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 31, 2013

OR

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 þNo o

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

þ Yes oNo

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

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

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

  Yes oNo þ

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:  8,305,066 shares of common stock outstanding as of May 1, 2013.

Page 1 of 53

Mission Community Bancorp

March 31, 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

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
Assets
Cash and due from banks	$	10,063		$	25,635		$	67,093
Total cash and cash equivalents		10,063			25,635			67,093
Certificates of deposit in other banks		3,210			3,706			3,492
Investment securities available for sale		142,918			127,822			128,622
Loans held for sale		1,426			1,548			5,874
Loans, net of unearned income		244,064			243,741			220,096
Less allowance for loan and lease losses		(4,237	)		(4,242	)		(3,562	)
Net loans		239,827			239,499			216,534
Federal Home Loan Bank stock and other investments		6,868			6,822			3,801
Premises and equipment		15,950			16,131			16,293
Other real estate owned		818			818			2,224
Company owned life insurance		8,069			8,015			7,844
Core deposit intangible asset, net of accumulated amortization		2,664			2,765			3,068
Accrued interest and other assets		1,850			2,446			2,929
Total Assets	$	433,663		$	435,207		$	457,774
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	123,956		$	130,694		$	113,388
Money market, NOW and savings		161,861			154,074			156,911
Time certificates of deposit		100,530			102,500			134,981
Total deposits		386,347			387,268			405,280
Junior subordinated debt securities		5,632			5,604			5,519
Accrued interest and other liabilities		1,850			2,063			4,709
Warrant liability		-			-			200
Total liabilities		393,829			394,935			415,708
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 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
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
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

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,
	2013		2012
Interest Income
Interest and fees on loans	$	4,083	$	4,299
Interest on investment securities		573		632
Other interest income		12		44
Total interest income		4,668		4,975
Interest Expense
Interest on money market, NOW and savings deposits		67		72
Interest on time certificates of deposit		99		256
Other interest expense		77		82
Total interest expense		243		410
Net interest income		4,425		4,565
Provision for loan and lease losses		100		225
Net interest income after provision for loan and lease losses		4,325		4,340
Non-interest income
Service charges on deposit accounts		261		207
Gain on sale of SBA-guaranteed loans		-		8
Net gains (losses) on disposition of other loans held for sale		414		12
Loan servicing fees, net of amortization		43		38
Gain on sale or call of available-for-sale securities		153		1
Loss or writedown of fixed assets and other real estate owned		-		(358	)
Change in fair value of warrant liability		-		30
Increase in cash surrender value of life insurance		54		59
Other income and fees		102		41
Total non-interest income		1,027		38
Non-interest expense
Salaries and employee benefits		2,395		2,483
Occupancy expenses		423		455
Furniture and equipment		220		179
Data processing		390		792
Professional fees		157		409
Marketing and business development		72		125
Office supplies and expenses		152		210
Insurance and regulatory assessments		138		153
Loan and lease expenses		92		64
Other real estate expenses		7		46
Provision for unfunded loan commitments		25		-
Amortization of core deposit intangible asset		101		101
Other expenses		226		192
Total non-interest expense		4,398		5,209
Income (loss) before income taxes		954		(831	)
Income tax expense		19		-
Net income (loss)	$	935	$	(831	)
Less earnings and dividends attributable to preferred stock		60		175
Net income (loss) attributable to common stock	$	875	$	(1,006	)
Per Common Share Data:
Net income (loss) - basic	$	0.11	$	(0.13	)
Net income (loss) - diluted	$	0.11	$	(0.13	)
Average common shares outstanding - basic		8,155,066		7,755,066
Average common shares outstanding - diluted		8,155,066		7,755,066

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,
	2013			2012
Net income (loss)	$	935		$	(831	)
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities, net of taxes of $-0-		(465	)		289
Less reclassification adjustment for securities gains included in net income, net of taxes of $-0-		(153	)		(1	)
Other comprehensive income (loss)		(618	)		288
Comprehensive income (loss)	$	317		$	(543	)

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
	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	)
Stock-based compensation						44								44
Net income								935						935
Other comprehensive loss		-		-		-		-			(618	)		(618	)
Balance at March 31, 2013		8,155,066	$	42,825	$	8,812	$	(15,236	)	$	1,183		$	37,584

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
	March 31, 2013			March 31, 2012
Operating Activities
Net income (loss)	$	935		$	(831	)
Adjustments to reconcile net income (loss) income to net cash provided by (used in) operating activities:
Depreciation		239			222
Accretion of discount on securities and loans, net		358			334
Amortization of core deposit intangible asset		101			101
Accretion of discount on assets acquired in merger		(997	)		(753	)
Amortization of discount on liabilities assumed in merger		28			28
Provision for loan and lease losses		100			225
Provision for losses on unfunded loan commitments		25			-
Stock-based compensation		44			37
Gain on sale or call of available-for-sale securities		(153	)		(1	)
Gain on sale of loans		-			(8	)
Gains on disposition of loans held for sale		(414	)		(12	)
Change in the fair value of warrant liability		-			(30	)
Net losses and writedowns of fixed assets or other real estate owned		-			358
Increase in company-owned life insurance		(54	)		(59	)
Reinvested earnings from FHLB stock and other investments		(46	)		-
Net increase in accrued taxes receivable		19			-
Other, net		371			(459	)
Proceeds from loan sales		-			183
Loans originated for sale		-			(154	)
Net cash provided by (used in) operating activities		556			(819	)
Investing Activities
Net (increase) decrease in deposits in other banks		496			100
Purchase of available-for-sale securities		(55,200	)		(7,717	)
Proceeds from maturities, calls and paydowns of available-for-sale securities		13,545			9,122
Proceeds from sales of available-for-sale securities		25,725			223
Net increase in loans held for investment		579			4,897
Net decrease in loans held for sale		536			2,429
Net (increase) decrease in Federal Home Loan Bank and other stock		-			125
Purchases of premises and equipment		(57	)		(232	)
Proceeds from sale of other real estate owned		-			2,638
Net cash (used in) provided by investing activities		(14,376	)		11,585
Financing Activities
Net increase in demand deposits and savings accounts		1,049			8,922
Net (decrease) increase in time deposits		(1,970	)		(14,216	)
Net Increase (decrease) in other borrowings		(750	)		-
Payment of dividends on preferred stock		(81	)		-
Net cash used in financing activities		(1,752	)		(5,294	)
Net (decrease) increase in cash and cash equivalents		(15,572	)		5,472
Cash and cash equivalents at beginning of period		25,635			61,621
Cash and cash equivalents at end of period	$	10,063		$	67,093
Non-cash changes:
Change in unrealized gains on available-for-sale securities	$	(618	)	$	288
Loans reclassified to held for sale		-			4,583
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			536
Taxes paid		-			-

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 periods ended March 31, 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, with no impact to previously reported net 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-month periods ended March 31, 2013 and 2012.

During the three-month periods ended March 31, 2013 and 2012, the Company recognized pre-tax stock-based compensation expense of $44,000 and $36,000, respectively.  As of March 31, 2013, the Company has unvested options outstanding with unrecognized compensation expense totaling $259,000, 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

No options outstanding were “in the money” as of March 31, 2013.

Page 8 of 53

The following table summarizes information about stock option activity for the three months ended March 31, 2013:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (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		8.4	$	-
Options exercisable at end of period		219,900		$	7.33		7.5	$	-
Options Vested or Expected to Vest		452,900		$	6.13		8.4	$	-

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:
U.S. Government agencies	$	21,643	$	567	$	(61	)	$	22,149
Residential mortgage-backed securities		79,686		851		(309	)		80,228
Municipal securities		19,377		138		(66	)		19,449
Corporate debt securities		4,254		18		-			4,272
Asset-backed securities		16,775		82		(37	)		16,820
	$	141,735	$	1,656	$	(473	)	$	142,918
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:
U.S. Government agencies	$	26,650	$	360	$	(12	)	$	26,998
Residential mortgage-backed securities		85,474		1,404		-			86,878
Municipal securities		4,596		219		(2	)		4,813
Corporate debt securities		3,048		3		(12	)		3,039
Asset-backed securities		6,871		32		(9	)		6,894
	$	126,639	$	2,018	$	(35	)	$	128,622

Page 10 of 53

The scheduled maturities of investment securities at March 31, 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	$	2,365
Due in one year to five years		9,648		9,677
Due in five years to ten years		33,948		34,186
Due in greater than ten years		95,776		96,690
	$	141,735	$	142,918

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:
U.S. Government agencies	$	6,062	$	61	$	-	$	-	$	6,062	$	61
Residential mortgage-backed securities		39,444		309		-		-		39,444		309
Municipal securities		12,584		66		-		-		12,584		66
Asset-backed securities		3,022		37		-		-		3,022		37
	$	61,112	$	473	$	-	$	-	$	61,112	$	473
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:
U.S. Government agencies	$	2,988	$	12	$	-	$	-	$	2,988	$	12
Residential mortgage-backed securities		-		-		-		-		-		-
Municipal securities		240		2		-		-		240		2
Corporate debt securities		988		12		-		-		988		12
Asset-backed securities		3,221		9		-		-		3,221		9
	$	7,437	$	35	$	-	$	-	$	7,437	$	35

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

No securities were sold in the first three months of 2012.  Gains totaling $153,000 were recognized in the first quarter of 2013 on sales of $25,725,000 of securities.

As of March 31, 2013, investment securities carried at $22,322,000 were pledged to secure public deposits, as required by law.  Investment securities carried at $12,417,000 as of March 31, 2013, were pledged to secure potential borrowings from the Federal Home Loan Bank of San Francisco.  Securities carried at $2,006,000 as of March 31, 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

(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*

(Dollars in thousands)

	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	%

* 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 periods ended March 31:

(in thousands)	Three Months Ended March 31,
	2013			2012
Balance at beginning of period	$	4,242		$	3,326
Provision for loan and lease losses charged to expense		100			225
Loans charged off		(123	)		(1	)
Recoveries on loans previously charged off		18			12
Balance at end of period	$	4,237		$	3,562

Page 13 of 53

Changes in the allowance for loan and lease losses for the three-month periods ended March 31, 2013 and 2012, are shown below disaggregated by portfolio segment:

	Threee Months Ended March 31, 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	$	51		$	-		$	-	$	372
Commercial real estate - owner-occupied		463		(106	)		-			-		357
Commercial real estate - non-owner-occupied		730		(131	)		-			-		599
Residential real estate		906		197			(117	)		3		989
All other real estate loans		35		30			-			-		65
Commercial and industrial loans		1,735		(80	)		-			15		1,670
Consumer and all other loans and lease financing		51		30			(6	)		-		75
Unallocated		1		109			-			-		110
Totals	$	4,242	$	100		$	(123	)	$	18	$	4,237

	Three Months Ended March 31, 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	$	(8	)	$	-		$	-	$	149
Commercial real estate - owner-occupied		253		3			-			-		256
Commercial real estate - non-owner-occupied		675		(136	)		-			-		539
Residential real estate		640		71			-			-		711
All other real estate loans		4		-			-			-		4
Commercial and industrial loans		1,363		190			(1	)		10		1,562
Consumer and all other loans and lease financing		124		59			-			2		185
Unallocated		110		46			-			-		156
Totals	$	3,326	$	225		$	(1	)	$	12	$	3,562

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.

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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.

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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:
Construction and land development	$	11,960	$	-	$	751	$	-	$	12,711
Commercial real estate - owner-occupied		60,643		-		5,699		-		66,342
Commercial real estate - non-owner-occupied		68,501		-		1,139		-		69,640
Residential real estate		28,197		84		1,709		186		30,176
All other real estate		12,661		-		25		-		12,686
Commercial and industrial		44,284		154		4,012		-		48,450
Consumer and all other loans and lease financing		4,059		-		-		-		4,059
Total loans, net of unearned income	$	230,305	$	238	$	13,335	$	186	$	244,064
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:
Construction and land development	$	13,923	$	148	$	1,034	$	-	$	15,105
Commercial real estate - owner-occupied		64,194		-		5,781		-		69,975
Commercial real estate - non-owner-occupied		49,454		5,129		5,890		-		60,473
Residential real estate		26,788		484		4,606		189		32,067
All other real estate		1,889		-		-		-		1,889
Commercial and industrial		32,263		234		4,375		85		36,957
Consumer and all other loans and lease financing		3,630		-		-		-		3,630
Total loans, net of unearned income	$	192,141	$	5,995	$	21,686	$	274	$	220,096

* 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

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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

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 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 loans totaling $697,000 were restructured in TDR’s during the first three months of 2013 and four loans totaling $743,000 were restructured in the first three months of 2012.  No TDR’s were in accruing status and more than 90 days past due as of March 31, 2013 or December 31, 2012.  The Bank has no commitments to lend additional funds under loans classified as TDR’s as of March 31, 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										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 March 31, 2013:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	294	$	553	$	733	$	892	$	26	$	601	$	-			$	3,099
Impaired Loans With No Allowance Recorded		-		894		-		-		-		217		-				1,111
Total Loans Individually Evaluated For Impairment		294		1,447		733		892		26		818		-				4,210
Loans Collectively Evaluated For Impairment		10,390		49,348		57,294		24,749		12,660		46,592		3,881				204,914
Loans Acquired With Deteriorated Credit Quality		2,027		15,547		11,613		4,535		-		1,040		178				34,940
Total Loans Held for Investment	$	12,711	$	66,342	$	69,640	$	30,176	$	12,686	$	48,450	$	4,059			$	244,064
Unpaid Principal Balance:
Impaired Loans With An Allowance Recorded	$	294	$	553	$	733	$	892	$	26	$	1,347	$	-			$	3,845
Impaired Loans With No Allowance Recorded		-		894		-		-		-		217		-				1,111
Total Loans Individually Evaluated For Impairment		294		1,447		733		892		26		1,564		-				4,956
Loans Collectively Evaluated For Impairment		10,390		49,348		57,294		24,749		12,660		46,592		3,881				204,914
Loans Acquired With Deteriorated Credit Quality		5,435		17,315		13,114		6,438		-		2,369		182				44,853
Total Loans Held for Investment	$	16,119	$	68,110	$	71,141	$	32,079	$	12,686	$	50,525	$	4,063			$	254,723
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	93	$	24	$	54	$	396	$	2	$	721	$	-			$	1,290
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		93		24		54		396		2		721		-				1,290
Loans Collectively Evaluated For Impairment		279		333		545		593		63		948		75	$	111		2,947
Loans Acquired With Deteriorated Credit Quality		-		-		-		-		-		-		-				-
Total Loans Held for Investment	$	372	$	357	$	599	$	989	$	65	$	1,669	$	75	$	111	$	4,237
For the Three Months Ended March 31, 2013:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	299	$	561	$	742	$	893	$	27	$	614	$	-			$	3,136
Impaired Loans With No Allowance Recorded		-		905		-		-		-		229		-				1,134
Total Loans Individually Evaluated For Impairment	$	299	$	1,466	$	742	$	893	$	27	$	843	$	-			$	4,270
Interest Income Recognized on Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment	$	-	$	-	$	-	$	10	$	-	$	-	$	-			$	10

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(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

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(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
Loans Held for Investment as of March 31, 2012:
Recorded Investment:
Impaired Loans With an Allowance Recorded	$	-	$	-	$	-	$	189	$	-	$	450	$	-			$	639
Impaired Loans With No Allowance Recorded		-		1,571		-		-		-		396		-				1,967
Total Loans Individually Evaluated For Impairment		-		1,571		-		189		-		846		-				2,606
Loans Collectively Evaluated For Impairment		12,224		51,429		48,512		26,516		1,889		33,153		3,444				177,167
Loans Acquired With Deteriorated Credit Quality		2,881		16,975		11,961		5,362		-		2,958		186				40,323
Total Loans Held for Investment	$	15,105	$	69,975	$	60,473	$	32,067	$	1,889	$	36,957	$	3,630			$	220,096
Unpaid Principal Balance:																		-
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	190	$	-	$	483	$	-			$	673
Impaired Loans With No Allowance Recorded		-		1,615		-		-		-		351		-				1,966
Total Loans Individually Evaluated For Impairment		-		1,615		-		190		-		834		-				2,639
Loans Collectively Evaluated For Impairment		12,224		51,429		48,512		26,516		1,889		33,153		3,444				177,167
Loans Acquired With Deteriorated Credit Quality		6,630		18,799		13,792		7,400		-		5,089		190				51,900
Total Loans Held for Investment	$	18,854	$	71,843	$	62,304	$	34,106	$	1,889	$	39,076	$	3,634			$	231,706
Related Allowance for Loan and Lease Losses:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	128	$	-	$	264	$	-			$	392
Impaired Loans With No Allowance Recorded		-		-		-		-		-		-		-				-
Total Loans Individually Evaluated For Impairment		-		-		-		128		-		264		-				392
Loans Collectively Evaluated For Impairment		149		192		539		583		4		1,132		185	$	156		2,940
Loans Acquired With Deteriorated Credit Quality		-		64		-		-		-		166		-				230
Total Loans Held for Investment	$	149	$	256	$	539	$	711	$	4	$	1,562	$	185	$	156	$	3,562
For the Three Months Ended March 31, 2012:
Average Recorded Investment in Impaired Loans:
Impaired Loans With An Allowance Recorded	$	-	$	-	$	-	$	94	$	-	$	464	$	-			$	558
Impaired Loans With No Allowance Recorded		-		1,606		-		-		-		383		-				1,989
Total Loans Individually Evaluated For Impairment	$	-	$	1,606	$	-	$	94	$	-	$	847	$	-			$	2,547
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,
(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	)		(260	)
Loans reclassified to held for sale		-			(355	)
Transfers from non-accretable discount to accretable		1,812			-
Balance at end of period	$	2,838		$	2,246

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 were modified and no consideration was transferred.

Page 21 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.  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 $1,250,000 as of March 31, 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 recognized as gains or losses through non-interest income, which impacts 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.

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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 exercised 1st Quarter 2013		-
Outstanding March 31, 2013		7,008,452		$	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 31, 2013, following the consummation of the transactions under the Securities Purchase Agreement, the rights offering, the 2011 warrants exercise, and the 2012 warrants exercises, the Manager is the beneficial owner of 6,328,179 shares of the common stock of the Company (not including warrants), or 77.6% 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	)

The following 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.

Note 7 —Income taxes

The Company recognized income tax expense of $19,000 in the first three months of 2013 and none in the comparable period of 2012.  In the first quarter of 2013, the provision for income tax was offset by available tax loss carry-forwards originating from 2008 through 2011.  The $19,000 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 31, 2013.

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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 31, 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.

No warrants were subject to fair value accounting as of March 31, 2013 or December 31, 2012.

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

	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3			Total
March 31, 2013
Available for sale securities:
U.S. Government agencies	$	-	$	22,149	$	-		$	22,149
Residential mortgage-backed securities		-		80,228		-			80,228
Municipal securities		-		19,449		-			19,449
Corporate debt securities		-		4,272		-			4,272
Asset-backed securities		-		16,820		-			16,820
Total available-for-sale securities		-		142,918		-			142,918
Loans held for sale		-		-		1,426			1,426
Total net assets measured at fair value on a recurring basis	$	-	$	142,918	$	1,426		$	144,344
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
Available for sale securities:
U.S. Government agencies	$	-	$	26,998	$	-		$	26,998
Residential mortgage-backed securities		-		86,878		-			86,878
Municipal securities		-		4,813		-			4,813
Corporate debt securities		-		3,039		-			3,039
Asset-backed securities		-		6,894		-			6,894
Total available-for-sale securities		-		128,622		-			128,622
Loans held for sale		-		-		5,874			5,874
Warrant liability		-		-		(200	)		(200	)
Total net assets measured at fair value on a recurring basis	$	-	$	128,622	$	5,674		$	134,296

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 months ended March 31, 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.

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.

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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)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	97	$	97	$	(83	)
Residential real estate		-		-		496		496		4
Commercial real estate - owner-occupied		-		-		1,423		1,423		19
Commercial real estate - non-owner-occupied		-		-		679		679		12
All other real estate		-		-		24		24		1
Construction and land development		-		-		201		201		2
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	2,920	$	2,920	$	(45	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	818	$	818	$	-

	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)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	582	$	582	$	-
Residential real estate		-		-		61		61		-
Commercial real estate - owner-occupied		-		-		1,571		1,571		-
Commercial real estate - non-owner-occupied		-		-		-		-		(128	)
All other real estate		-		-		-		-		-
Construction and land development		-		-		-		-		(190	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	2,214	$	2,214	$	(318	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	2,224	$	2,224	$	(358	)

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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 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
	2013			2012
Balance at beginning of year	$	1,548		$	(1,464	)
Net (decrease) increase in SBA loans held for sale		(66	)		61
Loans held for sale transfered into Level 3		-			4,282
Settlements - principal reductions in loans held for sale		(197	)		(21	)
Loan participations sold to related party		-			(2,168	)
Reduction in loans held for sale valuation reserve		141			-
Cancellation of warrants accounted for as liabilities		-			4,955
Changes in fair value of warrant liability		-			30
Balance at end of period	$	1,426		$	5,675

“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 of FHLB and FRB stock approximate their fair value.

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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

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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.

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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 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. In May 2010, the Bancorp formed its only other direct subsidiary, Mission Asset Management, Inc., in order to purchase certain of the non-performing assets of Mission Community Bank, which assets were purchased in June 2010.

Mission Community 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.

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Executive Summary of Operating Results

First quarter, 2013 marks the fourth consecutive quarter of profitability for the Company. Net income for the three months ended March 31, 2013 was $935 thousand as compared to a net loss of ($831) thousand for the same period of 2012.  The improvement of $1.766 million was largely driven by $989 thousand of higher non-interest income and $811 thousand of lower non-interest expense. Net income applicable to common stock was $875 thousand this quarter as compared to a net loss applicable to common stock of $(1.006) million for the same three month period in 2011.

The higher non-interest income this quarter was due to gains of $414 thousand on the disposition of loans held for sale and $153 thousand higher net gains on securities sold. In addition, in first quarter, 2012 the Company recognized a loss of $358 thousand on the write-down of foreclosed real estate that did not reoccur this quarter, further improving earnings.

The decline in non-interest expenses of $811 thousand was mainly due to the non-repeat of acquisition related costs that followed the Santa Lucia Bank acquisition that closed in October, 2011. Following this acquisition, one-time costs were incurred in first quarter, 2012 that included $402 thousand in data processing and technology spend, while another $252 thousand was incurred for professional fees in 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 $88 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 quarter, 2013 the provision for loan loss was $100 thousand, $125 thousand less than first quarter, 2012. Partly offsetting the lower provision for loan losses was $140 thousand less in net interest income due to lower average earning assets.

In first quarter, 2013 return on average assets (annualized) was 0.89% and return on average equity (annualized) was 10.15%, as compared to first quarter, 2012 where loss on average assets was (0.73)% and loss on average equity was (8.85)%.

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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 31, 2013, net interest income was $4.425 million, representing a decrease of $140 thousand from first quarter, 2012 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 4.57% for the three-month period ended March 31, 2013, an increase of 0.24% over the same period in 2012.  Loan discount accretion in first quarter, 2013 accounted for 1.13% of the 4.57% net interest margin in the first quarter of 2013 and 0.84% of the 4.33% net interest margin in 2012’s first quarter.

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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 periods ended March 31, 2013 and 2012:

Consolidated Net Interest Analysis

(Dollars in thousands)

	For the Three Months Ended
	March 31, 2013								March 31, 2012
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income*	$	244,184		$	4,083		6.78	% *	$	234,570		$	4,299		7.37	% *
Investment securities*		130,999			573		1.77	% *		126,551			632		2.01	% *
Other interest income		17,072			12		0.28	%		62,580			44		0.28	%
Total interest-earning assets / interest income		392,255			4,668		4.83	%		423,701			4,975		4.72	%
Non-interest-earning assets:
Allowance for loan losses		(4,328	)							(3,415	)
Cash and due from banks		3,166								2,155
Premises and equipment		16,087								15,787
Other assets		16,545								18,605
Total assets	$	423,725							$	456,833
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand accounts	$	32,497		$	12		0.15	%	$	27,177		$	11		0.16	%
Savings and Money Market deposit accounts		123,838			55		0.18	%		129,545			61		0.19	%
Certificates of deposit		96,367			99		0.42	%		141,666			256		0.73	%
Total interest-bearing deposits		252,702			166		0.27	%		298,388			328		0.44	%
Federal Home Loan Bank advances		578			-		0.19	%		-			-		-
Junior subordinated debt securities		5,615			77		5.53	%		5,503			82		6.02	%
Total borrowed funds		6,193			77		5.03	%		5,503			82		6.02	%
Total interest-bearing liabilities / interest expense		258,895			243		0.38	%		303,891			410		0.54	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits		122,867								107,889
Other liabilities		4,586								7,294
Total liabilities		386,348								419,074
Shareholders' equity		37,377								37,759
Total liabilities and shareholders' equity	$	423,725							$	456,833
Net interest-rate spread							4.45	%							4.18	%
Impact of non-interest-bearing sources and other changes in balance sheet composition							0.12	%							0.15	%
Net interest income / margin on earning assets				$	4,425		4.57	% **				$	4,565		4.33	% **

*No taxable-equivalent adjustment has been made on municipal securities and loans because no tax benefits are currently being recognized by the Company.  Loan accretion and loan fees (net of loan origination costs) included in loan interest income for the three-month periods ended March 31, 2013 and 2012, were $997 thousand and $756 thousand, respectively.

** Net interest income as a % of earning assets

Excluding the merger-related discount accretion from the above tables, the average rates for the first three months of 2013 and 2012, respectively, would have been as follows: loans 4.90% and 5.71%; total interest-earning assets 3.69% and 3.87%; certificates of deposit 0.56% and 0.82%; total interest-bearing deposits 0.32% and 0.49%; trust preferred securities 2.38% and 2.65%; total interest-bearing liabilities 0.38% and 0.55; and net interest margin 3.44% and 3.49%.

Page 34 of 53

Shown in the following table are the relative impacts on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities, together with changes in the rates earned and paid by the Bank and the Company on those assets and liabilities, for the three-month periods ended March 31, 2013 and 2012.  Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately among both variances.

Consolidated Rate / Volume Variance Analysis

(In thousands)	Three Months Ended March 31, 2013 Compared to 2012
	Increase (Decrease) in interest income and expense due to changes in:
	Volume			Rate			Total
Interest-earning assets:
Loans, net of unearned income	$	172		$	(388	)	$	(216	)
Investment securities		22			(81	)		(59	)
Other interest income		(31	)		(1	)		(32	)
Total increase (decrease) in interest income		163			(470	)		(307	)
Interest-bearing liabilities:
Transaction accounts		2			(1	)		1
Savings deposits		(3	)		(3	)		(6	)
Certificates of deposit		(67	)		(90	)		(157	)
Total interest-bearing deposits		(68	)		(94	)		(162	)
Junior subordinated debt securities		2			(7	)		(5	)
Total borrowed funds		2			(7	)		(5	)
Total decrease in interest expense		(66	)		(101	)		(167	)
Increase (decrease) in net interest income	$	229		$	(369	)	$	(140	)

Based on current economic forecasts, the Company anticipates that interest rates will likely remain at a very low level through 2013 and most of 2014. Should interest rates begin to increase in the market we would expect to see deposits re-price somewhat faster than loans in the short term as “floors rates” or minimum rates have been implemented on approximately 77% or $108 million of the variable rate loan portfolio.   Many of the floor rates are higher than the loan rate would be without the floor.  As a result, the portion of the variable rate loan portfolio with floors will not generate a material increase in interest income until the prime rate increases by at least 50 basis points from its current level.  The remaining 23% of variable rate loans will respond to rising rates more quickly.  A potential risk to the net interest margin would be any additional loans that might be placed in non-accrual status in the coming months and any significant shortening of the duration of the security portfolio.

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Provision for Loan Losses

The Bank recorded a $100 thousand provision for loan losses in first quarter, 2013 as compared to $225 thousand in the first quarter, 2012.

Loan charge-offs totaled $123 thousand with $18 thousand in recoveries for the first quarter 2013, as compared with $1 thousand of charge-offs and $12 thousand of recoveries for the same period in 2012.  The ratio of allowance for loan losses to total loans was 1.73% at March 31, 2013, as compared with 1.73% as of December 31, 2012.

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

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

Non-Interest Income

Non-interest income represents service charges on deposit accounts and other non-interest related charges and fees, including gains and servicing fees from the sale of loans and gains or losses on sales of securities and other real estate owned.  For the three-month period ended March 31, 2013, non-interest income was $1.027 million, an increase of $989 thousand from the same period in 2012.

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

Non-Interest Income

(In thousands)	For the Three Months Ended March 31,
	$ Amount					Change
	2013		2012			$			%
Service charges on deposit accounts	$	261	$	207		$	54			26	%
Gain on sale of SBA-guaranteed loans		-		8			(8	)		-100	%
Net gains on disposition of other loans held for sale		414		12			402			3350	%
Loan servicing fees, net of amortization		43		38			5			13	%
Gain on sale or call of available-for-sale securities		153		1			152			15200	%
Net losses or writedowns of fixed assets or other real estate		-		(358	)		358		nm
Change in fair value of warrant liability		-		30			(30	)		-100	%
Increase in cash surrender value of life insurance		54		59			(5	)		-8	%
Other income and fees		102		41			61			149	%
Total non-interest income	$	1,027	$	38		$	989			2603	%

nm - not meaningful

The increase in the first quarter of 2013 was primarily due to a $402 thousand higher gain on the disposition of loans held for sale, $152 thousand of higher gain on sale of securities and a $358 thousand decrease in losses and write-downs on other real estate owned.

Non-Interest Expense

Non-interest expense represents salaries and benefits, occupancy expenses, professional fees, outside services, and other miscellaneous expenses necessary to conduct business.  Non-interest expenses decreased by $811 thousand or 16% for the three months ended March 31, 2013 as compared to the first quarter of 2012.

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

Non-Interest Expense

(In thousands)	For the Three Months Ended March 31,
	$ Amount				Change
	2013		2012		$			%
Salaries and employee benefits	$	2,395	$	2,483	$	(88	)		-4	%
Occupancy expenses		423		455		(32	)		-7	%
Furniture and equipment		220		179		41			23	%
Data processing		390		792		(402	)		-51	%
Professional fees		157		409		(252	)		-62	%
Marketing and business development		72		125		(53	)		-42	%
Office supplies and expenses		152		210		(58	)		-28	%
Insurance and regulatory assessments		138		153		(15	)		-10	%
Loan and lease expenses		92		64		28			44	%
Other real estate expenses		7		46		(39	)		-85	%
Provision for unfunded loan commitments		25		-		25		nm
Amortization of core deposit intangible asset		101		101		-			0	%
Other		226		192		34			18	%
Total non-interest expense	$	4,398	$	5,209	$	(811	)		-16	%

 nm = not meaningful

The decrease of $811 thousand in non-interest expense was principally due to lower data processing and professional fees that were incurred in first quarter, 2012 related to the Santa Lucia Bank acquisition that did not repeat in first quarter, 2013. In addition, various other expenses were also less as the Company continued to identify opportunities for greater efficiency.

Income Taxes

In the first quarter of 2013, despite pre-tax earnings of $954 thousand, the provision for income tax expense was offset by utilizing available tax loss carry-forwards originating from 2008 through 2011.  The $19 thousand of income tax recorded in first quarter, 2013 represents an accrual for alternative minimum tax related to utilization of 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 31, 2013.  The valuation allowance was first established in 2010.  The Company will continue to assess the likelihood of its ability to realize the deferred tax asset each quarter until such time that earnings evidence and projections demonstrate that it is more likely than not that the deferred tax asset can be fully utilized.

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Balance Sheet Analysis

At March 31, 2013, consolidated assets totaled $433.7 million as compared with $435.2 million at December 31, 2012 and $457.1 million as of March 31, 2012.  This represents a decrease of $1.5 million over the past three months.  Total loans increased $201 thousand over prior quarter-end and increased $19.5 million or 8.6% from a year ago. Securities and cash equivalents decreased $0.7 million from prior quarter and decreased $42.7 million from March 31, 2012, partly due to the increase in loans and partly due to a decrease in deposits.  Overall deposits declined $0.9 million from December 31, 2012 and declined $18.9 million from a year ago, mainly due to a decrease in the higher rate time deposits. While total deposits remained essentially even in comparison to prior quarter and declined 4.7% from a year ago, the mix of deposits improved substantially over first quarter, 2012 as very low cost demand deposits increased 10.3% while higher cost time deposits declined 25.5%.  Shareholders’ equity increased $312 thousand over prior quarter and $4.425 million over first quarter, 2012.  The increase in shareholders’ equity was primarily due to higher earnings, partially offset by a reduction in net unrealized gains in the security portfolio.  See also the Capital section of this report.

The following table below set forth quarterly balance sheet changes growth trends over the past five quarters:

Balance Sheet Growth
(dollars in thousands)	Increase(Decrease) From Previous Quarter End
	March 31, 2013						December 31, 2012						September 31, 2012						June 30, 2012						March 31, 2012
	$			%			$			%			$			%			$			%			$			%
Total Assets	$	(1,544	)		-0.4	%	$	(8,110	)		-1.8	%	$	(15,659	)		-3.4	%	$	1,202			0.3	%	$	(5,538	)		-1.2	%
Earning Assets		(570	)		-0.1	%		(3,873	)		-1.0	%		(20,495	)		-4.8	%		1,300			0.3	%		(2,210	)		-0.5	%
Loans		201			0.1	%		8,263			3.5	%		13,395			6.0	%		(2,278	)		-1.0	%		(7,699	)		-3.3	%
Deposits		(921	)		-0.2	%		(2,140	)		-0.5	%		(19,237	)		-4.7	%		3,365			0.8	%		(5,294	)		-1.3	%
Borrowings		-			-			(3,800	)		-100.0	%		3,800			-			-			-			-			-
Shareholders' Equity		312			0.8	%		1,411			3.9	%		963			2.8	%		1,038			3.1	%		4,273			14.4	%

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Loans

The following table shows the composition of our loan portfolio by type of loan (including loans held for sale) and the changes in their balances.  While changes to prior quarter-end were relatively small, growth of $14.2 million from first quarter, 2012 was most notable in farmland (“all other real estate loans”), agricultural loans, and consumer loans which are primarily auto loans.

Loan Composition

(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	%

Asset Quality

Non-accrual loans (including loans held for sale) totaled $10.1 million at March 31, 2013 down from 10.2 million at December 31, 2012 and higher than March 31, 2012’s  balance of $8.2 million.

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

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

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The following table provides information about the Company’s non-performing loans, including quality ratios as of March 31, 2013, December 31, 2012, and March 31, 2012:

Non-Performing Assets*

(in thousands)	March 31			December 31			March 31
	2013			2012			2012
Loans in nonaccrual status:
Nonaccrual loans held for investment	$	8,992		$	9,068		$	5,475
Nonaccrual loans held for sale**		1,093			1,142			2,774
Loans past due 90 days or more and accruing		88			-			-
Restructured loans in accruing status		717			722			200
Total nonperforming loans		10,890			10,932			8,449
Foreclosed real estate		493			493			1,824
Total nonperforming assets	$	11,383		$	11,425		$	10,273
Real estate held by parent company		325			325			400
Total nonperforming loans and other real estate owned	$	11,708		$	11,750		$	10,673
Allowance for loan and lease losses allocated to impaired loans	$	1,290		$	1,231		$	392
Allowance for loan and lease losses allocated to loans held for sale**		-			-			-
Allowance for loan and lease losses allocated to all other loans		2,947			3,011			3,170
Total allowance for loan and lease losses	$	4,237		$	4,242		$	3,562
Asset quality ratios:
Non-performing assets to total assets		2.62	%		2.63	%		2.24	%
Excluding loans held for sale**		2.38	%		2.37	%		1.66	%
Non-performing loans to total loans		4.44	%		4.46	%		3.74	%
Excluding loans held for sale**		4.01	%		4.02	%		2.58	%
Allowance for loan and lease losses to total loans		1.73	%		1.73	%		1.58	%
Excluding loans held for sale**		1.74	%		1.74	%		1.62	%
Allowance for loan and lease losses to total non-performing loans		39	%		39	%		42	%
Excluding non-performing loans held for sale**		43	%		43	%		63	%

 *  Table combines bank and non-bank subsidiaries

 ** 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 are carried at fair value.

The level of non-performing loans continues to be high by historical standards, due to the significant downturn in the economy and subsequent reduction in real estate collateral values that occurred over the past few years.  Of the $10.1 million in non-accrual loan balances at March 31, 2013, 53% of these loans were current with their payments. The $10.9 million of non-performing loans as of March 31, 2013, includes $1.0 million of SBA-guaranteed loans, which are supported by $720 thousand of SBA loan guarantees.  The remaining $9.1 million of non-performing loans are loans which management has determined to be impaired.  A determination of impairment is one of expected payment nonperformance, but not necessarily probability of loss.  Based on a loan-by-loan analysis of collateral values or the present value of estimated cash flows, the extent of the impairment of those impaired loans in excess of amounts already charged off is estimated to be $1.290 million and has been provided in the allowance for loan and lease losses.

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Nonperforming assets (which are comprised of nonperforming loans and foreclosed real estate) at March 31, 2013 were $11.7 million, approximately even with the prior quarter and $1.2 million higher than the $10.5 million balance at December 31, 2012.

Potential Problem Loans

At March 31, 2013, the Company had approximately $4.3 million of loans that were not categorized as non-performing but for which known information about the borrower’s financial condition caused management to have concern about the ability of the borrower to comply with the repayment terms of the loan.

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

While credit quality as of March 31, 2013, as measured by loan delinquencies and by the Company’s internal asset quality rating system, is stable and well managed, there can be no assurances that continuing economic weakness will not lead to new problem loans in future periods.  A further decline in economic conditions in the Company’s market area or other factors could adversely impact individual borrowers or the loan portfolio in general.  The Company has well defined underwriting standards and expects to continue with prompt collection efforts, but economic uncertainties or changes may cause one or more borrowers to experience problems in the coming months.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”) at March 31, 2013 totaled $4.237 million, a decrease of $5 thousand from December 31, 2012 and $675 thousand higher than first quarter 2012.  The ratio of ALLL to total loans at March 31, 2013 was 1.73%, as compared with 1.73% at December 31, 2012 and 1.58% at March 31, 2012.  At March 31, 2013 and 2012, the ratio of ALLL to total non-performing loans was 39% and 42%, respectively. Both the ALLL to total loan ratio and the ALLL to total non-performing loans ratio are affected by the purchase discount taken on loans acquired during the acquisition of Santa Lucia Bank in October, 2011. If the credit-related portion of the purchase discount on such loans were included in the ALLL, the ALLL to total loans ratio would be 4.37% and the ALLL to total non-performing loans would be 101% at March 31, 2013.

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The following table provides an analysis of the changes in the ALLL for the three-month and twelve-month periods ended March 31, 2013 and 2012:

Allowance for Loan and Lease Losses
(dollars in thousands)	Three Months Ended
	March 31,
	2013			2012
Balance at beginning of period	$	4,242		$	3,326
Provision for loan losses		100			225
Loans charged off		(123	)		(1	)
Recoveries of previous charge-offs		18			12
Net (charge-offs) recoveries		(105	)		11
Balance at end of period	$	4,237		$	3,562
Allowance for loan losses as a percentage of:
Period end loans, including loan held for sale		1.73	%		1.58	%
Period end loans, excluding loans held for sale*		1.74	%		1.62	%
Total non-performing loans, including loans held for sale		39	%		42	%
Non-performing loans, excluding loans held for sale*		43	%		63	%
As a percentage of average loans (annualized):
Net charge-offs (recoveries)		0.17	%		-0.02	%
Provision for loan losses		0.17	%		0.39	%
Total loans, including loans held for sale	$	245,490		$	225,970
Loans excluding loans held for sale		244,064			220,096
* 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 are carried at fair value.

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

Based on its quarterly review, management believes that the allowance for loan losses at March 31, 2013, is sufficient to absorb losses inherent in the loan portfolio.  This assessment is based upon the best available information and does involve uncertainty and matters of judgment.   Accordingly, the adequacy of the allowance cannot be determined with precision and could be susceptible to significant change in future periods.

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In addition, management has established a reserve for undisbursed loan commitments.  As of March 31, 2013, this reserve totaled $431 thousand as compared to $406 thousand as of December 31, 2012 and $381 thousand from March 31, 2012.  The reserve for undisbursed loan commitments is included in other liabilities in the consolidated balance sheet and changes to this reserve are recorded as adjustments to non-interest expenses.

Investments

All but one of the securities in the Bank’s investment portfolio are considered to be investment grade. The one security below investment grade has been fully reserved for.  The portfolio consists of a mixture of fixed-rate US agency securities (15%), fixed-rate mortgage-backed securities (35%), floating-rate mortgage-backed securities (21%), fixed-rate tax-exempt municipal securities (14%), and other fixed-rate securities (12%) and floating-rate securities (3%).   The weighted average life of the portfolio, based on projected prepayment speeds, is 4.8 years with an approximate effective duration of 3.2 years.

Deposits

Deposits are the primary source of funding for lending and investing needs.  Total deposits were $386.3 million as of March 31, 2013 as compared with $387.3 million at December 31, 2012 and $405.3 million at March 31, 2012. As noted earlier, while deposits were essentially flat to prior quarter and $18.9 million less than first quarter, 2012, the mix of deposits was substantially improved following the acquisition of Santa Lucia Bank in October, 2011. Subsequent to acquisition, the higher interest rate time deposits declined $34.4 million and the lower rate demand deposit and money market account deposits increased $15.5 million as of March 31, 2013.  Noninterest-bearing demand deposits increased from 28% of total deposits at March 31, 2012, to 32% at March 31, 2013.

The Bank generally prices interest-bearing deposits competitively based on periodic interest rate surveys in the local market and based on the Bank’s own balance sheet needs.  Deposit rates are adjusted as needed using a deposit pricing model that considers the type of product, competition, interest rate yield curve, depth of customer relationship, the Bank’s cost of funds, liquidity profile and other asset and liability considerations.  The Net Interest Analysis and Rate/Volume Analysis provided earlier in this Discussion contain information regarding the average rates paid on deposits for the first three months of 2012 and 2013.

The Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) as well as the Insured Cash Sweep (“ICS”) programs.  These programs provide customers the ability to deposit their money into CDARS certificates of deposit and/or ICS money market accounts in excess of $250,000, which is the FDIC insurable deposit limit, yet retain FDIC insurance over the total deposit.  In order to obtain this level of insurance, the CDARS and ICS programs act as clearinghouses among banks, splitting the deposit and then matching them with other banks in the CDARS and ICS network of approximately 3,000 banks in increments of less than $250,000 per depositor, thereby qualifying for full FDIC insurance and keeping the total deposit with our bank.  The CDARS and ICS programs are attractive to large depositors who are more interested in their deposits being fully insured by the FDIC than they are in seeking higher interest rates. As of March 31, 2013, the Bank had issued $20.3 million of certificates of deposit to local customers through the CDARS program and $11.2 million through the ICS program.

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Borrowings

In addition to the Company’s junior subordinated debt securities, the Bank has a secured borrowing facility through the Federal Home Loan Bank of San Francisco (“FHLB”).  The Bank had no outstanding borrowings from the FHLB as of March 31, 2013 or December 31, 2012.

Capital

Total shareholders’ equity has increased by $312 thousand from fourth quarter 2012 and $3.723 million from first quarter, 2012, primarily due to higher net income, partially offset by less unrealized net security gains and losses.

The following table sets forth the Bank’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the regulatory minimum capital ratios needed to qualify as a “well-capitalized” institution at March 31, 2013, December 31, 2012, and March 31, 2012:

Mission Community Bank
Capital Ratios
(dollars in thousands)						Amount of Capital Required To Be
	Actual					Well-Capitalized
	Amount		Ratio			Amount		Ratio
As of March 31, 2013:
Total Capital (to Risk-Weighted Assets)	$	41,456		13.61	%	$	30,465		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	37,637		12.35	%	$	18,279		6.0	%
Tier 1 Capital (to Average Assets)	$	37,637		8.99	%	$	20,925		5.0	%
As of December 31, 2012:
Total Capital (to Risk-Weighted Assets)	$	40,544		13.65	%	$	29,703		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	36,820		12.40	%	$	17,822		6.0	%
Tier 1 Capital (to Average Assets)	$	36,820		8.61	%	$	21,391		5.0	%
As of March 31, 2012:
Total Capital (to Risk-Weighted Assets)	$	37,720		14.03	%	$	26,887		10.0	%
Tier 1 Capital (to Risk-Weighted Assets)	$	34,387		12.79	%	$	16,132		6.0	%
Tier 1 Capital (to Average Assets)	$	34,387		7.72	%	$	22,284		5.0	%

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The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $500 million, the minimum asset size criteria for bank holding companies subject to those requirements.  However, regulatory capital amounts and ratios for the Company (consolidated) are as follows:

Mission Community Bancorp
Regulatory Capital Ratios	March 31, 2013					December 31, 2012					March 31, 2012
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk-Weighted Assets)	$	44,206		14.39	%	$	43,802		14.62	%	$	43,506		15.90	%
Tier 1 Capital (to Risk-Weighted Assets)	$	40,367		13.14	%	$	40,057		13.37	%	$	40,086		14.65	%
Tier 1 Capital (to Average Assets)	$	40,367		9.59	%	$	40,057		9.30	%	$	40,086		8.83	%

Liquidity

The Bank’s liquidity, which primarily represents the ability to meet fluctuations in deposit levels and provide for customers’ credit needs, is managed through various funding strategies that reflect the maturity structures of the sources of funds and the assets being funded.  The Bank’s liquidity is further augmented by payments of principal and interest on loans and increases in short-term liabilities such as demand deposits and short-term certificates of deposit.  Cash and cash equivalents (such as federal funds sold) are the primary means for providing immediate liquidity.  Borrowings from established lines of credit with the FHLB and other banks are additional sources of  readily available liquidity.  The Company had $10.1 million in cash and cash equivalents as of March 31, 2013 as compared with $25.6 million as of December 31, 2012.

In order to manage the Bank’s liquidity requirements, the Bank strives to maintain an appropriate ratio of loans to deposits and to maintain sufficient off-balance-sheet sources of liquidity which may be drawn upon when or if needed.  As of March 31, 2013 the Company’s loan-to-deposit ratio was 63% as compared with 56% as of December 31, 2012.  A low loan-to-deposit ratio indicates that the Bank has sufficient liquidity in place to meet potential needs for loan funding and/or deposit withdrawals.  The Bank’s sources of funding ratio, which measures available off-balance-sheet sources of funds as a percentage of total on-balance-sheet assets, grew to 47.1% as of March 31, 2013, as compared with 46.2% as of December 31, 2012.

One of the off-balance-sheet sources of funds is potential borrowing capacity through the FHLB.  FHLB borrowings are collateralized by loans and/or investments and can be structured over various terms ranging from overnight to ten years.  As of March 31, 2013, the Bank had no outstanding borrowings from the FHLB.  Interest rates and terms for FHLB borrowings are generally more favorable than the rates for similar term brokered certificates of deposit or for federal funds purchased.  The Bank has the potential (on a secured basis) to borrow from the FHLB up to approximately 25 percent of its total assets.  Based on this limitation and loans and securities pledged as of March 31, 2013, up to $108.2 million could be borrowed from the FHLB if needed.  FHLB borrowings may be used from time to time when needed as part of the Bank’s normal liquidity management to fund asset growth on a cost-effective basis.  The Bank has adequate loans and securities to pledge as collateral should it need additional liquidity that cannot be funded by deposits.

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The Bank also has the ability to access the Federal Reserve Board’s “Discount Window” to the extent that collateral is delivered to them.

Off-Balance-Sheet Arrangements

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

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

Loan Commitments
(in thousands)	March 31,		December 31,		March 31,
	2013		2012		2012
Commitments to Extend Credit	$	48,377	$	41,155	$	38,193
Standby Letters of Credit		2,305		2,365		1,836
	$	50,682	$	43,520	$	40,029

The Company’s exposure to credit loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  Management has established a reserve for undisbursed loan commitments that at March 31, 2013 totaled $431 thousand ($406 thousand as of December 31, 2012 and $381 thousand as of March 31, 2012) and is included in other liabilities in the consolidated balance sheet.

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

Effects of Inflation and Economic Issues

A financial institution’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively low levels of investment in fixed assets or inventories.  Inflation and its impact on interest rates have a very direct effect on the Company’s balance sheet and earnings. Management believes that the impact of inflation on financial results has much to do with  the Company’s ability to anticipate and respond to such changes. Management endeavors to structure its balance sheet and mix of financial instruments to benefit from all interest rate trends and at the same time to do that within a well defined set of parameters to avoid excessive risk to capital, liquidity and earnings.

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The Company’s growth and earnings performance will also be influenced by the local economies it serves. As we entered 2013 overall economic activity and unemployment in California continued to reflect slow and steady progress.  However, recent domestic and international economic reports remind us of how fragile and slow this recovery is. California continues to outpace the overall U.S. economic recovery with private sector job creation, lower levels of unemployment, and what seems like a strong bounce to the housing market recovery.

Real estate has been one of the major shifts in all of California over the past twelve months, transitioning from a drag on the economic recovery to becoming a driver of growth in the state with the median price of an existing single-family home up 23% last year according to economists. Construction, supported by the resurgence of residential construction around the state, is helping to fuel job growth. In San Luis Obispo County, where we do the majority of our business, lack of residential inventory has created opportunities to build and the market is seeing the start of new construction. In both San Luis Obispo and the North County movement in multifamily land development and renewed interest in identifying projects is occurring. In the commercial real estate sector, despite the slow economic recovery, the retail segment remains flat with slight increases in vacancy. The office segment, on the other hand, is faring better with vacancy declining from 25% last year to 8.6% this year.

California’s leisure and hospitality segment remains an economic force, particularly in the Central Coast where we do business, with hotel occupancy over 70% as compared to 62% nationwide.  As of January, the state’s restaurants, hotels, and entertainment businesses have expanded by more than 4%. Exports of agricultural products including livestock, fruits and nuts, as well as high-tech items like aircraft all increased by more than 20%. Locally, the Central Coast wine industry continues to gain important recognition with growth in investment, sales, and export evident. Buildings supporting viticulture are continuing to be built, while agricultural land values continue very strong.

Given several positive economic developments in the communities we serve, we continue to be optimistic with regard to how this will translate into increased business for the Company. At the same time, we are mindful of the economic uncertainties of this recovery and the intense competition in our marketplace from larger banks which will influence our balance sheet and earnings growth into the future.

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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Item 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Under the supervision of our management, including our principal executive officer and principal financial officer, the Company conducted, as of March 31, 2013, an assessment of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were effective as of March 31, 2013.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal  Proceedings

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

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Index:

Exhibit #

2.1  Plan of Reorganization and Agreement of Merger dated as of October 4, 2000 (A)

3.1  Restated Articles of Incorporation (B)

3.2  Certificate of Amendment to Articles of Incorporation (C)

3.3  Certificate of Amendment to Articles of Incorporation (D)

3.4  Amended and Restated Bylaws (E)

4.1  Certificate of Determination for Series A Non-Voting Preferred Stock (F)

4.2  Certificate of Determination for Series B Non-Voting Preferred Stock (F)

4.3  Certificate of Determination for Series C Non-Voting Preferred Stock (G)

4.4  Indenture dated as of October 14, 2003 by and between Registrant and Wells Fargo Bank, National Association, as trustee (H)

4.5  Declaration of Trust of Mission Community Capital Trust I dated  October 10, 2003 (H)

4.6  Amended and Restated Declaration of Trust of Mission Community Capital Trust I dated October 14, 2003 by and among the Registrant, Wells Fargo Delaware Trust Company, as Trustee, and Anita M. Robinson and William C. Demmin, as Administrators (H)

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4.7  Guarantee Agreement dated October 14, 2003 between Registrant, as Guarantor, and Wells Fargo Bank, National Association, as Guarantee Trustee (H)

4.8  Certificate of Determination for Series D Preferred Stock (H)

4.9  Form of Common Stock Purchase Warrant (I)

4.10  Form of Warrant Agreement for warrants issued pursuant to subscription rights (J)

4.11  Amendment No. 1 to public warrants issued pursuant to subscription rights offering (K)

4.12  Form of Warrant Issued to Replace Warrants Issued in 2010 Private Placement (L)

4.13  Form of Warrant Issued to Replace Warrants Issued in 2011 Private Placement (L)

4.14  Additional Form of Warrant Issued to Replace Warrants Issued in 2011 Private Placement (M)

4.15  Amended and Restated Declaration of Trust, dated as of April 28, 2006, of Santa Lucia Bancorp (CA) Capital Trust (N)

4.16  Indenture dated as of April 28, 2006, between Wells Fargo Bank, National Association, as Trustee, and Santa Lucia Bancorp (N)

4.17  First Supplemental Indenture dated as of October 21, 2011 between Wells Fargo Bank, National Association, as trustee, and Mission Community Bancorp (N)

10.1  Purchase and Sale Agreement and Lease dated January, 1997, as amended (F)

10.2  Lease Agreement – Paso Robles (F)

10.3  Lease Agreement – Arroyo Grande (F)

10.4  1998 Stock Option Plan, as amended (F)

10.5  Lease Agreement – 569 Higuera, San Luis Obispo (G)

10.6  Lease Agreement – 3480 S. Higuera, San Luis Obispo (O)

10.7  Employment Agreement dated June 3, 2007 between Brooks Wise and Mission Community Bank (P)

10.8  Financial Advisory Services Agreement dated January 4, 2007 between the Company and Seapower Carpenter Capital, Inc. (Q)

10.9  Build-to-Suit Lease Agreement between Walter Bros. Construction Co., Inc. and Mission Community Bank for property at South Higuera Street and Prado Road in San Luis Obispo, California (R)

10.10  Lease Agreement – 1670 South Broadway, Santa Maria (S)

10.11  Mission Community Bancorp 2008 Stock Incentive Plan (T)

10.12  Amendment No. 1 to Employment Agreement dated December 29, 2008 by and among Mission Community Bancorp, Mission Community Bank, and Brooks W. Wise (U)

10.13  Amended and Restated Salary Protection Agreement dated December 29, 2008 by and between Mission Community Bank and Ronald B. Pigeon (U)

10.14  Letter Agreement dated January 9, 2009 between Mission Community Bancorp and the United States Department of Treasury, which include the Securities Purchase Agreement—Standard Term attached thereto, with respect to the issuance and sale of the Series D. Preferred Stock (V)

10.15  Side Letter Agreement dated January 9, 2009 amendment the Stock Purchase Agreement between Mission Community Bancorp and the Department of the Treasury (V)

10.16  Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding maintenance of two open seats on the Board of Directors (V)

10.17  Side Letter Agreement dated January 9, 2009 between Mission Community Bancorp and The Department of the Treasury regarding CDFI status (V)

10.18  Securities Purchase Agreement dated December 22, 2009 between the Company and Carpenter Fund Manager GP, LLC (“Securities Purchase Agreement”) (W)

10.19  Amendment No. 1 to Securities Purchase Agreement dated March 17, 2010 (X)

10.20  Amendment No. 2 to Employment Agreement of Brooks Wise dated March 22, 2010 (Y)

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10.21  Amendment No. 2 to Securities Purchase Agreement dated March 17, 2010 (Z)

10.22  Employment Agreement dated July 1, 2010 between James W. Lokey and Mission Community Bancorp (AA)

10.23  Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Robert J. Stevens (BB)

10.24  Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Thomas J. Tolda (BB)

10.25  Employment Agreement dated December 18, 2012 between Mission Community Bancorp, Mission Community Bank and Tom L. Dobyns (BB)

10.28  Agreement and Plan of Merger dated as of June 24, 2011 by and among Carpenter Fund Manager GP, LLC; Mission Community Bancorp; Mission Community Bank; Santa Lucia Bancorp and Santa Lucia Bank (CC)

10.29  2011 Equity Incentive Plan (DD)

14  Code of Ethics (EE)

31.1  Certification of CEO pursuant to Section 302 of Sarbanes Oxley Act

31.2  Certification of CFO pursuant to Section 302 of Sarbanes Oxley Act

32.1  Certification of CEO pursuant to Section 906 of Sarbanes Oxley Act

32.2  Certification of CFO pursuant to Section 906 of Sarbanes Oxley Act

101  Interactive Data Files

(A)  Included in the Company’s Form 8-K filed on December 18, 2000, and incorporated by reference herein.

(B)  Included in the Company’s Form 10-QSB filed on August 14, 2006, and incorporated by reference herein.

(C)  Included in the Company’s Pre-Effective Amendment No. 1 to the Form SB-2 Registration Statement filed on July 24, 2007, and incorporated by reference herein.

(D)  Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein.

(E)  Included in the Company's Form 8-K filed on March 29, 2012, and incorporated herein by reference.

(F)  Included in the Company’s Form 10-KSB filed on April 2, 2001, and incorporated by reference herein.

(G)  Included in the Company’s Form 10-QSB filed November 12, 2002, and incorporated by reference herein.

(H)  Included in the Company’s Form 8-K filed on October 21, 2003, incorporated by reference herein.

(I)  Included in the Company’s Form S-1 Registration Statement filed on August 31, 2010, and incorporated by reference herein.

(J)  Included in Amendment No. 1 to the Company's Form S-1 Registration Statement filed on October 1, 2010, and incorporated by reference herein.

(K)  Included in the Company's Form 8-K filed on September 7, 2012 and incorporated herein by reference.

(L)  Included in the Company’s Form 8-K filed on March 26, 2012, and incorporated by reference herein.

(M)  Included in the Company’s Form 8-K filed on October 3, 2012, and incorporated herein by reference .

(N)  Included in the Company's Form 8-K filed on October 27, 2012, and incorporated by reference herein.

(O)  Included in the Company’s Form 10-QSB filed on August 10, 2004, and incorporated by reference herein.

(P)  Included in the Company’s Form 8-K filed on June 13, 2007, and incorporated by reference herein.

(Q)  Included in the Company’s Form SB-2 Registration Statement filed on June 13, 2007, and incorporated by reference herein.

(R)  Included in the Company’s Form 8-K filed on October 23, 2007, and incorporated by reference herein.

(S)  Included in the Company’s Form 10-KSB filed on March 28, 2008, and incorporated by reference herein.

(T)  Included in the Company’s Form 10-Q filed on May 15, 2008, and incorporated by reference herein.

(U)  Included in the Company’s Form 8-K filed on December 30, 2008, and incorporated by reference herein.

(V)  Included in the Company’s Form 8-K filed January 14, 2009, and incorporated by reference herein.

(W)  Included in the Company’s Form 8-K filed on December 24, 2009, and incorporated by reference herein.

(X)  Included in the Company’s From 8-K filed on March 22, 2010, and incorporated by reference herein.

(Y)  Included in the Company’s Form 8-K filed on March 26, 2010, and incorporated by reference herein.

(Z)  Included in the Company’s Form 8-K filed on June 1, 2010, and incorporated by reference herein.

(AA)  Included in the Company’s Form 8-K filed on August 2, 2010, and incorporated by reference herein.

(BB)  Included in the Company's Form 8-K filed on December 21, 2012, and incorporated herein by reference.

(CC)  Included in Form 8-K filed on June 27, 2011, and incorporated by reference herein.

(DD)  Included in the Company’s Form 8-K filed on September 30, 2011 and incorporated by reference herein.

(EE)  Included in the Company's Form 10-K filed on March 31, 2011, and incorporated herein by reference

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Signatures

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

MISSION COMMUNITY BANCORP

By:	/s/ James W. Lokey
JAMES W. LOKEY
Chairman and Chief Executive Officer
Dated:  May 3, 2013

By:	/s/ Thomas J. Tolda
THOMAS J. TOLDA
Executive Vice President and Chief Financial Officer
Dated:  May 3, 2013

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