		-		2522		-		1217,~~686~~541
Commercial and industrial		4436,~~284~~277		~~154~~763		43,~~012~~703		-18		4840,~~450~~761
Consumer and all other loans and lease financing		45,~~059~~716		-		-		-		45,~~059~~716
Total loans, net of unearned income	$	~~230~~234,~~305~~529	$	~~238~~1,186	$	1312,~~335~~037	$	~~186~~202	$	~~244~~247,~~064~~954
As of December 31, 2012:
Construction and land development	$	11,440	$	-	$	555	$	-	$	11,995
Commercial real estate - owner-occupied		65,132		-		5,896		-		71,028
Commercial real estate - non-owner-occupied		66,799		1,396		1,166		-		69,361
Residential real estate		28,588		-		2,268		185		31,041
All other real estate		8,319		-		29		-		8,348
Commercial and industrial		44,921		161		4,272		-		49,354
Consumer and all other loans and lease financing		2,614		-		-		-		2,614
Total loans, net of unearned income	$	227,813	$	1,557	$	14,186	$	185	$	243,741
As of March 31, 2012:
As of June 30, 2012:
Construction and land development	$	1314,~~923~~996	$	~~148~~127	$	~~1,034~~418	$	-	$	15,~~105~~541
Commercial real estate - owner-occupied		6463,~~194~~475		-		53,~~781~~713		-		6967,~~975~~188
Commercial real estate - non-owner-occupied		4958,~~454~~524		5,~~129~~108		~~5,890~~872		-		6064,~~473~~504
Residential real estate		2632,~~788~~027		~~484~~-		41,~~606~~214		~~189~~-		3233,~~067~~241
All other real estate		1,~~889~~880		-		-		-		1,~~889~~880
Commercial and industrial		3230,~~263~~228		~~234~~275		43,~~375~~406		85-		3633,~~957~~909
Consumer and all other loans and lease financing		3,~~630~~088		-		-		-		3,~~630~~088
Total loans, net of unearned income	$	~~192~~204,~~141~~218	$	5,~~995~~510	$	219,~~686~~623	$	~~274~~-	$	~~220~~219,~~096~~351
* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

* Loans held for sale consists of all loans held at Mission Asset Management, Inc. and SBA-guaranteed loans held for sale at Mission Community Bank

Page 16 of 53

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

(in thousands)			Commercial Real Estate										Consumer and All
	Construction and Land Development		Owner- Occupied		Non-Owner- Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Other Loans and Leases		Total Loans
As of March 31, 2013:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	-	$	-	$	377	$	-	$	262	$	-	$	639
60-89 Days		-		894		-		76		-		6		9		985
90+ Days		-		758		-		158		-		866		-		1,782
Total Past Due		-		1,652		-		611		-		1,134		9		3,406
Loans in Current Payment Status		12,711		64,690		69,640		29,565		12,686		47,316		4,050		240,658
Total Loans	$	12,711	$	66,342	$	69,640	$	30,176	$	12,686	$	48,450	$	4,059	$	244,064
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		11		-		706		-		-		-		717
Loans in Non-accrual Status		751		3,626		827		912		25		2,851		-		8,992
As of December 31, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	55	$	-	$	325	$	-	$	620	$	69	$	1,069
60-89 Days		-		916		-		-		-		44		-		960
90+ Days		-		820		-		343		-		227		-		1,390
Total Past Due		-		1,791		-		668		-		891		69		3,419
Loans in Current Payment Status		11,995		69,237		69,361		30,373		8,348		48,463		2,545		240,322
Total Loans	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614	$	243,741
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		13		-		709		-		-		-		722
Loans in Non-accrual Status		555		3,779		845		842		29		3,018		-		9,068
As of March 31, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	133	$	977	$	-	$	-	$	-	$	240	$	8	$	1,358
60-89 Days		-		-		-		-		-		112		-		112
90+ Days		-		594		-		459		-		205		-		1,258
Total Past Due		133		1,571		-		459		-		557		8		2,728
Loans in Current Payment Status		14,972		68,404		60,473		31,608		1,889		36,400		3,622		217,368
Total Loans	$	15,105	$	69,975	$	60,473	$	32,067	$	1,889	$	36,957	$	3,630	$	220,096
Loans 90+ Days Past Due and Accruing1	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		200		-		-		-		-		-		-		200
Loans in Non-accrual Status		279		1,756		108		1,640		-		1,692		-		5,475

(in thousands)	Construction		Commercial Real Estate										Consumer and All Other
	and Land Development		Owner- Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Loans and Leases		Total Loans
As of June 30, 2013:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	339	$	-	$	488	$	-	$	53	$	-	$	880
60-89 Days		-		872		-		-		-		308		-		1,180
90+ Days		-		746		-		76		-		393		-		1,215
Total Past Due		-		1,957		-		564		-		754		-		3,275
Loans in Current Payment Status		11,541		66,941		75,015		27,918		17,541		40,007		5,716		244,679
Total Loans	$	11,541	$	68,898	$	75,015	$	28,482	$	17,541	$	40,761	$	5,716	$	247,954

Loans 90+ Days Past Due and Accruing¹	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		8		-		704		-		-		-		712
Loans in Non-accrual Status		741		3,536		807		874		22		2,909		-		8,889

As of December 31, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	55	$	-	$	325	$	-	$	620	$	69	$	1,069
60-89 Days		-		916		-		-		-		44		-		960
90+ Days		-		820		-		343		-		227		-		1,390
Total Past Due		-		1,791		-		668		-		891		69		3,419
Loans in Current Payment Status		11,995		69,237		69,361		30,373		8,348		48,463		2,545		240,322
Total Loans	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614	$	243,741

Loans 90+ Days Past Due and Accruing¹	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		13		-		709		-		-		-		722
Loans in Non-accrual Status		555		3,779		845		842		29		3,018		-		9,068

As of June 30, 2012:
Recorded Balance of Loans Past Due:
30-59 Days	$	-	$	858	$	-	$	185	$	-	$	1,497	$	8	$	2,548
60-89 Days		219		961		-		-		-		81		-		1,261
90+ Days		-		581		-		-		-		97		-		678
Total Past Due		219		2,400		-		185		-		1,675		8		4,487
Loans in Current Payment Status		15,322		64,788		64,504		33,056		1,880		32,234		3,080		214,864
Total Loans	$	15,541	$	67,188	$	64,504	$	33,241	$	1,880	$	33,909	$	3,088	$	219,351

Loans 90+ Days Past Due and Accruing¹	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Accruing Troubled Debt Restructurings		-		-		-		-		-		-		-		-
Loans in Non-accrual Status		963		2,053		104		1,117		-		1,452		-		5,689

¹ Includes pooled loans acquired with deteriorated credit quality. Management evaluates estimated cash flows subsequent to acquisition. If cash flows have not decreased, the pooled acquired loans remain in performing status.

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

Concessions granted in TDR’s typically are intended to reduce the borrower’s cash requirements, such as an extension of the payment terms or a change in the interest rate charged. TDR’s with extended payment terms are ~~reported~~ accounted for as impaired until adequate performance is established~~, at which time they will no longer be reported as a TDR, but will continue to be analyzed for impairment~~. A reduction in the interest rate for a borrower experiencing financial difficulties would result in a change to TDR status if the restructured loan yield is below the yield for a new loan with comparable risk. TDR’s with below-market rates are considered ~~permanently~~ impaired until fully collected. TDR’s may be reported as non-accrual, rather than TDR, if they are not performing under the restructured terms or if adequate payment performance under the restructured terms has yet to be established.

Page 17 of 53

~~Six~~Eleven loans totaling $~~697~~1,314,000 were restructured in TDR’s during the first ~~three~~six months of 2013 and four loans totaling $743,000 were restructured in the first ~~three~~six months of 2012. No TDR’s were in accruing status and more than 90 days past due as of ~~March~~June 3130, 2013 or December 31, 2012. The Bank has no commitments to lend additional funds under loans classified as TDR’s as of ~~March~~June 3130, 2013.

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

(in thousands)	Construction		Commercial Real Estate								Commercial		~~Consumer~~Consumerand ~~and~~ All Other
	and Land Development		Owner- Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		~~Commercial~~ and Industrial		Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of March 31, 2013:
Loans Held for Investment as of June 30, 2013:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	~~294~~288	$	~~553~~124	$	~~733~~717	$	~~892~~964	$	2622	$	~~601~~952	$	-			$	3,~~099~~067
Impaired Loans With No Allowance Recorded		-		~~894~~2,043		-		-		-		~~217~~1,473		-				13,~~111~~516
Total Loans Individually Evaluated For Impairment		~~294~~288		12,~~447~~167		~~733~~717		~~892~~964		2622		~~818~~2,425		-				46,~~210~~583
Loans Collectively Evaluated For Impairment		109,~~390~~236		4951,~~348~~242		5762,~~294~~685		2423,~~749~~114		1217,~~660~~519		4637,~~592~~421		35,~~881~~539				~~204~~206,~~914~~756
Loans Acquired With Deteriorated Credit Quality		2,~~027~~017		15,~~547~~489		11,613		4,~~535~~404		-		~~1,040~~915		~~178~~177				34,~~940~~615
Total Loans Held for Investment	$	1211,~~711~~541	$	6668,~~342~~898	$	6975,~~640~~015	$	3028,~~176~~482	$	1217,~~686~~541	$	4840,~~450~~761	$	45,~~059~~716			$	~~244~~247,~~064~~954
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	~~294~~309	$	~~553~~135	$	~~733~~758	$	~~892~~1,001	$	2625	$	1,~~347~~048	$	-			$	3,~~845~~276
Impaired Loans With No Allowance Recorded		-		~~894~~2,301		-		-		-		~~217~~1,683		-				13,~~111~~984
Total Loans Individually Evaluated For Impairment		~~294~~309		12,~~447~~436		~~733~~758		~~892~~1,001		2625		12,~~564~~731		-				47,~~956~~260
Loans Collectively Evaluated For Impairment		109,~~390~~236		4951,~~348~~242		5762,~~294~~685		2423,~~749~~114		1217,~~660~~519		4637,~~592~~421		35,~~881~~539				~~204~~206,~~914~~756
Loans Acquired With Deteriorated Credit Quality		5,~~435~~411		17,~~315~~157		13,~~114~~048		65,~~438~~779		-		2,~~369~~063		~~182~~180				4443,~~853~~638
Total Loans Held for Investment	$	1614,~~119~~956	$	6870,~~110~~835	$	7176,~~141~~491	$	3229,~~079~~894	$	1217,~~686~~544	$	5042,~~525~~215	$	45,~~063~~719			$	~~254~~257,~~723~~654
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	93121	$	2432	$	5442	$	~~396~~424	$	21	$	~~721~~605	$	-			$	1,~~290~~225
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		93121		2432		5442		~~396~~424		21		~~721~~605		-				1,~~290~~225
Loans Collectively Evaluated For Impairment		~~279~~306		~~333~~313		~~545~~594		~~593~~577		6388		~~948~~894		75103	$	~~111~~132		23,~~947~~007
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	~~372~~427	$	~~357~~345	$	~~599~~636	$	~~989~~1,001	$	6589	$	1,~~669~~499	$	75103	$	~~111~~132	$	4,~~237~~232
For the Three Months Ended March 31, 2013:
For the Six Months Ended June 30, 2013:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	~~299~~295	$	~~561~~670	$	~~742~~733	$	~~893~~967	$	2726	$	~~614~~1,527	$	-			$	34,~~136~~218
Impaired Loans With No Allowance Recorded		-		~~905~~1,557		-		-		-		~~229~~1,047		-				12,~~134~~604
Total Loans Individually Evaluated For Impairment	$	~~299~~295	$	12,~~466~~227	$	~~742~~733	$	~~893~~967	$	2726	$	~~843~~2,574	$	-			$	46,~~270~~822
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	1019	$	-	$	-	$	-			$	1019
Impaired Loans With No Allowance Recorded		-		-1		-		-		-		-		-				-1
Total Loans Individually Evaluated For Impairment	$	-	$	-1	$	-	$	1019	$	-	$	-	$	-			$	1020

Page 18 of 53

(in thousands)	Construction		Commercial Real Estate										Consumer and All Other
	and Land Development		Owner-Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of December 31, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	385	$	686	$	749	$	894	$	29	$	1,354	$	-			$	4,097
Impaired Loans With No Allowance Recorded		170		1,599		-		-		-		1,298		-				3,067
Total Loans Individually Evaluated For Impairment		555		2,285		749		894		29		2,652		-				7,164
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		2,455		16,906		11,554		4,534		-		967		179				36,595
Total Loans Held for Investment	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614			$	243,741
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	404	$	731	$	763	$	899	$	30	$	2,040	$	-			$	4,867
Impaired Loans With No Allowance Recorded		177		1,745		-		-		-		1,427		-				3,349
Total Loans Individually Evaluated For Impairment		581		2,476		763		899		30		3,467		-				8,216
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		6,264		18,575		13,184		6,468		-		2,489		183				47,163
Total Loans Held for Investment	$	15,830	$	72,888	$	71,005	$	32,980	$	8,349	$	51,691	$	2,618			$	255,361
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	103	$	53	$	66	$	324	$	2	$	683	$	-			$	1,231
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		103		53		66		324		2		683		-				1,231
Loans Collectively Evaluated For Impairment		218		410		664		582		33		1,052		51	$	1		3,011
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	321	$	463	$	730	$	906	$	35	$	1,735	$	51	$	1	$	4,242
For the Year Ended December 31, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	198	$	655	$	303	$	291	$	6	$	791	$	-			$	2,244
Impaired Loans With No Allowance Recorded		533		1,378		109		782		-		1,425		-				4,227
Total Loans Individually Evaluated For Impairment	$	731	$	2,033	$	412	$	1,073	$	6	$	2,216	$	-			$	6,471
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10
Impaired Loans With No Allowance Recorded		-		-		1		-		-		-		-				1
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	1	$	10	$	-	$	-	$	-			$	11

(in thousands)			Commercial Real Estate										Consumer and All
	Construction and Land Development		Owner-Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Other Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of December 31, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	385	$	686	$	749	$	894	$	29	$	1,354	$	-			$	4,097
Impaired Loans With No Allowance Recorded		170		1,599		-		-		-		1,298		-				3,067
Total Loans Individually Evaluated For Impairment		555		2,285		749		894		29		2,652		-				7,164
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		2,455		16,906		11,554		4,534		-		967		179				36,595
Total Loans Held for Investment	$	11,995	$	71,028	$	69,361	$	31,041	$	8,348	$	49,354	$	2,614			$	243,741
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	404	$	731	$	763	$	899	$	30	$	2,040	$	-			$	4,867
Impaired Loans With No Allowance Recorded		177		1,745		-		-		-		1,427		-				3,349
Total Loans Individually Evaluated For Impairment		581		2,476		763		899		30		3,467		-				8,216
Loans Collectively Evaluated For Impairment		8,985		51,837		57,058		25,613		8,319		45,735		2,435				199,982
Loans Acquired With Deteriorated Credit Quality		6,264		18,575		13,184		6,468		-		2,489		183				47,163
Total Loans Held for Investment	$	15,830	$	72,888	$	71,005	$	32,980	$	8,349	$	51,691	$	2,618			$	255,361
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	103	$	53	$	66	$	324	$	2	$	683	$	-			$	1,231
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		103		53		66		324		2		683		-				1,231
Loans Collectively Evaluated For Impairment		218		410		664		582		33		1,052		51	$	1		3,011
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	321	$	463	$	730	$	906	$	35	$	1,735	$	51	$	1	$	4,242

For the Year Ended December 31, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	198	$	655	$	303	$	291	$	6	$	791	$	-			$	2,244
Impaired Loans With No Allowance Recorded		533		1,378		109		782		-		1,425		-				4,227
Total Loans Individually Evaluated For Impairment	$	731	$	2,033	$	412	$	1,073	$	6	$	2,216	$	-			$	6,471
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10
Impaired Loans With No Allowance Recorded		-		-		1		-		-		-		-				1
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	1	$	10	$	-	$	-	$	-			$	11

Page 19 of 53

(in thousands)	~~Construction~~		Commercial Real Estate				~~Residential~~				~~Commercial~~		Consumer and All ~~Other~~
	and Land Development		Owner-Occupied		Non-Owner-Occupied		Real Estate		All Other Real Estate		and Industrial		Loans and Leases		Unallocated		Total Loans
	Construction and Land Development		Owner-Occupied		Non-Owner-Occupied		Residential Real Estate		All Other Real Estate		Commercial and Industrial		Other Loans and Leases		Unallocated		Total Loans
Loans Held for Investment as of March 31, 2012:
Loans Held for Investment as of June 30, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	-199	$	-581	$	-	$	~~189~~185	$	-	$	~~450~~326	$	-			$	~~639~~1,291
Impaired Loans With No Allowance Recorded		-544		1,~~571~~294		-		-		-		~~396~~590		-				12,~~967~~428
Total Loans Individually Evaluated For Impairment		-743		1,~~571~~875		-		~~189~~185		-		~~846~~916		-				23,~~606~~719
Loans Collectively Evaluated For Impairment		1211,~~224~~988		5149,~~429~~100		4852,~~512~~940		2628,~~516~~213		1,~~889~~880		3330,~~153~~551		32,~~444~~904				177,~~167~~576
Loans Acquired With Deteriorated Credit Quality		2,~~881~~810		16,~~975~~213		11,~~961~~564		54,~~362~~843		-		2,~~958~~442		~~186~~184				4038,~~323~~056
Total Loans Held for Investment	$	15,~~105~~541	$	6967,~~975~~188	$	6064,~~473~~504	$	3233,~~067~~241	$	1,~~889~~880	$	3633,~~957~~909	$	3,~~630~~088			$	~~220~~219,~~096~~351
Unpaid Principal Balance:																		-
Impaired Loans With An Allowance Recorded	$	-200	$	-594	$	-	$	190	$	-	$	~~483~~353	$	-			$	~~673~~1,337
Impaired Loans With No Allowance Recorded		-547		1,~~615~~370		-		-		-		~~351~~1,143		-				13,~~966~~060
Total Loans Individually Evaluated For Impairment		-747		1,~~615~~964		-		190		-		~~834~~1,496		-				24,~~639~~397
Loans Collectively Evaluated For Impairment		1211,~~224~~988		5149,~~429~~100		4852,~~512~~940		2628,~~516~~213		1,~~889~~880		3330,~~153~~551		32,~~444~~904				177,~~167~~576
Loans Acquired With Deteriorated Credit Quality		6,~~630~~632		1817,~~799~~954		13,~~792~~317		76,~~400~~835		-		54,~~089~~330		~~190~~188				5149,~~900~~256
Total Loans Held for Investment	$	1819,~~854~~367	$	7169,~~843~~018	$	6266,~~304~~257	$	3435,~~106~~238	$	1,~~889~~880	$	3936,~~076~~377	$	3,~~634~~092			$	231,~~706~~229
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	-2	$	-13	$	-	$	~~128~~124	$	-	$	~~264~~135	$	-			$	~~392~~274
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		-2		-13		-		~~128~~124		-		~~264~~135		-				~~392~~274
Loans Collectively Evaluated For Impairment		~~149~~364		~~192~~491		~~539~~884		~~583~~534		47		1,~~132~~063		~~185~~133	$	~~156~~31		23,~~940~~507
Loans Acquired With Deteriorated Credit Quality		-		64-		-		-		-		~~166~~-		-				~~230~~-
Total Loans Held for Investment	$	~~149~~366	$	~~256~~504	$	~~539~~884	$	~~711~~658	$	47	$	1,~~562~~198	$	~~185~~133	$	~~156~~31	$	3,~~562~~781
For the Three Months Ended March 31, 2012:
For the Six Months Ended June 30, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-199	$	-588	$	-	$	94185	$	-	$	~~464~~350	$	-			$	~~558~~1,322
Impaired Loans With No Allowance Recorded		-544		1,~~606~~294		-		-		-		~~383~~590		-				12,~~989~~428
Total Loans Individually Evaluated For Impairment	$	-743	$	1,~~606~~882	$	-	$	94185	$	-	$	~~847~~940	$	-			$	23,~~547~~750
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	-	$	-	$	-	$	-			$	-
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-			$	-

Page 20 of 53

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

Changes in the accretable discount for loans purchased with credit quality deterioration follows:

	For the Three Months Ended March 31,
	For the Six Months Ended June 30,
(in thousands)	2013			2012
Balance at beginning of year	$	1,734		$	3,289
Measurement period adustments to Santa Lucia Bank fair values		-			(428	)
Accretion to interest income		(~~708~~1,111	)		(~~260~~690	)
Loans reclassified to held for sale		-			(355	)
Transfers from non-accretable discount to accretable		1,~~812~~930			-158
Balance at end of period	$	2,~~838~~553		$	21,~~246~~974

Note 6 —Common and Preferred Stock and Earnings (Loss) per Share

Common Stock

During 2010, the Company issued an aggregate of 5,000,000 shares of its common stock paired with warrants to purchase an additional 5,000,000 shares of its common stock (the “2010 Warrants”) for an aggregate purchase price of $25 million. These securities were sold pursuant to the terms of a Securities Purchase Agreement dated December 22, 2009, as amended, by and between the Company and Carpenter Fund Manager GP, LLC (the “Manager”) on behalf of and as General Partner of Carpenter Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community BancFund-CA, L.P. (the “Investors”)(the “Securities Purchase Agreement”). The 2010 Warrants were issued for a term of five years at an exercise price of $5.00 per share and contained customary anti-dilution provisions. The Company used a substantial majority of the proceeds from the sale of securities under the Securities Purchase Agreement to enable a newly-formed wholly-owned subsidiary, Mission Asset Management, Inc., to purchase from the Bank certain non-performing loans and other real estate owned assets.

The Securities Purchase Agreement further provided that the Company would conduct a rights offering to its existing shareholders, pursuant to which each shareholder was offered the right to purchase 15 additional shares of common stock, paired with a warrant (the “Public Warrants”), for each share held, at a price of $5.00 per unit of common stock and warrant. The rights offering closed on December 15, 2010, with 748,672 shares being issued. Net proceeds from the rights offering totaled $3,527,000. On September 5, 2012, the expiration date of the Public Warrants was extended from December 17, 2015 to March 21, 2017. No other terms or conditions of the Public ~~Warrant~~Warrants were modified and no consideration was transferred.

Page 2120 of 53

Bancorp-Issued Preferred Stock

As a result of a change in control in 2010, the Company lost its status as a Community Development Financial Institution (“CDFI”) in 2012. Accordingly, the Company may be required to redeem the Company’s Series A and C preferred stock at a total redemption price of $1,000,000. Those series of preferred stock are carried at their redemption values in the consolidated balance sheets and are classified as mezzanine financing rather than equity.

Mission Asset Management, Inc. Preferred Stock and Company Warrants

On October 21, 2011, for an aggregate purchase price of $10 million, Mission Asset Management, Inc. issued 10,000 shares of its newly authorized Series A Non-Cumulative Perpetual Preferred Stock (“MAM Preferred Stock”) and the Company issued warrants to purchase an aggregate of 2,202,641 shares of the Company’s common stock (the “2011 Warrants”). The 2011 Warrants were issued for a term of 10 years from issuance at an exercise price of $4.54 per share. In December 2011, 660,792 of the 2011 Warrants were exercised and $3,000,000 of the MAM Preferred Stock was liquidated. From June 2012 through December 2012 an additional $5,000,000 of the MAM Preferred Stock was liquidated, and in the first six months of 2013 another $1,350,000 was liquidated. These preferred shares include redemption provisions that are outside the control of the Company. Accordingly, these preferred shares are presented as mezzanine financing at their redemption value of $1650,~~250,~~000 as of ~~March~~June 3130, 2013.

In addition to customary anti-dilution provisions, the 2010 Warrants and the 2011 Warrants referred to above contain certain anti-dilution features that ~~have~~ caused these warrants to be reflected as derivative liabilities pursuant to ASC 815—at their fair values—in the consolidated balance sheets rather than as components of equity. Subsequent changes in their fair values ~~are~~were recognized as gains or losses through non-interest income, which ~~impacts~~impacted net loss and loss per share in the consolidated statement of operations. In March 2012 all 2010 Warrants and substantially all of the 2011 Warrants (i.e., those issued to the Investors) were cancelled and replaced with 6,487,800 five-year warrants having approximately the equivalent aggregate fair value as the cancelled warrants but without the anti-dilution features that call for derivative accounting treatment. Accordingly, $4,955,000 (the fair value of the cancelled warrants immediately prior to cancellation) was transferred from warrant liability to additional paid-in capital in March 2012. In September 2012 the remaining 153,876 of the 2011 Warrants were cancelled and replaced with 171,980 warrants having substantially identical terms as those issued in March 2012 and aggregate fair value equivalent to the cancelled warrants. The remaining $161,000 of warrant liability at that date was transferred to additional paid-in capital.

Page 2221 of 53

Activity in the Company’s outstanding warrants follows:

	Shares			Weighted Average Exercise Price
Outstanding December 31, 2011		7,290,521		$	4.90
Warrants cancelled in 2012		( 6,541,849	)		4.89
Warrants issued in 2012		6,659,780			5.00
Warrants exercised in 2012		( 400,000	)		5.00
Outstanding December 31, 2012		7,008,452			5.00
Warrants granted 1st Quarter 2013		-
Warrants granted 1st half 2013		-
Warrants exercised 1st Quarter 2013		-
Warrants exercised 1st half 2013		( 600,000	)		5.00
Outstanding March 31, 2013		7,008,452		$	5.00
Outstanding June 30, 2013		6,408,452		$	5.00

Prior to the consummation of the transactions under the Securities Purchase Agreement, the Manager was the largest shareholder of the Company, beneficially owning 333,334 shares of the common stock of the Company or 24.7% of the issued and outstanding shares. As of ~~March~~June 3130, 2013, following the consummation of the transactions under the Securities Purchase Agreement, the rights offering, and the 2011 ~~warrants exercise~~, 2012 and ~~the~~2013 ~~2012~~ warrants exercises, the Manager is the beneficial owner of 6,~~328~~928,179 shares of the common stock of the Company (not including warrants), or 7779.61% of the issued and outstanding shares.

Page 23 of 53

Earnings (Loss) per Share

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

(in thousands, except per share data)	For the Three Months Ended March 31,
	2013		2012
Net income (loss)	$	935	$	(831	)
Less earnings and dividends applicable to preferred stock:
Convertible preferred (Series A & C)		11		-
Non-convertible subsidiary-issued preferred stock		49		175
Net income allocated to all classes of preferred stock		60		175
Net income (loss) attributable to common stock	$	875	$	(1,006	)
Average common shares outstanding		8,155,066		7,755,066
Dilutive effect of outstanding stock-based awards and other potential common shares		-		-
Average common shares used for diluted EPS		8,155,066		7,755,066
Basic earnings (loss) per common share	$	0.11	$	(0.13	)
Diluted earnings (loss) per common share	$	0.11	$	(0.13	)

(in thousands, except per share data)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Net income (loss)	$	589	$	522	$	1,524	$	(309	)
Less earnings and dividends applicable to preferred stock:
Convertible preferred (Series A & C)		7		-		17		-
Non-convertible subsidiary-issued preferred stock		20		174		70		349
Net income allocated to all classes of preferred stock		27		174		87		349
Net income (loss) attributable to common stock	$	562	$	348	$	1,437	$	(658	)

Average common shares outstanding		8,340,066		7,766,055		8,247,055		7,760,561
Dilutive effect of outstanding stock-based awards and other potential common shares		17,409		-		26,976		-
Average common shares used for diluted EPS		8,357,475		7,766,055		8,274,031		7,760,561

Basic earnings (loss) per common share	$	0.07	$	0.04	$	0.17	$	(0.08	)
Diluted earnings (loss) per common share	$	0.07	$	0.04	$	0.17	$	(0.08	)

~~The~~Page ~~following~~22 potential common shares were excluded from diluted EPS in 2013: 452,900 outstanding stock options; 7,008,452 outstanding warrants and 220,264 shares related to convertible preferred shares, due to the exercise or conversion price of each exceeding the average market price of the Company’s common shares. Excluded from diluted EPS in 2012 were 284,900 outstanding stock options; 7,390,348 outstanding warrants and 220,264 shares related to convertible preferred shares, as the Company incurred a net loss for the first quarter of 2012.53

The following potential common shares were excluded from diluted EPS in 2013: 452,900 outstanding stock options; 6,408,452 outstanding warrants and 220,264 shares related to convertible preferred shares, due to the exercise or conversion price of each exceeding the average market price of the Company’s common shares. Excluded from diluted EPS in 2012 were 277,400 outstanding stock options; 7,290,348 outstanding warrants and 220,264 shares related to convertible preferred shares, as the Company incurred a net loss for the first six months of 2012.

Note 7 —Income taxes

The Company recognized income tax expense of $1939,000 in the first ~~three~~six months of 2013 and ~~none~~$3,000 in the comparable period of 2012. In the first ~~quarter~~half of 2013, the provision for income tax was offset by available tax loss carry-forwards originating from 2008 through 2011. The $1939,000 income tax recorded in 2013 represents an accrual for alternative minimum tax related to utilizing those tax loss carry-forwards.

The Company continues to maintain a full valuation allowance for deferred income taxes, as a result of the Company being in a cumulative loss position as of ~~March~~June 3130, 2013.

Page 24 of 53

Note 8 — Fair Value Measurement

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of ~~March~~June 3130, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

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

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

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

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

NoPage ~~warrants~~23 ~~were subject to fair value accounting as~~ of ~~March 31, 2013 or December 31, 2012.~~53

~~Page~~No 25warrants were subject to fair value accounting as of 53June 30, 2013 or December 31, 2012.

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

	Fair Value Measurements Using
(in thousands)	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3			Total
June 30, 2013	Level 1		Level 2		Level 3			Total
March 31, 2013
Available for sale securities:
U.S. Government agencies	$	-	$	2224,~~149~~723	$	-		$	2224,~~149~~723
Residential mortgage-backed securities		-		8085,~~228~~379		-			8085,~~228~~379
Municipal securities		-		1916,~~449~~847		-			1916,~~449~~847
Corporate debt securities		-		43,~~272~~236		-			43,~~272~~236
Asset-backed securities		-		1619,~~820~~756		-			1619,~~820~~756
Total available-for-sale securities		-		~~142~~149,~~918~~941		-			~~142~~149,~~918~~941
Loans held for sale		-		-		12,~~426~~885			12,~~426~~885
Total net assets measured at fair value on a recurring basis	$	-	$	~~142~~149,~~918~~941	$	12,~~426~~885		$	~~144~~152,~~344~~826
December 31, 2012
Available for sale securities:
U.S. Government agencies	$	-	$	30,589	$	-		$	30,589
Residential mortgage-backed securities		-		61,660		-			61,660
Municipal securities		-		19,273		-			19,273
Corporate debt securities		-		2,996		-			2,996
Asset-backed securities		-		13,304		-			13,304
Total available-for-sale securities		-		127,822		-			127,822
Loans held for sale		-		-		1,548			1,548
Total net assets measured at fair value on a recurring basis	$	-	$	127,822	$	1,548		$	129,370
March 31, 2012
June 30, 2012
Available for sale securities:
U.S. Government agencies	$	-	$	2664,~~998~~717	$	-		$	2664,~~998~~717
Residential mortgage-backed securities		-		8683,~~878~~335		-			8683,~~878~~335
Municipal securities		-		4,~~813~~823		-			4,~~813~~823
Corporate debt securities		-		3,~~039~~027		-			3,~~039~~027
Asset-backed securities		-		615,~~894~~570		-			615,~~894~~570
Total available-for-sale securities		-		~~128~~171,~~622~~472		-			~~128~~171,~~622~~472
Loans held for sale		-		-		54,~~874~~280			54,~~874~~280
Warrant liability		-		-		(~~200~~150	)		(~~200~~150	)
Total net assets measured at fair value on a recurring basis	$	-	$	~~128~~171,~~622~~472	$	54,~~674~~130		$	~~134~~175,~~296~~602

The fair value of securities available for sale equals quoted market prices, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities. There were no changes in the valuation techniques used during 2013 or 2012 and there were no transfers into or out of Levels 1, 2 or 3 of the fair value hierarchy during the ~~three~~six months ended ~~March~~June 3130, 2013.

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

Page 24 of 53

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

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

Page 2625 of 53

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

(in thousands)	Fair Value Measurements Using								Current Period Gains
March 31, 2013	Level 1		Level 2		Level 3		Total		(Losses)
June 30, 2013	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	971,820	$	971,820	$	~~(83~~68	)
Residential real estate		-		-		~~496~~540		~~496~~540		4(123	)
Commercial real estate - owner-occupied		-		-		12,~~423~~135		12,~~423~~135		1920
Commercial real estate - non-owner-occupied		-		-		~~679~~675		~~679~~675		1224
All other real estate		-		-		2421		2421		1
Construction and land development		-		-		~~201~~167		~~201~~167		2(25	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	25,~~920~~358	$	25,~~920~~358	$	(4535	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	~~818~~790	$	~~818~~790	$	-(28	)

	Fair Value Measurements Using								Full Year Gains
*December 31, 2012*	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	1,969	$	1,969	$	7
Residential real estate		-		-		570		570		(324	)
Commercial real estate - owner-occupied		-		-		2,232		2,232		(20	)
Commercial real estate - non-owner-occupied		-		-		683		683		(66	)
All other real estate		-		-		27		27		(2	)
Construction and land development		-		-		452		452		(96	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	5,933	$	5,933	$	(501	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	818	$	818	$	(463	)

	Fair Value Measurements Using								Current Period Gains
March 31, 2012	Level 1		Level 2		Level 3		Total		(Losses)
June 30, 2012	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	~~582~~781	$	~~582~~781	$	-115
Residential real estate		-		-		61		61		-124
Commercial real estate - owner-occupied		-		-		1,~~571~~862		1,~~571~~862		-13
Commercial real estate - non-owner-occupied		-		-		-		-		~~(128~~-	)
All other real estate		-		-		-		-		-
Construction and land development		-		-		-741		-741		~~(190~~2	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	23,~~214~~445	$	23,~~214~~445	$	~~(318~~254	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	2,~~224~~299	$	2,~~224~~299	$	(~~358~~288	)

Page 2726 of 53

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

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

The following table presents a reconciliation of net assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first ~~three~~six months of 2013 and 2012:

(in thousands)	Level 3 Securities Available for Sale, Loans Held for Sale and Warrant Liability
	Three Months Ended March 31
	Six Months Ended June 30
	2013			2012
Balance at beginning of year	$	1,548		$	(1,464	)
Net (decrease) increase in SBA loans held for sale		~~(66~~1,849	)		61(93	)
Loans held for sale transfered into Level 3		-			4,282
Settlements - principal reductions in loans held for sale		(~~197~~826	)		(21969	)
Loan participations sold to related party		-			(2,168	)
Reduction in loans held for sale valuation reserve		141			-
Loans held for sale transferred to other real estate owned		-			(492	)
Reduction in loans held for sale valuation reserve		314			-
Cancellation of warrants accounted for as liabilities		-			4,955
Changes in fair value of warrant liability		-			3079
Balance at end of period	$	12,~~426~~885		$	54,~~675~~130

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

Financial Assets. The carrying amounts of cash and short-term investments are considered to approximate fair value. Short-term investments include federal funds sold and interest bearing deposits with other banks. For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using other observable data, which may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors. The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available, and are considered to be within Level 2. Impaired loans are within Level 3 of the fair value hierarchy. The carrying value of accrued interest receivable approximates fair value. The carrying ~~amount~~amounts of stock in the Federal Home Loan Bank of San Francisco (“FHLB”) and ~~FRB~~in ~~stock~~the FRB approximate their fair value.

Page 2827 of 53

Financial Liabilities. The carrying amounts of deposit liabilities payable on demand and short-term borrowed funds are considered to approximate fair value. For fixed maturity (i.e., time) deposits, which are within Level 2 of the fair value hierarchy, fair value is estimated by discounting estimated future contractual cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of junior subordinated debt securities (Level 2) is based on rates currently available to the Bank for debt with similar terms and remaining maturities.

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

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

(in thousands)	March 31, 2013				December 31, 2012				March 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	10,063	$	10,063	$	25,635	$	25,635	$	67,093	$	67,093
Interest-bearing deposits in other banks		3,210		3,210		3,706		3,706		3,492		3,492
Investment securities		142,918		142,918		127,822		127,822		128,622		128,622
Loans held for sale		1,426		1,426		1,548		1,548		5,874		5,874
Loans, net of allowance for loan and lease losses		239,827		240,666		239,499		244,979		216,534		215,233
Federal Home Loan Bank and other stocks		6,868		6,868		6,822		6,822		3,801		3,801
Accrued interest receivable		1,238		1,238		1,361		1,361		1,216		1,216
Financial Liabilities:
Deposits		386,347		386,619		387,268		387,589		405,280		405,582
Junior subordinated debt securities		5,632		4,611		5,604		4,607		5,519		4,612
Accrued interest payable		115		115		111		111		205		205
Warrant liability		-		-		-		-		199		199

(in thousands)	June 30, 2013				December 31, 2012				June 30, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	12,125	$	12,125	$	25,635	$	25,635	$	27,256	$	27,256
Interest-bearing deposits in other banks		2,224		2,224		3,706		3,706		5,176		5,176
Investment securities		149,941		149,941		127,822		127,822		171,472		171,472
Loans held for sale		2,885		2,885		1,548		1,548		4,280		4,280
Loans, net of allowance for loan and lease losses		243,722		243,923		239,499		244,979		215,570		213,272
Federal Home Loan Bank and other stocks		6,927		6,927		6,822		6,822		3,800		3,800
Accrued interest receivable		1,400		1,400		1,361		1,361		1,452		1,452

Financial Liabilities:
Deposits		397,675		398,020		387,268		387,589		408,645		408,912
Other borrowings		3,000		2,882		-		-		-		-
Junior subordinated debt securities		5,660		4,622		5,604		4,607		5,548		4,176
Accrued interest payable		119		119		111		111		154		154
Warrant liability		-		-		-		-		150		150

Page 2928 of 53

Note 9 — Recent Accounting Pronouncements

Adoption of New Accounting Standards

Offsetting Assets and Liabilities

In January 2013, the FASB issued guidance within ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2013-01 to Topic 210, Balance Sheet, clarify that the scope of ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities,” would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse agreements, and securities borrowing and securities lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated statement of cash flows.

Reclassifications Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued guidance within ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in ASU 2013-02 to Topic 220, Comprehensive Income, update, supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and 2011-12. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of operations, its consolidated balance sheet, or its consolidated statement of cash flows and only impacts the presentation of other comprehensive income in the consolidated financial statements.

Page 3029 of 53

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

Forward-Looking Statements

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

Overview of Results of Operations and Financial Condition

Overview

The Company

Mission Community Bancorp (“Bancorp”) is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is headquartered in San Luis Obispo, California. It was incorporated on September 22, 2000 and acquired all the outstanding shares of Mission Community Bank (“the Bank”) in a one bank holding company organization effective December 15, 2000. The Bancorp’s principal activity is the ownership of all of the outstanding common stock of Mission Community Bank and any other subsidiaries it may acquire or establish. The Bancorp formed a wholly-owned subsidiary, Mission Community Capital Trust I, in 2003 solely to facilitate the issuance of trust preferred securities, and in conjunction with the 2011 acquisition of Santa Lucia Bank, Santa Lucia Bancorp (CA) Capital Trust was acquired by the Bancorp. In May 2010, the Bancorp formed its only other direct subsidiary, Mission Asset Management, Inc. (“MAM”), in order to purchase certain of the non-performing assets of ~~Mission~~the ~~Community~~ Bank, which assets were purchased in June 2010. In March 2012, MAM purchased from the Bank certain non-performing assets acquired in the Santa Lucia Bank acquisition.

~~Mission~~Page ~~Community~~30 ~~Bank, a wholly-owned subsidiary~~ of the Bancorp, is a California state-chartered bank headquartered in San Luis Obispo, California. It is a member of the Federal Reserve System. The Bank operates five branches in the Central Coast area of California serving the cities of San Luis Obispo, Paso Robles, Atascadero, Arroyo Grande and Santa Maria. In addition, the Bank operates two loan production offices, one in San Luis Obispo with a primary focus on Small Business Administration lending and the other—focused on agricultural lending—is located in the city of Oxnard, in Ventura County. The Bank’s primary source of revenue is providing real estate, commercial loans and lines of credit and agricultural loans to customers who are predominately small and middle-market businesses. The Bank also provides loans, deposits, and other banking services to consumers through the branches and internet banking.53

~~Page~~Mission 31Community Bank, a wholly-owned subsidiary of 53the Bancorp, is a California state-chartered bank headquartered in San Luis Obispo, California. It is a member of the Federal Reserve System. The Bank operates five branches in the Central Coast area of California serving the cities of San Luis Obispo, Paso Robles, Atascadero, Arroyo Grande and Santa Maria. In addition, the Bank operates two loan production offices, one in San Luis Obispo with a primary focus on Small Business Administration lending and the other—focused on agricultural lending—is located in the city of Oxnard, in Santa Barbara County. The Bank’s primary source of revenue is providing real estate loans, commercial loans and lines of credit and agricultural loans to customers, who are predominately small and middle-market businesses. The Bank also provides loans, deposits, and other banking services to consumers through the branches and internet banking.

Executive Summary of Operating Results

~~First~~Second quarter, 2013 marks the ~~fourth~~fifth consecutive quarter of profitability for the Company. Net income for the three months ended ~~March~~June 3130, 2013 was $~~935~~589 thousand as compared to ~~a net loss of (~~$~~831)~~522 thousand for the same period of 2012. The improvement of $~~1.766~~67 ~~million~~thousand was ~~largely~~ driven by $~~989~~656 thousand of ~~higher~~lower non-interest ~~income~~expense and $~~811~~225 thousand of lower provision for loan and lease losses, partially offset by lower net interest income and non-interest ~~expense~~income. Net income applicable to common stock was $~~875~~562 thousand this quarter as compared to ~~a net loss applicable to common stock of~~ $~~(1.006)~~348 ~~million~~thousand for the same three month period in ~~2011~~2012.

The ~~higher~~lower ~~non-~~net interest income this quarter was primarily due to ~~gains~~a of $~~414~~306 thousand onreduction ~~the~~in ~~disposition~~discount ofaccretion on loans ~~held~~acquired ~~for~~in ~~sale~~the ~~and~~Santa ~~$153~~Lucia ~~thousand~~Bank ~~higher~~merger, ~~net~~while ~~gains~~the onlower ~~securities~~non-interest ~~sold.~~income Inthis ~~addition, in first~~ quarter, ~~2012~~was ~~the~~due ~~Company~~to ~~recognized~~ a ~~loss of~~ $~~358~~505 thousand onreduction ~~the~~in ~~write-down~~net ofgains ~~foreclosed~~on ~~real~~securities ~~estate that did not reoccur this quarter, further improving earnings~~sold.

The decline in non-interest expenses of $~~811~~656 thousand was ~~mainly~~accomplished ~~due~~across tomost ~~the~~categories ~~non-repeat~~ of ~~acquisition~~expense, ~~related~~following ~~costs that followed~~ the Santa Lucia Bank acquisition that closed in October, 2011. ~~Following~~In ~~this~~the ~~acquisition~~second quarter of 2012, one-time costs were incurred infor ~~first~~employee ~~quarter,~~severance ~~2012 that included~~ ($~~402~~181 thousand), in data processing and technology ~~spend, while another~~ ($~~252~~91 thousand), ~~was~~and ~~incurred for~~ professional fees infor ~~connection with~~ accounting and legal services, ~~both of which were non-recurring in first quarter, 2013. Also contributing to the overall non-interest expense decline was~~ ($8860 thousand ~~less in salaries and benefits expense and $53 thousand less in marketing cost~~).

As the credit quality of the loan portfolio stabilizes and improves, the provision for loan losses has continued to decline. In ~~first~~second quarter, 2013 ~~the~~no provision for loan loss was ~~$100 thousand~~recognized, down $~~125~~225 thousand ~~less~~from ~~than~~second ~~first~~ quarter, 2012. ~~Partly~~In ~~offsetting~~addition, ~~the~~expenses ~~lower~~associated ~~provision~~with ~~for~~other ~~loan~~real ~~losses~~estate ~~was~~owned declined by $~~140~~101 thousand, ~~less~~as inthe ~~net~~balance ~~interest~~of ~~income~~other ~~due~~real toestate ~~lower~~owned ~~average~~has ~~earning~~dropped ~~assets~~by $1.509 million since June 30, 2012.

In ~~first~~second quarter, 2013 return on average assets (annualized) was 0.8956% and return on average equity (annualized) was 106.1532%, as compared to ~~first~~second quarter, 2012 where ~~loss~~return on average assets was (0.~~73)~~46% and ~~loss~~return on average equity was (86.~~85)~~16%.

Page 3231 of 53

For the first six months of 2013, net income was $1.524 million, an increase of $1.833 million over the net loss of $(309) thousand for the comparable period of 2012. Reductions in non-interest expenses ($1.467 million, including $679 thousand of one-time costs directly related to the Santa Lucia Bank acquisition), loan loss provision ($350 thousand) and write-downs on other real estate owned ($260 thousand), combined with increased gains on the disposition of loans held for sale ($583 thousand), were the primary contributors to the improved performance for the first half of 2013. These favorable variances were partially offset by reduced gains on the sale of securities ($353 thousand) and lower net interest income ($601 thousand).

Income Summary

Net Interest Income

Net interest income is the largest source of the Bank’s operating income. For the three-month period ended ~~March~~June 3130, 2013, net interest income was $4.~~425~~274 million, representing a decrease of $~~140~~236 thousand from ~~first~~the second quarter of 2012. For the six months ended June 30, 2013, net interest income was $8.699 million, down $601 thousand from the comparable period in 2012. These reductions in net interest income in 2013 were primarily due to less interest income on loans and investment securities as yields declined in the low rate environment. Partly offsetting this impact was lower interest expenses, as both the volume of deposits and rates paid on deposits were lower.

The net interest margin (net interest income as a percentage of average interest earning assets) was 4.5705% for the three-month period ended ~~March~~June 3130, 2013, ana ~~increase~~decrease of 0.2443% ~~over~~from the ~~same~~second ~~period~~quarter inof 2012. Loan discount accretion ~~in first quarter, 2013~~ accounted for 10.1358% of the 4.5705% net interest margin in the ~~first~~second quarter of 2013 and 0.8492% of the 4.3348% net interest margin in 2012’s ~~first~~second quarter.

For the six months ended June 30, 2013, net interest margin was 4.36%, a decrease of 0.05% from the same period in 2012. Loan discount accretion accounted for 0.90% of the 4.36% net interest margin in the first half of 2013 and 0.90% of the 4.41% net interest margin in the first six months of 2012.

Page 32 of 53

The tables that follow provide the relative impact of changes in average balance sheet information, interest earned and paid, average yields/rates and net interest income and margin of interest earning assets and interest bearing liabilities, and interest rates earned and paid by the Company and the Bank on those assets and liabilities for the three-month and six-month periods ended June 30, 2013 and 2012:

*Consolidated Net Interest Analysis*
(Dollars in thousands)
	For the Three Months Ended
	June 30, 2013								June 30, 2012
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income	$	246,468		$	3,845		6.10	%*	$	228,537		$	4,351		7.64	%*
Investment securities		147,829			663		1.89	%*		160,239			707		1.77	%*
Other interest income		18,115			11		0.39	%		34,926			24		0.27	%
Total interest-earning assets / interest income		412,412			4,519		4.34	%		423,702			5,082		4.81	%
Non-interest-earning assets:
Allowance for loan losses		(4,166	)							(3,667	)
Cash and due from banks		3,857								2,885
Premises and equipment		15,874								15,807
Other assets		16,383								15,303
Total assets	$	444,360							$	454,030

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	27,990		$	9		0.15	%	$	26,934		$	10		0.15	%
Savings and Money Market deposit accounts		134,382			58		0.18	%		128,604			59		0.18	%
Certificates of deposit		103,206			97		0.58	%		128,677			196		0.61	%
Total interest-bearing deposits		265,578			164		0.33	%		284,215			265		0.37	%
Other short-term borrowings		1			-		0.00	%		11			-		1.09	%
Federal Home Loan Bank advances

Filing Compare · MISSION COMMUNITY BANCORP