UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM
10-K

(Mark One)


|                                              |                                                                                     
|--------------------------------------------- | ------------------------------------------------------------------------------------
|x :                                           | ANNUAL REPORT UNDER SECTION 13
  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934   
|                                             
|For the fiscal year ended December 31,
  2007
|                                             
|o                                             | TRANSITION REPORT UNDER SECTION 13
  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from          to

Commission File No. 333-105991

EPIC BANCORP(Exact name of registrant as specified in its charter)

|                                         |                                     
|---------------------------------------- | ------------------------------------
|California                               | 68-0175592                          
|(State or jurisdiction of incorporation) | (I.R.S. Employer Identification No.)

630 Las Gallinas
Avenue, San Rafael, California 94903(Address and zip code of principal executive offices)

Registrants telephone number including area code: (415)
526-6400

N/A
(Former name, former address and formal fiscal year, if changed since last
report)

Securities
registered pursuant to Section 12(b) of the Act: Common Stock, no par value

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

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

Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.  Yes o No x

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

Indicate by
check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

|                               |  |                         |  |                             |  |                               
|------------------------------ |  | ----------------------- |  | --------------------------- |  | ------------------------------
|Large
  accelerated filer    o |  | Accelerated filer     o |  | Non-accelerated filer     o |  | Smaller Reporting Company    x

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

The aggregate
market value of the registrants voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock, as of June 30,
2007 was $50,539,487.

The number of
registrants shares of Common Stock outstanding as of March 10, 2008 was
3,818,284.

The following documents are
incorporated by reference in Part III of this Form 10-K: Items 10
through 14 of registrants definitive Proxy Statement for its June 2008 Annual
Meeting of Shareholders.

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|                  |                                                                                                                  |  |     
|----------------- | ---------------------------------------------------------------------------------------------------------------- |  | ----
|TABLE OF CONTENTS
|                  |                                                                                                                  |  | PAGE
|                  |                                                                                                                  |  |     
|                  |                                                                                                                  |  |     
|                  | PART I                                                                                                           |  |     
|                  |                                                                                                                  |  |     
|Item
  1.         | Business                                                                                                         |  | 3   
|                  |                                                                                                                  |  |     
|Item
  1B.        | Unresolved
  Staff Comments                                                                                      |  | 17  
|                  |                                                                                                                  |  |     
|Item
  2.         | Properties                                                                                                       |  | 17  
|                  |                                                                                                                  |  |     
|Item
  3.         | Legal
  Proceedings                                                                                              |  | 19  
|                  |                                                                                                                  |  |     
|Item
  4.         | Submission
  of Matters to a Vote of Security Holders                                                            |  | 19  
|                  |                                                                                                                  |  |     
|                  | PART II                                                                                                          |  |     
|                  |                                                                                                                  |  |     
|Item
  5.         | Market
  for Registrants Common Equity, Related Shareholder Matters and Issuer
  Purchases of Equity Securities |  | 19  
|                  |                                                                                                                  |  |     
|Item
  6.         | Selected
  Financial Data                                                                                        |  | 21  
|                  |                                                                                                                  |  |     
|Item 7.           | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                          |  | 22  
|                  |                                                                                                                  |  |     
|Item 7A.          | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 51  
|                  |                                                                                                                  |  |     
|Item 8.           | Consolidated Financial Statements and Supplementary Data                                                         |  | 51  
|                  |                                                                                                                  |  |     
|Item 9.           | Changes In and Disagreements with Accountants on Accounting and
  Financial Disclosure                           |  | 88  
|                  |                                                                                                                  |  |     
|Item 9A.          | Controls and Procedures                                                                                          |  | 88  
|                  |                                                                                                                  |  |     
|Item 9A (T)       | Controls and Procedures                                                                                          |  | 88  
|                  |                                                                                                                  |  |     
|Item 9B.          | Other Information                                                                                                |  | 88  
|                  |                                                                                                                  |  |     
|                  | PART III                                                                                                         |  |     
|                  |                                                                                                                  |  |     
|Item 10.          | Directors, Executive Officers and Corporate Governance                                                           |  | 88  
|                  |                                                                                                                  |  |     
|Item 11.          | Executive Compensation                                                                                           |  | 89  
|                  |                                                                                                                  |  |     
|Item 12.          | Security Ownership of Certain Beneficial Owners and Management and
  Related Shareholder Matters                 |  | 89  
|                  |                                                                                                                  |  |     
|Item 13.          | Certain Relationships, Related Transactions and Director Independence                                            |  | 89  
|                  |                                                                                                                  |  |     
|Item 14.          | Principal Accountant Fees and Services                                                                           |  | 89  
|                  |                                                                                                                  |  |     
|                  | PART IV                                                                                                          |  |     
|                  |                                                                                                                  |  |     
|Item 15.          | Exhibits and Financial Statement Schedules                                                                       |  | 89  

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Forward-Looking Statements

In addition to the
historical information, this Annual Report on Form 10-K contains
forward-looking statements with respect to the financial condition, results of
operation and business of Epic Bancorp and its subsidiaries. These include, but
are not limited to, statements that relate to or are dependent on estimates or
assumptions relating to the prospects of loan growth, credit quality, changes
in securities or financial markets, and certain operating efficiencies
resulting from the operations of Tamalpais Bank and Tamalpais Wealth
Advisors.  These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(1) competitive pressure among financial services companies increases
significantly; (2) changes in the interest rate environment reduce interest
margins; (3) general economic conditions, internationally, nationally or in the
State of California are less favorable than expected; (4) legislation or
regulatory requirements or changes adversely affect the businesses in which the
consolidated organization is or will be engaged; (5) the ability to satisfy the
requirements of the Sarbanes-Oxley Act and other regulations governing internal
controls; (6) decline in real estate values in the Companys operating market
areas; (7) volatility or significant changes in the equity and bond markets
which can affect overall growth and profitability of the wealth advisors
business; and, (8) other risks detailed in the Epic Bancorp filings with the
Securities and Exchange Commission. When relying on forward-looking statements
to make decisions with respect to Epic Bancorp, investors and others are
cautioned to consider these and other risks and uncertainties.  Epic Bancorp disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward-looking statements contained in this report to reflect
future events or developments.

Moreover, wherever
phrases such as or similar to In Managements opinion or Management
considers are used, such statements are as of and based upon the knowledge of
Management at the time made and are subject to change by the passage of time
and/or subsequent events and, accordingly, such statements are subject to the
same risks and uncertainties noted above with respect to forward-looking
statements.

PART I

ITEM 1.  BUSINESS

Epic Bancorp (the Company)
was incorporated under the laws of the State of California on December 20, 1988
and is the parent company for Tamalpais Bank (the Bank) and Tamalpais Wealth
Advisors  (TWA) formerly Epic Wealth
Management (EWM).

As of December 31,
2007, the consolidated Company was comprised of three entities, Epic Bancorp,
the Bank, and TWA.  The Bank,
established in 1991, offers a full range of banking services targeting
small-to-medium sized businesses, individuals and high-net worth
consumers.  TWA, established in January
2005, offers investment advisory and financial planning services to the general
community and to clients of the Bank.
San Rafael Capital Trust II and III (the Trusts) are wholly owned unconsolidated
subsidiaries that were formed during 2006 and 2007, respectively, for the
purpose of enabling the Company to issue junior subordinated debentures and
accordingly, the investment activities related to the issuance, investment and
debt service payments associated with the $3.1 and $10.3 million, respectively,
of junior subordinated debentures are so reflected.

The Companys principal
source of cash flow is dividends from the Bank.  Legal limitations are imposed on the amount of dividends that may
be paid and loans that may be made by the Bank to the Company.

At December 31,
2007, the Company had $556.8 million in consolidated assets, $464.7 million in
net loans receivable, and $361.2 million in deposits. At December 31,
2006, the Company had $503.5 million in consolidated assets, $421.3 million in
net loans receivable, and $369.8 million in deposits.

3

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The Companys outstanding
equity securities consist of one class of no par value Common Stock.  The principal executive offices of the
Company are located at 630 Las Gallinas Avenue, San Rafael, California, 94903,
telephone number (415) 526-6400, facsimile number (415) 485-3742.The Company makes available free
of charge on its website at www.epicbancorp.com its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments thereto, and reports of insider transactions
on Forms 3, 4, and 5 as soon as reasonably practicable after the Company files,
or insiders, as the case maybe, such reports with, or furnishes them to the
Securities and Exchange Commission (SEC). Investors are encouraged to access
these reports and the other information about the Companys business on its
website.  The Company may also be
contacted via electronic mail at info@epicbancorp.com.

Tamalpais Bank

The Bank is a California
industrial bank and is under the supervision of the California Department of
Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC).  The Banks deposit accounts
are insured by the FDIC up to the maximum amount permitted by law.

The Bank operates seven
full service branches in Marin County, located north of San Francisco,
California.  The Bank seeks to focus on
relationship banking, providing each customer with a number of services,
familiarizing itself with, and addressing itself to, customer needs.  These customers demand the convenience and
personal service that a local, independent financial institution can
offer.  The Bank attracts deposits from
small-to-medium sized businesses, not-for-profit organizations, individuals,
merchants, and professionals who live and/or work in the communities comprising
the Banks market areas.  A broad range
of commercial and retail lending programs, commercial cash management products
and services and investment advice through its affiliate, TWA, to enable its
customers to reach their personal and financial goals are also offered.

The Banks deposit
products include checking products for both business and personal accounts,
tiered money market accounts offering a variety of access methods, tax
qualified deposits accounts (e.g., IRAs), and
certificates of deposit products.
The Bank also offers DepositNOW Remote Deposit Capture which is a check
clearing tool that allows customers to deposit checks without going to the
bank.  A courier   service is also available to the Banks
professional and business clients.
Additionally, the Bank offers its depositors 24-hour access to their
accounts by telephone and to both consumer and business accounts through its
internet banking products. Automatic teller machines (ATMs) are available at
each branch location and at United Market in San Anselmo and Woodland Market in
Kentfield.  The Banks ATM network is
linked to both the STAR and PLUS networks and is also a member of the
MoneyPass® nationwide network whereby customers have access to more than 11,500
surcharge-free ATMs.  The Bank does not
offer international banking services or trust services, and the Bank holds no
patents, registered trademarks, licenses (other than licenses required by the
appropriate banking regulatory agencies), franchises or concessions.

The Banks lending
programs include commercial and industrial real estate loans, commercial loans
to businesses including SBA loans, mortgages for multifamily real estate,
revolving lines of credit and term loans, consumer loans including home equity
lines of credit and secured and unsecured lines of credit, land and
construction lending for commercial real estate, single family residences, and
apartment buildings.  In addition to its
seven full-service banking centers, the Bank operates two loan production
offices located in Santa Rosa and Roseville, California, which focus
principally on the origination of SBA and other small business loans.

4

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Tamalpais Wealth Advisors

As an integral element of
its strategic plan to increase market share in Marin County and to further
service its high-net worth business and consumer base the Company established
TWA, a registered investment advisor under the Investment Advisors Act of 1940,
as amended.  TWA provides investment
management, financial planning and advice to high-net worth individuals,
families and institutions in the Marin County and surrounding marketplace.

Market Area

The Company is
headquartered in Marin County, California, which has a population of 252,485,
the second highest household income in the state and the highest per capita
income out of the 3,111 counties nationwide, according to data from the U.S.
Census Bureau and USDA.  In Marin
County, the median price for a single family home is $835,750 according to
DataQuick December 2007 home sales report.
The per capita income is $44,962, which is the highest in the nation,
and household income is $71,306, which is the second highest in the State,
according to data from U.S. Census Bureau.
Marin County had $7.8 billion in total deposits as of June 30, 2007
according to data from the FDIC, the most recent date for which data is
available.

The Companys market area
consists of Marin County and the Greater Bay Area including San Francisco,
Alameda, Contra Costa, San Mateo, Santa Clara, Sonoma and Napa counties.  The Banks deposit gathering efforts are
focused primarily in the Marin County communities surrounding its full service
branches.

The Company has no foreign or international activities
or operations.

Company Strategy

During the past several
years, the Company has adopted a business strategy of developing a
business-based banking approach as a means of increasing market share in Marin
County and increasing shareholder value.
The Companys strategy of providing financial services and advice to
business owners and individuals incorporates a relationship-based approach to
customer service and marketing, with an understanding of the balance sheet and
income statement profile of clients to even more effectively present loan and
deposit products and investment management and financial planning to its
constituency.

The Company has
demonstrated expertise in providing the full service banking needs of its
business clients through innovative and flexible financing and cash management
services.  Directors and employees of
the Company maintain a high level of involvement and visibility within the
community and the not-for-profit sector.
The Company also strives to add value for its shareholders by optimizing
its capital, expanding the volume of its earning assets and increasing
non-interest income.  In the past five
years, the Company has grown significantly; however, its business is subject to
various risks.  This strategy, executed
primarily through its expanding retail branch presence, incorporates:

| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | tailoring loan and deposit products such as
  commercial mortgages, business and personal loans and lines of credit, and
  cash management services to small-to-medium sized businesses and individuals;                                  
| |   |                                                                                                                                                                                                                                           
| | · | building relationships through advisory services in
  the high-net worth community of Marin County and the greater San Francisco
  Bay Area;                                                                                              
| |   |                                                                                                                                                                                                                                           
| | · | providing fee-based investment advisory, asset
  management, and financial planning services;                                                                                                                                             
| |   |                                                                                                                                                                                                                                           
| | · | offering consultation and planning services,
  delivered in a personalized, non-intimidating way;                                                                                                                                         
| |   |                                                                                                                                                                                                                                           
| | · | embarking on a key customer service and loyalty
  strategy whereby the goal is to enhance the service culture of the Company,
  build customer loyalty, improve internal business workflows and develop a
  meaningful measurement system;
| |   |                                                                                                                                                                                                                                           
| | · | increasing non-interest income to a greater portion
  of total revenue; and,                                                                                                                                                              
| |   |                                                                                                                                                                                                                                           
| | · | utilizing new technologies to better meet the
  financial needs of businesses, professionals and families.                                                                                                                                

5

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2007 Accomplishments

The Company has achieved
favorable financial performance and has made significant progress in achieving
its strategic goals over the past several years. The following are among the
accomplishments that the Company achieved in financial performance and
executing its strategic plan in 2007:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | The Company had record
  fourth quarter and full-year earnings in 2007.  Net income for the quarter ended December 31, 2007 was
  $1,139,000, a 5.9% increase over net income of $1,076,000 for the same
  quarter ended in 2006.  Quarterly
  diluted earnings per share of $0.30 increased 11.1% over the comparable
  period last year.  Net income for
  fiscal year 2007 was $4,209,000, a 7.1% increase over net income of
  $3,928,000 in 2006.  Diluted earnings
  per share of $1.07 increased 8.1% over 2006.                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | In 2007, the Company
  achieved double digit loan and asset growth in an increasingly difficult
  environment.  The Company has never
  participated in subprime lending and has low exposure to residential
  mortgages, construction and land loans.                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | The Companys asset
  quality remains exceptional.  The Bank
  only had one $466,000 nonperforming loan as of December 31, 2007.  The Company does not expect to recognize a
  loss on this loan and anticipates recovering all principal and interest.  Charge-offs of only $1,000 were recorded
  for the full year and no loan losses have been recorded at the Company in the
  prior ten years.                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | There was heightened
  competition for deposits among Marin County banks in 2007.  Even with this competition, the Bank was
  able to increase its deposit market share as of June 30, 2007 from 4.52% to
  4.76%, according to data from FDIC the most recent date for which data is
  available.                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | Noninterest checking
  accounts increased by $5.1 million to $23.3 million in 2007 as compared to
  2006, an increase of 28.2%. The relationship focused approach to commercial
  and relationship banking is becoming increasing successful.                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | In September 2007, the
  Company received Board of Directors approval to repurchase up to 5% of the
  shares of the Companys common stock in the open market over the next twelve
  months.  As of December 31, 2007, the
  Company repurchased 196,216 shares of its company stock at a weighted average
  price of $12.51 per share, which is 97.8% of the targeted repurchase amount
  of 200,649 shares.                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | Increases in TWA assets under management produced fourth quarter
  and full year Registered Investment Advisory Services fee income increases of
  22% and 19%, respectively, over the prior year periods.                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | A
  bank owned life insurance (BOLI) asset was purchased in the second quarter
  2007, with a year-end book value of $10.4 million.  Fourth quarter and full year income from the BOLI totaled
  $138,000 and $387,000, respectively.                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | The
  Company increased its quarterly dividend to $0.05 from $0.045 in the fourth
  quarter 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | Tamalpais Bank has been
  named the largest SBA lender based in Marin County by the San Francisco
  Business Times in its recently published 2008 Book of Lists.  In addition, the Bank, was the only Marin
  County community bank ranked in the Top twenty-five SBA lenders, and was
  cited as the seventh largest in the Bay Area, according to the rankings.                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | The
  Company continued to utilize key customer loyalty measurement and analysis in
  2007.  The goal of this strategy is to
  enhance the service culture of the Company, build customer loyalty, improve
  internal business workflows and develop a meaningful measurement system.  The Company uses Net Promoter Score
  methodology for feedback and measurement.                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | In
  2007, the Company refinanced $10 million of trust preferred securities that
  were issued by a wholly owned trust, San Rafael Capital Trust I.  These trust preferred securities were
  originally issued on June 27, 2002 and had a floating interest rate of
  three-month LIBOR plus 3.65% and were refinanced through a newly formed
  wholly owned trust, San Rafael Capital Trust III.  The new trust preferred securities were issued on July 25, 2007
  and bear a floating interest rate of three-month LIBOR plus 1.44%.

6

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| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| | · | Since 1993, the Company has allocated over $1.3 million in cash
  to its Community Outreach Program (COP).
  COP consists of the following:

| |   |                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Community Counts:  The Bank donates directly to non-profit
  organizations designated by the Banks customers.                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                       
| | * | Employees in Action:  Officers, directors and employees have
  devoted thousands of hours of their personal time as volunteers for various
  Marin-based non-profit organizations.
  Employees of the Company donated over 1,452 hours to volunteering for
  various non-profit organizations in 2007.
| |   |                                                                                                                                                                                                                                                                                                       
| | * | Heart of Marin Awards:  For 15 years, the Bank has demonstrated
  its commitment to Marin County by establishing and continuing to underwrite
  the annual Heart of Marin Awards, which recognizes outstanding contributions
  to the Marin non-profit community.                                     
| |   |                                                                                                                                                                                                                                                                                                       
| | * | Community Rooms:  The community rooms in each branch of the
  Bank offer conference facilities for-profits and non-profits free of charge,
  days, nights and weekends.                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                       
| | * | Financial Literacy Programs:  A free web-based program, Practical Money
  Skills for Life, provides educators and parents a library of interactive
  tools, games and lessons. The Practical Money Skills for Life program makes
  learning about money fun for children.                             
| |   |                                                                                                                                                                                                                                                                                                       
| | * | Green Business
  Activities:  The
  Bank funded a Green Affordable Housing project in Novato, CA in 2007.                                                                                                                                                                                             

| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| | · | The Bank was
  awarded the first fully Green Certified Bank in Marin County in 2007 by the
  County of Marin.

New Facilities

Management believes that the likelihood of success of
its new branches is increased by placing new branches in proximity to existing
branches of other financial institutions with large deposit bases. Therefore,
the Banks branching strategy focused on opening branches in those geographies
that generally have at least $100 million in deposits.  The Bank opened one new branch in 2002 (Mill
Valley), one new branch in 2003 (Greenbrae), two new branches in 2004 (San
Anselmo and Northgate - North San Rafael), one new branch in 2005 (Corte Madera),
and one new branch in 2006 (Tiburon/Belvedere).  The Northgate facility also serves as the Companys
headquarters.  The Company intends to
open future branches and loan production offices in similar business and high
net worth markets  in the upcoming
years.

Competition

The banking and financial services business in
California generally, and in the Companys market area specifically, is highly
competitive with respect to attracting both loan and deposit relationships. The
increasingly competitive environment is a result of many factors including, but
not limited to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the ongoing sub-prime
  and Alt-A lending crisis, which began in the summer of 2007 and continued
  into 2008, has caused a liquidity shortage, particularly among large mortgage
  lenders.  This has caused increased
  competition for retail deposits, as these institutions needed to offer above
  market rates for retail deposits due to their inability to raise liquidity
  through capital market sources.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | · | significant
  consolidation among financial institutions which has occurred over the past
  several years, resulting in a number of substantially larger competitors with
  greater resources than the Company;                                                                                                                                                                                                      

7

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| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | increasing integration
  among commercial banks, insurance companies, securities brokers, and
  investment banks;                                                                                               
| |   |                                                                                                                                                                                                                 
| | · | increased number of
  denovo banks;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                 
| | · | continued growth and
  increased market share of non-bank financial service providers that often
  specialize in a single product line such as credit cards or residential mortgages;                           
| |   |                                                                                                                                                                                                                 
| | · | increased internet
  based competition causing the Bank to compete more frequently with remote
  entities soliciting customers in its primary market area via web based
  advertising and product delivery; and,
| |   |                                                                                                                                                                                                                 
| | · | introduction of new
  technologies which may bypass the traditional banking system for funds
  settlement.                                                                                                      

The Company competes for
loans, deposits, investments, fee based products, and customers for financial
services with commercial banks, savings and loans, credit unions, industrial banks,
mortgage bankers, securities and brokerage companies, registered investment
advisor firms, insurance firms, finance companies, mutual funds, and other
non-bank financial service providers. Many of these competitors are much larger
than the Company in total assets, market reach, and capitalization and enjoy
greater access to capital markets and can offer a broader array of products and
services than the Company currently offers.

As of June 30, 2007,
approximately 86 banking offices with $7.8 billion in total deposits served the
Marin County market.  The four banking
institutions with the greatest market share, Bank of America, Wells Fargo Bank,
Washington Mutual Bank and Westamerica Bank, had deposit market shares of
17.66%, 16.92%, 10.56% and 10.42%, respectively, as of June 30, 2007, the most
recent date for which data is available, compared with the Banks share of
4.76%.

The Company also competes
for depositors funds with money market mutual funds and with non-bank
financial institutions such as brokerage firms, investment management firms and
insurance companies.  Among the
competitive advantages held by certain of these non-bank financial institutions
is the ability to finance extensive advertising campaigns, and to allocate
investment assets to regions of California or other states with areas of
highest demand and often, therefore, highest yield.  Large commercial banks also have substantially greater lending
limits than the Bank and the ability to offer certain services which are not
offered directly by the Company.

In order to compete with
other financial service providers, the Company uses to the fullest extent
possible the flexibility and rapid response capabilities which are accorded by
its independent status.  This includes
an emphasis on:

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| | · | development and sale of specialized products and
  services tailored to meet its customers needs;
| |   |                                                                                                   
| | · | local, flexible, and fast decision making;                                                        
| |   |                                                                                                   
| | · | personal service and the resulting personal
  relationships of its staff and customers;           
| |   |                                                                                                   
| | · | referrals from directors, employees, and satisfied
  customers; and,                              
| |   |                                                                                                   
| | · | local community involvement.                                                                      

Employees

As of December 31, 2007, the Company employed
seventy-seven full-time employees.  The
employees are not represented  by a
union or covered by a collective bargaining agreement.  The Company believes that its employee
relations are good.

8

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Other Information

There were no
expenditures made by the Company during the last two fiscal years on material
research activities relating to the development of services.

The Companys
business is not seasonal. The Company intends to continue with the same banking
activities that have characterized the Companys operations over the last few
years and the investment management activities of TWA that began in 2005. The
Company anticipates continued profitable growth while maintaining sound credit
and management policies and/or practices.

Effect of Governmental Policies and
Legislation

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

From time to
time, legislation is enacted which has the effect of increasing the cost of
doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial intermediaries. Proposals
to change the laws and regulations governing the operations and taxation of
banks, bank holding companies and other financial intermediaries are frequently
made in Congress, the California legislature and before various bank regulatory
and other professional agencies.

Supervision and Regulation

General
Industrial banking companies are extensively regulated under both federal and
state law. This regulation is intended primarily for the protection of
depositors and the Bank Insurance Fund (BIF) and not for the benefit of
shareholders. Moreover, major new legislation and other regulatory changes
affecting the Company, the Bank and the financial services industry in general
have occurred in the current and recent years and can be expected to occur in
the future. The nature, timing and impact of new and amended laws and
regulations cannot be accurately predicted. The following information describes
certain aspects of that regulation applicable to the Company and the Bank, and
does not purport to be complete and is qualified in its entirety by reference
to all particular statutory or regulatory provisions.

Regulation and Supervision of The Company
The Company is not under direct oversight by the FDIC or the DFI. However, as a
part of their examinations of the Bank, the FDIC and DFI may review the
operating records of the Company as they review affiliated party transactions
and to determine any obligation that the Bank will have to cover the Companys
operating expenses or funding commitments. The Companys securities are
registered with the SEC under the Securities Exchange Act of 1934, as amended
(the Exchange Act). As such, the Company is subject to the information, proxy
solicitation, insider trading and other requirements and restrictions of the
Exchange Act.

Directors,
officers and principal shareholders of the Company have had and will continue
to have banking transactions with the Bank in the ordinary course of business.
Any loans and commitments to lend included in such transactions are made in
accordance with applicable law, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons of similar creditworthiness, and on terms not
involving more than the normal risks of collection or presenting other
unfavorable features.

9

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Restrictions on Acquisitions
Federal law generally provides that no person, acting directly or indirectly
or through or in concert with one or more other persons, may acquire control,
as that term is defined in FDIC regulations, of a federally insured institution
without giving at least 60 days written notice to the FDIC and providing the
FDIC an opportunity to disapprove the proposed acquisition. In addition, no
person may acquire control of such an institution in California without prior
DFI approval.

Regulation and Supervision of The Bank
The Bank is licensed under the laws of the State of California and its deposits
are insured by FDIC to the extent provided by law. The Bank is subject to the
supervision of, and is regularly examined by, comprehensive reviews of all
major aspects of the Banks business and condition. Various requirements and
restrictions under the laws of the State of California and the United States
affect the operations of the Bank. State and federal statues and regulations
relate to many aspects of the Banks operations, including reserves against
deposits, ownership of deposit accounts, certain interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of banking centers and capital requirements. Furthermore, the Bank is
required to maintain certain levels of capital. The Bank is also subject to
consumer protection laws.

If, as a
result of an examination of the Bank, the FDIC or the DFI should determine that
the financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of the Banks operations are
unsatisfactory or that the Bank or its management is violating or has violated
any law or regulation, various remedies are available to those regulatory
agencies. Such remedies include the power to enjoin unsafe or unsound
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth
of the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate the Banks deposit insurance, which for a
California chartered bank would result in a revocation of the Banks charter.

Regulation of Non-banking Affiliates  TWA
TWA is registered with the SEC as an investment advisor and is subject to
various regulations and restrictions imposed by those entities, as well as by
various state authorities. Such regulations cover a broad range of subject
matters. Rules and regulations for registered investment advisors cover
such issues as sales and trading practices; use of client funds and securities;
the conduct of directors, officers, and employees; record-keeping and
recording; supervisory procedures to prevent improper trading on material
non-public information; and qualification and licensing of sales personnel. The
SECs risk assessment rules also apply to TWA as a registered investment
advisor. These rules require a registered investment advisor to maintain
and preserve records and maintain risk management policies and procedures. In
addition to federal registration, state securities commissions require the
registration of certain investment advisors.

Violations of
federal, state and NASD rules or regulations may result in the revocation
of investment advisor licenses, imposition of censures or fines, the issuance
of cease and desist orders, and the suspension or expulsion of officers and
employees from the securities business firm.

Dividends and Other Transfer of Funds
Dividends from the Bank constitute the principal source of funds to the
Company. The Company is a legal entity separate and distinct from the Bank. The
Companys ability to pay cash dividends is limited by California law such that
shareholders of the Company may receive dividends when and as declared by the
Board of Directors out of funds legally available for such purpose. With
certain exceptions, a California corporation may not pay a dividend to its
shareholders unless (i) its retained earnings equal at least the amount of the
proposed dividend, or (ii) after giving effect to the dividend, the
corporations assets would equal at least 1.25 times its liabilities and, for
corporations with classified balance sheets, the current assets of the
corporation would be at least equal to its current liabilities or, if the
average of the earnings of the corporation before taxes on income and before
interest expense for the two preceding fiscal years was less than the average
of the interest expense of the corporation for those fiscal years, at least
equal to 1.25 times its current liabilities.

10

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The FDIC and
the DFI have authority to prohibit the Bank from engaging in activities that,
in their opinion, constitute unsafe or unsound practices in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC and DFI could assert that the payment
of dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Furthermore, the FDIC has established guidelines with respect
to the maintenance of appropriate levels of capital by banks under its
jurisdiction. Compliance with the standards set forth in such guidelines and
the restrictions that are or may be imposed under the prompt corrective action
provisions of federal law could limit the amount of dividends which the Bank
may pay. An insured depository institution is prohibited from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. The DFI may impose similar limitations on the Bank. Under
certain circumstances, dividends could be prohibited under the Trust Preferred
Securities.

Capital Adequacy
The FDIC has established risk-based minimum capital guidelines with respect to
the maintenance of appropriate levels of capital by United States banking
organizations. These guidelines are intended to provide a measure of capital
that reflects the degree of risk associated with a banking organizations
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as commercial loans.

The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount
of Tier 1 capital to average assets, referred to as the leverage ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio must be
3%. In addition to these uniform risk-based capital guidelines and leverage
ratios that apply across the industry, the regulators have the discretion to
set individual minimum capital requirements for specific institutions at rates
significantly above minimum guidelines and ratios. As of December 31, 2007 the
Banks ratios exceeded applicable regulatory requirements.

Prompt Corrective Action and Other
Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
the respective federal regulatory agencies to implement systems for prompt
corrective action for insured depository institutions that do not meet minimum
capital requirements to be classified as well-capitalized or adequately
capitalized. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. An
undercapitalized institution must develop a capital restoration plan.

An institution
that, based upon its capital levels, is classified as well capitalized,
adequately capitalized, or undercapitalized, may be treated as though it were
in the next lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an unsafe or unsound
condition or practice warrants such treatment. At each successive lower capital
category, an insured depository institution is subject to more restrictions.
Banking agencies have also adopted regulations which mandate that regulators
take into consideration (i) concentrations of credit risk; (ii) interest rate
risk (when the interest rate sensitivity of an institutions assets does not
match the sensitivity of its liabilities or its off-balance-sheet position);
and, (iii) risks from non-traditional activities, as well as an institutions
ability to manage those risks, when determining the adequacy of an
institutions capital. This evaluation will be made as a part of the
institutions regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to
incorporate a measure for market risk. In accordance with the amended
guidelines, the Company and any company with significant trading activities
must incorporate a measure for market risk in its regulatory capital
calculations.

11

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In addition to
measures taken under the prompt corrective action provisions, industrial
banking organizations may be subject to potential enforcement actions by the
supervising agencies for unsafe or unsound practices in conducting their
businesses for violations of law, rule, regulation or any condition imposed in
writing by the agency or any written agreement with the agency. Enforcement
actions vary commensurate with the severity of the violation.

Safety and Soundness Standards
FDICIA imposes certain specific restrictions on transactions and requires
federal banking regulators to adopt overall safety and soundness standards for
depository institutions related to internal control, loan underwriting and
documentation and asset growth. Among other things, FDICIA limits the interest
rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository
institution to an executive officer, director, principal shareholder or related
interest, and reduces deposit insurance coverage for deposits offered by
undercapitalized institutions for deposits by certain employee benefit
accounts. The federal banking agencies may require an institution to submit to
an acceptable compliance plan as well as have the flexibility to pursue other
more appropriate or effective courses of action given the specific
circumstances and severity of an institutions noncompliance with one or more
standards.

In December
2006, the FRB and FDIC issued joint guidance relating to institutions
concentrations in commercial real estate lending. These agencies have observed
that commercial real estate concentrations have been rising over the past
several years and have reached levels that could create safety and soundness
concerns in the event of a significant economic downturn. While these agencies
are not establishing a limit on the amount of commercial real estate lending
that an institution may conduct, they have established a threshold which
examiners may use to identify institutions with potential concentration risk.
Any institution that (1) has experienced rapid growth in commercial real estate
lending; (2) has notable exposure to a specific type of commercial real estate;
or, (3) is approaching or exceeds the supervisory criteria may be identified
for further examination.

Premiums for Deposit Insurance and
Assessments for ExaminationsThe Banks deposit accounts are insured by the BIF, as
administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operation, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institutions primary regulator.
The termination of deposit insurance for the Bank would have a material adverse
effect on the Companys condition since it would result in the revocation of
the Banks charter and the cessation of its operations as a going concern.

Prior to 2006,
the FDIC was required to maintain insurance fund reserves of $1.25 for each
$100 of insured deposits. The FDIC has authority to levy special assessments
against insured financial institutions based upon insured deposits. On February
8, 2006, President Bush signed into law the Federal Deposit Insurance Reform
Act of 2005 as part of the Deficit Reduction Act of 2005 and signed a companion
bill, the Federal Deposit Insurance Reform Conforming Amendments Act of 2005,
on February 15, 2006. This legislation provides for:

| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| | · | merging the
  BIF and SAIF deposit insurance funds;                                                                  
| |   |                                                                                                                      
| | · | annually
  adjusting the minimum insurance fund reserve ratio between $1.15 and $1.50
  per $100 of insured deposits;

12

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| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                       
| | · | increasing
  deposit coverage for retirement accounts to $250,000;                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                       
| | · | indexing the
  insurance level for inflation, with any increases approved by the FDIC and
  National Credit Union Administration on a five-year cycle beginning in 2010
  after review of the state of the deposit insurance fund and related factors;
| |   |                                                                                                                                                                                                                                                       
| | · | credits of
  up to $4.7 billion to offset premiums for banks that were members of the
  FDIC and paid deposit insurance premiums prior to 1996; and,                                                                                                  
| |   |                                                                                                                                                                                                                                                       
| | · | an
  historical basis concept for distributing credits and dividends to reflect
  past contributions to the insurance funds.                                                                                                                          

In the fourth
quarter of 2006, the FDIC adopted two final rules implementing the Federal
Deposit Insurance Reform Act of 2005:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | a rule
  creating a new system for risk-based assessments and sets assessment rates
  beginning January 1, 2007. Assessment rates are three basis points above
  the base rates, ranging from 5 to 7 basis for Risk Category I institutions
  (well capitalized institutions perceived as posting the least risk to the
  insurance fund), 10 basis points for Risk Category II institutions, 28 basis
  points for Risk Category III institutions, and 43 basis points for Risk
  Category IV institutions; and,
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | a rule
  setting the designated reserve ratio at 1.25 percent. In October of
  2006, FDICs Board adopted a final rule governing the distribution and use of
  the $4.7 billion one-time assessment credit and a temporary final rule that
  expires at the end of 2009 governing dividends from the insurance fund. The
  Bank had assessment credits of approximately $70,000 as of December 31, 2006
  and which were used in 2007.                                                                           

Consumer Protection Laws and Regulations
The bank regulatory agencies are focusing greater attention on compliance with
consumer protection laws and their implementing regulations. Examination and
enforcement have become more intense in nature, and insured institutions have
been advised to monitor carefully compliance with various consumer protection
laws and their implementing regulations. The Bank is subject to many federal
consumer protection statutes and regulations, including Community Reinvestment
Act, Equal Credit Opportunity Act, Truth in Lending Act, Fair Housing Act, Home
Mortgage Disclosure Act and Real Estate Settlement Procedures Act. Penalties
under these statutes may include fines, reimbursements and other penalties. Due
to heightened regulatory concern related to compliance with these and other
statutes generally, the Bank may incur additional compliance costs.

The Community Reinvestment Act (CRA) and
Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving lending, investing and other CRA activities. CRA requires
the Company to identify the communities served by the Companys offices and to
identify the types of credit and investments the Company is prepared to extend
within such communities including low and moderate income neighborhoods. It
also requires the Companys regulators to assess the Companys performance in
meeting the credit needs of its community and to take such assessment into
consideration in reviewing application for mergers, acquisitions, relocation of
existing branches, opening of new branches and other transactions. A bank may
be subject to substantial penalties and corrective measures for a violation of
certain fair lending laws. The federal banking agencies may take compliance
with such laws and CRA in consideration when regulating and supervising other
banking activities.

A banks
compliance with its CRA obligations is determined based on a performance-based
evaluation system which bases CRA ratings on an institutions lending, service
and investment performance. An unsatisfactory rating may be the basis for
denying a merger application. The Banks latest CRA examination was completed
by the FDIC and received an overall rating of outstanding in complying with its
CRA obligations.

13

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Gramm-Leach-Bliley Financial Services
Modernization Act (GLB Act)
In November 1999, the GLB Act was enacted. The GLB Act repeals provisions of
the Glass-Steagall Act which restricted the affiliation of Federal Reserve
member banks with firms engaged principally in specified securities
activities, and which restricted officer, director or employee interlocks
between a member bank and any company or person primarily engaged in specified
securities activities. In addition, the GLB Act contains provisions that
expressly preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect of the law is
to establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers by revising and expanding the BHCA framework to permit a holding
company to engage in a full range of financial activities through a new entity
known as a financial holding company. Financial activities is broadly
defined to include not only banking, insurance and securities activities, but
also merchant banking and additional activities that the FRB, in consultation with
the Secretary of the Treasury, determines to be financial in nature, incidental
to such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.

The GLB Act
provides that no company may acquire control of an insured savings association
unless that company engages, and continues to engage, only in the financial
activities permissible for a financial holding company, unless the company is
grandfathered as a unitary savings and loan holding company. The GLB Act
grandfathers any company that was a unitary savings and loan holding company on
May 4, 1999 or became a unitary savings and loan holding company pursuant to an
application pending on that date. The GLB Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries.
A national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
financial holding company. Financial activities include all activities permitted
under new sections of the BHCA or permitted by regulation.

To the extent
that the GLB Act permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further
consolidation. The GLB Act is intended to grant to community banks powers as a
matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB Act may have the result of increasing the amount of
competition that the Company faces from larger institutions and other types of
companies offering financial products, many of which may have substantially
more financial resources than the Company has.

Customer Information Security
The federal bank regulatory agencies have established standards for
safeguarding nonpublic personal information about customers that implement
provisions of the GLBA (the Guidelines). Among other things, the Guidelines
require each financial institution, under the supervision and ongoing oversight
of its Board of Directors or an appropriate committee thereof, to develop,
implement and maintain a comprehensive written information security program
designed to ensure the security and confidentiality of customer information, to
protect against any anticipated threats or hazards to the security or integrity
of such information, and to protect against unauthorized access to or use of
such information that could result in substantial harm or inconvenience to any
customer.

Bank Secrecy Act(BSA)
The BSA is a tool that U.S. government uses to fight drug trafficking, money
laundering and other crimes. Under the BSA, financial institutions are required
to file certain reports, including suspicious activities reports and currency
transaction reports, with the Financial Crimes Enforcement Network under
certain circumstances. Financial institutions are also required to have
policies and procedures in place to ensure compliance with the BSA. If a
financial institution fails to timely file a report or fails to implement its
BSA policies and procedures, it could subject the institution to enforcement
action or civil money penalties. In July 2007, federal banking regulators
issued the Intercompany Statement on Enforcement of Bank Secrecy Act/Anti-Money
Laundering Requirements to provide greater consistency among the agencies in
enforcement decisions in BSA matters and to offer insight into the
considerations that form the basis of such BSA enforcement decisions.

14

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On October 26,
2001, the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT)
Act of 2001. The USA PATRIOT Act also made significant changes to the Bank
Secrecy Act. Under the USA PATRIOT Act, financial institutions are subject to
prohibitions against specified financial transactions and account relationships
as well as enhanced due diligence and of identifying customers when
establishing new relationships and standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures, and controls generally require financial
institutions to take reasonable steps:

| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | to conduct
  enhanced scrutiny of account relationships to guard against money laundering
  and report any suspicious transaction;                                                                                
| |   |                                                                                                                                                                                                                   
| | · | to ascertain
  the identity of the nominal and beneficial owners of, and the source of funds
  deposited into, each account as needed to guard against money laundering and
  report any suspicious transactions; 
| |   |                                                                                                                                                                                                                   
| | · | to ascertain
  for any foreign bank, the shares of which are not publicly traded, the
  identity of the owners of the foreign bank, and the nature and extent of the
  ownership interest of each such owner; and,
| |   |                                                                                                                                                                                                                   
| | · | to ascertain
  whether any foreign bank provides correspondent accounts to other foreign
  banks and, if so, the identity of those foreign banks and related due
  diligence information.                         

Under the USA
PATRIOT Act, financial institutions are to establish anti-money laundering
programs to enhance their Bank Secrecy Act program. The USA PATRIOT Act sets
forth minimum standards for these programs, including the development of
internal policies, procedures, and controls, designation of a compliance
officer, ongoing employee training program, and independent audit function to
test the programs. Management believes that the Bank is currently in compliance
with the Act.

Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOX), was signed into law
to address corporate and accounting fraud. SOX establishes a new accounting
oversight board that will enforce auditing standards and restricts the scope of
services that accounting firms may provide to their public company audit
clients. Among other things, SOX also (i) requires chief executive officers and
chief financial officers to certify to the accuracy of periodic reports filed
with the SEC; (ii) imposes new disclosure requirements regarding internal
controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures;
(iii) accelerates the time frame for reporting of insider transactions and
periodic disclosures by public companies; and, (iv) requires companies to
disclose whether or not they have adopted a code of ethics for senior financial
officers and whether the audit committee includes at least one audit committee
financial expert.

Under SOX, the
SEC is required to regularly and systematically review corporate filings, based
on certain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonuses
issued to top executives to disgorgement if a restatement of a companys
financial statements was due to corporate misconduct; (ii) prohibits an officer
or director from misleading or coercing an auditor; (iii) prohibits insider
trades during pension fund blackout periods; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and, (v) extends the period during
which certain securities fraud lawsuits can be brought against a company or its
officers. As a public reporting company, the Company was required to provide
managements report on internal control over financial reporting beginning with
its 2007 Annual Report on Form 10-K. The auditors attestation report on
internal controls over financial reporting is not required until 2009. The
Company has adopted a code of ethics (Code of Ethics) that applies to its
executive officers. A copy of the Code of Ethics is filed as an exhibit hereto.

California Financial Information Privacy
Act/Fair Credit Reporting Act
In 1970, the Federal Fair Credit Reporting Act (the FCRA) was enacted to
insure the confidentiality, accuracy, relevancy and proper utilization of
consumer credit report information. Under the framework of the FCRA, the United
States has developed a highly advanced and efficient credit reporting system.
The information contained in that broad system is used by financial
institutions, retailers and other creditors of every size in making a wide
variety of decisions regarding financial transactions. Employers and law
enforcement agencies have also made wide use of the information collected and
maintained in databases made possible by the FCRA. The FCRA affirmatively
preempts state law in a number of areas, including the ability of entities
affiliated by common ownership to share and exchange information freely, and
the requirements on credit bureaus to reinvestigate the contents of reports in
response to consumer complaints, among others.

15

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Congress
enacted the FACT Act, (Fair and Accurate Credit Transaction Act) of 2003,
which has the effect of avoiding the sunset preemption provision of the Fair
Credit Reporting Act (FCRA) that were due to expire on December 31, 2003. The
President signed the FACT Act into law on December 4, 2003. In general, the
FACT Act amends the FCRA and, in addition, provides that, when the implementing
regulations have been issued and become effective, the FACT Act preempts
elements of the California Financial Information Privacy Act. A series of
regulations and announcements were promulgated during 2004, including a joint
FTC/Federal Reserve announcement of effective dates for FCRA amendments, the
FTCs Free Credit Report rule, revisions to the FTCs FACT Act Rules, the
FTCs final rules on identity theft and proof of identity, the FTCs final
regulation on consumer information and records disposal, and the FTCs final
summaries and notices. Regulations implementing this provision of FACT Act have
a mandatory effective date of October 1, 2008. FACT Act section 114, which
requires institutions to develop and implement a written program to detect,
prevent, and mitigate identity theft for certain new and existing accounts,
must be in place by November 1, 2008.

Regulation W
Transactions between a bank and its affiliates are governed by Sections 23A
and 23B of the Federal Reserve Act. The Federal Deposit Insurance Act applies
Sections 23A and 23B to insured nonmember banks in the same manner and to the
same extent as if they were members of the Federal Reserve System. The FRB also
issued Regulation W, which became effective on April 1, 2003, which codifies
prior regulations under Sections 23A and 23B of the Federal Reserve Act and
provides interpretative guidance with respect to affiliate transactions.
Affiliates of a bank include, among other entities, the banks parent company
and companies that are under common control with the bank. The Company is
considered to be an affiliate of the Bank. In general, subject to certain
specified exemptions, a bank or its subsidiaries are limited in their abilities
to engage in covered transactions with affiliates:

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| | · | to an amount
  equal to 10% of the banks capital and surplus, in the case of covered
  transactions with any one affiliate; and,
| |   |                                                                                                                                  
| | · | to an amount
  equal to 20% of the banks capital and surplus, in the case of covered
  transactions with all affiliates.        

A covered transaction
includes, among other things, a loan or extension of credit to an affiliate; a
purchase of securities issued by an affiliate; a purchase of assets from an
affiliate, with some exceptions; and the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. In addition, a bank and its
subsidiaries may engage in certain transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies.

Recent Developments

Programs to Mitigate Identity TheftIn November 2007, federal banking agencies together
with the NCUA and FTC adopted regulations under the Fair and Accurate Credit
Transactions Act of 2003 to require financial institutions and other creditors
to develop and implement a written identity theft prevention program to detect,
prevent and mitigate identity theft in connection with certain new and existing
accounts. Covered accounts generally include consumer accounts and other
accounts that present a reasonably foreseeable risk of identity theft. Each
institutions program must include policies and procedures designed to: (i)
identify indicators, or red flags, of possible risk of identity theft based;
(ii) detect the occurrence of red flags; (iii) respond appropriately to red
flags that are detected; and (iv) ensure that the program is updated periodically
as appropriate to address changing circumstances. The regulations include
guidelines that each institution must consider and, to the extent appropriate,
include in its program.

16

---



Administration Response to Subprime Mortgage Crises
The Bank did not originate subprime mortgages and does not hold subprime
investments, but the value of real estate collateral securing its mortgages may
be affected by residential real estate values in its service area. In 2007 the
subprime mortgage market suffered substantial losses. Subprime mortgages
generally include residential real estate loans made to borrowers with certain
credit deficiencies, most using relaxed underwriting and documentation
standards and usually with adjustable interest rates that reset upward after an
introductory period. The combination of falling real estate prices and upward
interest rate and payment adjustments has caused the default rate on subprime
mortgages to increase. In December 2007, the Bush administration announced a
proposal to freeze interest rates on certain subprime mortgages at
preadjustment levels for up to five years in an effort to minimize residential
foreclosures and bring some stability to home prices. As currently described,
the proposal would benefit residential owner-occupants who are not yet in
default but are likely to default after interest rate and payment adjustments
are put into effect; those already in default and those who are presumed able
to afford their adjusted payments would not be covered. No assurance can be
given whether this proposal will ultimately be adopted, what revisions might be
made before adoption, how many borrowers will be affected by it or what effect
it may have on foreclosures and home prices. In addition to the Bush
administration proposal, various state and federal legislative proposals are
pending and could be enacted.

ITEM 1A  RISK FACTORS

Not required.

ITEM 1B  UNRESOLVED STAFF COMMENTS

None.

ITEM 2  PROPERTIES

The
following table sets forth information relating to each of the Companys
offices as of December 31, 2007:

17

---



|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|--------------------------------------------------- |  | ------------------- |  | ------------------------------------ |  | ---------------------------- |  | ---------------- | 
|                                                    |  | Leased
  Or
  Owned |  | Original Date
  Leased or
  Acquired |  | Date of
  Lease
  Expiration |  | Square
  Footage
|                                                    |  |                     |  |                                      |  |                              |  |                 
|Administrative Offices:                             |  |                     |  |                                      |  |                              |  |                  | 
|630 Las
  Gallinas Ave.San Rafael, California 94903 |  | Leased              |  | 6/1/2005                             |  | 6/1/2015                     |  | 9,453            | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|Epic Bancorp                                        |  | Leased              |  | 3/1/2005                             |  | 10/31/2007                   |  | 632              | 
|851 Irwin
  St., Suite 301                          |  |                     |  |                                      |  |                              |  |                  | 
|San Rafael,
  California 94901                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|630 Las
  Gallinas Ave.                             |  | Leased              |  | 1/1/2007                             |  | 12/16/2016                   |  | 190              | 
|San Rafael,
  California 94903                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|Full Service Branch Offices Currently Open:         |  |                     |  |                                      |  |                              |  |                  | 
|851 Irwin
  St., Suite 100                          |  | Leased              |  | 8/18/1998                            |  | 8/31/2008                    |  | 3,417            | 
|San Rafael,
  California 94901                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|453-455
  Miller Ave.                               |  | Leased              |  | 5/1/2002                             |  | 4/31/2012                    |  | 3,026            | 
|Mill Valley,
  California 94941                     |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|575 Sir
  Francis Drake Blvd.                       |  | Leased              |  | 7/23/2002                            |  | 7/31/2012                    |  | 2,600            | 
|Greenbrae,
  California 94904                       |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|100 Sir
  Francis Drake Blvd.                       |  | Leased              |  | 11/15/2002                           |  | 11/15/2017                   |  | 3,300            | 
|San Anselmo,
  California 94960                     |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|630 Las Gallinas
  Ave., Suite 100                  |  | Leased              |  | 6/1/2005                             |  | 6/1/2015                     |  | 2,500            | 
|San Rafael,
  California 94903                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|71 Casa
  Buena Drive                               |  | Leased              |  | 12/29/2003                           |  | 12/29/2013                   |  | 3,746            | 
|Corte
  Madera, California 94925                    |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|1652 Tiburon
  Boulevard                            |  | Leased              |  | 8/15/2005                            |  | 8/15/2015                    |  | 2,230            | 
|Tiburon,
  California 94920                         |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|Loan Production Offices:                            |  |                     |  |                                      |  |                              |  |                  | 
|740 4th
  Street                                    |  | Leased              |  | 12/31/2005                           |  | 7/31/2007                    |  | 300              | 
|Santa Rosa,
  California 95404                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|50 Old
  Couthouse Square                           |  | Leased              |  | 1/1/2007                             |  | 1/1/2009                     |  | 1,353            | 
|Santa Rosa,
  California 95404                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|3017 Douglas
  Blvd., Ste. 300                      |  | Leased              |  | 12/1/2007                            |  | 5/31/2008                    |  | 108              | 
|Roseville,
  California 95661                       |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|Tamalpais Wealth Advisors:                          |  |                     |  |                                      |  |                              |  |                  | 
|851 Irwin
  St., Suite 301                          |  | Leased              |  | 11/1/2002                            |  | 10/31/2007                   |  | 2,169            | 
|San Rafael,
  California 94901                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|630 Las
  Gallinas Ave.                             |  | Leased              |  | 7/19/2007                            |  | 6/30/2008                    |  | 700              | 
|San Rafael,
  California 94903                      |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|Stand Alone ATM Machines:                           |  |                     |  |                                      |  |                              |  |                  | 
|735 College
  Ave.                                  |  | Leased              |  | 5/29/2003                            |  | 5/29/2009                    |  | 12               | 
|Kentfield,
  California 94904                       |  |                     |  |                                      |  |                              |  |                  | 
|                                                    |  |                     |  |                                      |  |                              |  |                  | 
|100 Redhill
  Boulevard                             |  | Leased              |  | 9/12/2005                            |  | 9/12/2008                    |  | 25               | 
|San Anselmo,
  California 94960                     |  |                     |  |                                      |  |                              |  |                  | 

Management believes that its
existing facilities are adequate for its present needs and that the Companys
insurance coverage on its properties and tenant improvements are adequate.

18

---



ITEM 3  LEGAL PROCEEDINGS

The Company is not a
defendant in any material pending legal proceedings and no such proceedings are
known to be contemplated. No director, officer, affiliate, more than 5%
shareholder of the Company or any associate of these persons is a party adverse
to the Company or has a material interest adverse to the Company in any
material legal proceeding.

From time to time, the
Company and/or its subsidiaries is a party to claims and legal proceedings
arising in the ordinary course of business. The Companys management is not
aware of any material pending legal proceedings to which either it or its
subsidiaries may be a party or has recently been a party, which will have a
material adverse effect on the financial condition or results of operations of
the Company or its subsidiaries, taken as a whole.

ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during
the fourth quarter of the fiscal year covered by this Annual Report to a vote
of security holders, through the solicitation of proxies or otherwise.

PART II

ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
SHAREHOLDER MATTERS AND ISSUERS PURCHASE OF EQUITY SECURITIES

The Companys common stock
trades on the NASDAQ Capital Market System under the symbol EPIK. At February
29, 2008, 3,818,284 shares of the Companys common stock, no par value, which
reflects the 7% stock dividend declared on January 30, 2007, were outstanding
and held by 975 holders of record. The following table sets forth, for the
periods indicated, the range of high and low trade prices of the Companys
common stock.

|               |  |                               |       |     |   |       | 
|-------------- |  | ----------------------------- | ----- | --- | - | ----- | 
|               |  | Sales
  Price of Common Stock |      
|               |  |                               |      
|               |  | High                          |       | Low |  
|               |  |                               |       |     |  
|2007           |  |                               |       |     |   |       | 
|First Quarter  |  | $                             | 15.47 |     | $ | 13.87 | 
|Second Quarter |  |                               | 15.35 |     |   | 13.13 | 
|Third Quarter  |  |                               | 13.96 |     |   | 11.67 | 
|Fourth Quarter |  |                               | 12.84 |     |   | 10.35 | 
|               |  |                               |       |     |   |       | 
|2006           |  |                               |       |     |   |       | 
|First Quarter  |  | $                             | 15.86 |     | $ | 12.65 | 
|Second Quarter |  |                               | 14.39 |     |   | 13.08 | 
|Third Quarter  |  |                               | 14.02 |     |   | 12.71 | 
|Fourth Quarter |  |                               | 13.79 |     |   | 12.85 | 

The prices have been
adjusted to reflect the 7% stock dividend declared in 2007. The Companys
closing price on December 31, 2007 was $11.07, compared to the closing price
one year earlier of $13.55.

19

---



Dividends

The Company initiated a cash
dividend program in 2004. It is currently the intention of the Board of
Directors of the Company to continue payment of cash dividends on a quarterly
basis. The shareholders of the Company will be entitled to receive dividends
when and as declared by its Board of Directors, out of funds legally available,
subject to the dividend preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the California General
Corporation Law. There are no preferred shares outstanding at this time. There
is no assurance, however, that any dividends will be paid since they are
dependent upon earnings, cash balances, financial condition and capital
requirements of the Company and its subsidiaries. See Supervision and
Regulation  Dividends and Other Transfer of Funds. See also Note 13 to the
Consolidated Financial Statements.

The Company paid a cash dividend of $0.05
per share in November 2007 and $0.045 per share in April and August 2007. The
Company also declared a 7% stock dividend to be paid on February 14, 2007 to
shareholders of record on January 31, 2007. The Company paid four cash
dividends of $0.04 per share and paid four cash dividends of $0.03 per share in
2006 and 2005, respectively.

Stock Repurchase

The Company repurchases
shares of its common stock in the open market to optimize the Companys use of
equity capital and enhance shareholder value and with the intention of
lessening the dilultive impact of issuing new shares to meet stock performance,
option plans, and other ongoing requirements. In September 2007, the Company
received Board of Director approval to repurchase up to 5% of the shares of the
Companys common stock in the open market over the next twelve months. The repurchase
plan represents approximately 200,649 shares of the Companys common stock
outstanding as of July 28, 2007, as reported on the Companys most recent Form
10-Q filed with the SEC on August 10, 2007. The Company executed these
transactions pursuant to the safe harbor provisions of the SECs Rule 10b-18.
All shares repurchased were made in open market transactions and were part of
the publicly announced repurchase program.

The following table lists
shares repurchased through December 31, 2007 and the maximum amount available
to repurchase under the repurchase plan.

|                       |  |                                  |         |                                    |   |                                                                     |  |                                                                   |         |  |  |         | 
|---------------------- |  | -------------------------------- | ------- | ---------------------------------- | - | ------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ------- |  |  | ------- | 
|Period                 |  | Total Number
of Shares
Purchased |         | Average
  Price
  Paid
  Per Share |   | Total Number of
Shares Purchased
as Part of Publicly
Announced Plan |  | Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan |        
|                       |  |                                  |         |                                    |   |                                                                     |  |                                                                   |         |  |  |         | 
|                       |  |                                  |         |                                    |   |                                                                     |  |                                                                   |         |  |  |         | 
|September
  9-30, 2007 |  |                                  | 75,000  |                                    | $ | 12.78                                                               |  |                                                                   | 75,000  |  |  | 125,649 | 
|October
  1-31, 2007   |  |                                  | 59,776  |                                    |   | 12.49                                                               |  |                                                                   | 134,776 |  |  | 65,873  | 
|November
  1-30, 2007  |  |                                  | 61,440  |                                    |   | 12.15                                                               |  |                                                                   | 196,216 |  |  | 4,433   | 
|                       |  |                                  |         |                                    |   |                                                                     |  |                                                                   |         |  |  |         | 
|Total                  |  |                                  | 196,216 |                                    | $ | 12.47                                                               |  |                                                                   | 405,992 |  |  | 195,955 | 
|                       |  |                                  |         |                                    |   |                                                                     |  |                                                                   |         |  |  |         | 

Securities Authorized for Issuance Under Equity Compensation
Plans

The following table
summarizes information as of December 31, 2007 with respect to equity
compensation plans. All plans have been approved by the shareholders.

20

---



|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------- | ------- | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                             |  | Number of securities
to be issued upon exercise of outstanding options,
warrants, and rights |         | Weighted-average exercise price of outstanding
options, warrants and rights |  | Number of securities remaining available for
future issuance under
equity compensation plans
(excluding securities reflecting in column (a) | 
|                                                             |  | (a)                                                                                          |         | (b)                                                                         |  | (c)                                                                                                                                         | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             | 
|Plan Category                                                |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|                                                            
|Equity compensation plans approved by security holders:      |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|1997 Incentive Stock Option Plan                             |  |                                                                                              | 228,121 |                                                                             |  | 11.84                                                                                                                                       |  |  |        | 
|2006 Incentive Stock Option Plan                             |  |                                                                                              | 79,955  |                                                                             |  | 13.49                                                                                                                                       |  |  | 190,976 | 
|2003 Non-Employee Directors Stock Option
Plan               |  |                                                                                              | 102,263 |                                                                             |  | 12.24                                                                                                                                       |  |  | 29,347  | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|Equity compensation plans
  not approved by security holders |  |                                                                                              |        |                                                                             |  |                                                                                                                                            |  |  |        | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 
|Total                                                        |  |                                                                                              | 410,339 |                                                                             |  | 12.26                                                                                                                                       |  |  | 220,323 | 
|                                                             |  |                                                                                              |         |                                                                             |  |                                                                                                                                             |  |  |         | 

ITEM 6  SELECTED FINANCIAL DATA

The following table sets forth
the results of operations as of December 31, 2007, 2006, 2005, 2004 and 2003.
This information should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations included herein
and the consolidated financial statements and notes thereto included herein.

21

---



|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|----------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|At or For
  the Year Ended December 31,               |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|(Dollars in thousands)                                |  | 2007 |           | 2006 |   | 2005      |   | 2004 |           | 2003 |  
|                                                      |  |      |          
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Financial
  Condition Data:                           |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Total assets                                          |  | $    | 556,815   |      | $ | 503,514   |   | $    | 461,839   |      | $ | 425,610   |   | $ | 301,961   |  
|Available-for-sale
  securities                       |  |      | 40,661    |      |   | 26,516    |   |      | 15,118    |      |   | 22,040    |   |   |          |  
|Held-to-maturity securities                           |  |      | 14,515    |      |   | 21,823    |   |      | 28,844    |      |   | 40,851    |   |   | 18,907    |  
|Federal Home Loan Bank
  restricted stock             |  |      | 6,886     |      |   | 5,892     |   |      | 6,198     |      |   | 6,934     |   |   | 3,609     |  
|Pacific Coast Bankers Bank
  restricted stock        |  |      | 50        |      |   | 50        |   |      | 50        |      |   | 50        |   |   | 50        |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Loans receivable, net of
  allowance for loan losses  |  |      | 464,699   |      |   | 421,335   |   |      | 382,424   |      |   | 325,651   |   |   | 246,418   |  
|Deposits                                              |  |      | 361,175   |      |   | 369,805   |   |      | 313,399   |      |   | 274,620   |   |   | 211,626   |  
|Federal Home Loan Bank
  advances                     |  |      | 146,508   |      |   | 86,251    |   |      | 107,812   |      |   | 115,781   |   |   | 65,101    |  
|Junior Subordinated
  Debentures                      |  |      | 13,403    |      |   | 13,403    |   |      | 10,310    |      |   | 10,310    |   |   | 10,310    |  
|Other liabilities                                     |  |      | 2,797     |      |   | 3,175     |   |      |          |      |   |          |   |   |          |  
|Total stockholders equity                            |  |      | 32,933    |      |   | 30,881    |   |      | 26,845    |      |   | 23,175    |   |   | 13,874    |  
|Statement
  of Operations Data:                       |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Interest income                                       |  | $    | 39,041    |      | $ | 35,815    |   | $    | 28,724    |      | $ | 21,602    |   | $ | 17,451    |  
|Interest expense                                      |  |      | 21,482    |      |   | 18,185    |   |      | 11,728    |      |   | 7,602     |   |   | 6,303     |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income                                   |  |      | 17,559    |      |   | 17,630    |   |      | 16,996    |      |   | 14,000    |   |   | 11,148    |  
|Provision for loan losses                             |  |      | 244       |      |   | 439       |   |      | 632       |      |   | 874       |   |   | 784       |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net interest income after
  provision for loan losses |  |      | 17,315    |      |   | 17,191    |   |      | 16,364    |      |   | 13,126    |   |   | 10,364    |  
|Noninterest income                                    |  |      | 2,546     |      |   | 2,176     |   |      | 1,634     |      |   | 814       |   |   | 560       |  
|Noninterest expenses (4)                              |  |      | 13,365    |      |   | 13,036    |   |      | 11,262    |      |   | 8,783     |   |   | 6,405     |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Income (loss) before income
  tax expense (benefit)   |  |      | 6,496     |      |   | 6,331     |   |      | 6,736     |      |   | 5,157     |   |   | 4,519     |  
|Income tax expense (benefit)                          |  |      | 2,287     |      |   | 2,402     |   |      | 2,639     |      |   | 1,709     |   |   | 1,721     |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Net income (loss)                                     |  | $    | 4,209     |      | $ | 3,929     |   | $    | 4,097     |      | $ | 3,448     |   | $ | 2,798     |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Per Share
  Data:                                     |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Earnings (loss) per
  shareBasic                     |  | $    | 1.07      |      | $ | 0.99      |   | $    | 1.04      |      | $ | 0.90      |   | $ | 0.83      |  
|Earnings (loss) per
  shareDiluted                   |  |      | 1.07      |      |   | 0.99      |   |      | 1.01      |      |   | 0.87      |   |   | 0.81      |  
|Common shares outstanding at
  end of period          |  |      | 3,818,284 |      |   | 3,960,852 |   |      | 3,937,239 |      |   | 3,922,301 |   |   | 3,356,544 |  
|Book value per share                                  |  | $    | 8.62      |      | $ | 7.80      |   | $    | 6.82      |      | $ | 5.91      |   | $ | 4.13      |  
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Performance
  Ratios and Other Data:                  |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Return on average assets                              |  |      | 0.81      | %    |   | 0.81      | % |      | 0.92      | %    |   | 0.90      | % |   | 0.97      | %
|Return on average
  stockholders equity               |  |      | 12.9      | %    |   | 13.8      | % |      | 16.5      | %    |   | 17.2      | % |   | 22.2      | %
|Efficiency ratio                                      |  |      | 66.5      | %    |   | 65.8      | % |      | 60.5      | %    |   | 59.3      | % |   | 54.7      | %
|                                                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Tamalpais
  Bank Capital Ratios:                      |  |      |           |      |   |           |   |      |           |      |   |           |   |   |           |  
|Tier 1 risk based capital                             |  |      | 8.3       | %    |   | 9.7       | % |      | 9.1       | %    |   | 10.0      | % |   | 9.1       | %
|Total risk based capital                              |  |      | 10.2      | %    |   | 10.8      | % |      | 10.1      | %    |   | 11.0      | % |   | 10.2      | %
|Tier 1 leverage capital                               |  |      | 9.2       | %    |   | 8.6       | % |      | 7.7       | %    |   | 8.1       | % |   | 7.5       | %

Earnings
per share, book value per share and common shares outstanding have been
adjusted for the January 2007 7% stock dividend.

ITEM 7  MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion address information pertaining to the financial condition
and results of operations of the Company that may not be otherwise apparent
from a review of the consolidated financial statements and related footnotes.
It should be read in conjunction with those statements and notes found therein
as well as the other information presented throughout the report. Average
balances, including balances used in calculating certain financial ratios, are
generally comprised of average daily balances.

22

---



In January 2007, the Board of Directors declared a
7% stock dividend. Earnings per share and book value per share amounts have
been restated for prior periods to reflect the stock dividend.

In September 2007, the Company received Board of
Director approval to repurchase up to 5% of the share of the Companys common
stock over the next twelve months from the approval date in the open market.
The repurchase plan represents approximately 200,649 of the Companys
then-outstanding shares as of July 28, 2007, as reported on the Companys most
recent Form 10-Q filed with the Securities and Exchange Commission (SEC) on
August 10, 2007. As of December 31, 2007, the Company repurchased 196,216
shares at prices ranging from $11.65 to $13.00 for a total cost of $2.5
million.

For discussion of stock dividends and share
repurchases, see Note 18 of the Notes to Financial Statements.

Critical Accounting Policies

The accounting policies
are integral to understanding the results reported. The most complex accounting
policies require managements judgment to ascertain the valuation of assets,
liabilities, commitments and contingencies. The Company has established
detailed policies and control procedures that are intended to ensure valuation
methods are well controlled and applied consistently from period to period. In
addition, the policies and procedures are intended to ensure that the process
for changing methodologies occurs in an appropriate manner. The following is a
brief description of the current accounting policies involving significant
management valuation judgments.

Allowance
for Loan LossesThe
allowance for loan losses represents managements best estimate of losses
inherent in the existing loan portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense and reduced by
loans charged-off, net of recoveries. The Company evaluates the allowance for
loan loss on a quarterly basis and believes that the allowance for loan loss is
a critical accounting estimate because it is based upon managements
assessment of various factors affecting the collectibility of the loans,
including current and projected economic conditions, past credit experience,
delinquency status, the value of the underlying collateral, if any, and a continuing
review of the portfolio of loans and commitments.

The Company determines
the appropriate level of the allowance for loan losses, primarily on an
analysis of the various components of the loan portfolio, including all
significant credits on an individual basis. The Company segments the loan
portfolios into as many components as practical. Each component would normally
have similar characteristics, such as risk classification, past due status,
type of loan, industry or collateral. The Company analyzes the following
components of the portfolio and provides for them in the allowance for loan
losses.

| |   |                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | All significant credits on an individual basis that
  are classified doubtful.                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                     
| | · | All other significant credits reviewed individually.
  If no allocation can be determined for such credits on an individual basis,
  they shall be provided for as part of an appropriate pool.                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                     
| | · | All other loans that are not included by the credit
  grading system in the population of loans reviewed individually, but are
  delinquent or are classified or designated special mention (e.g. pools of
  smaller delinquent, special mention and classified commercial and industrial,
  and real estate loans).
| |   |                                                                                                                                                                                                                                                                                                                     
| | · | Homogenous loans that have not been reviewed
  individually, or are not delinquent, classified, or designated as special
  mention (e.g. pools of real estate mortgages).                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                     
| | · | All other loans that have not been considered or
  provided for elsewhere (e.g. pools of commercial and industrial loans that
  have not been reviewed, classified, or designated special mention, standby
  letters of credit, and other off-balance sheet commitments to lend).                                   

No assurance can be given
that the Company will not sustain loan losses that are sizable in relation to
the amount reserved, or that subsequent evaluations of the loan portfolio will
not require an increase in the allowance.

23

---



Prevailing factors in association
with the methodology may include improvement or deterioration of individual
improvement or deterioration of individual commitments or pools of similar
loans, or loan concentrations.

Available-for-Sale
SecuritiesStatement of Financial
Accounting Standards (SFAS) 115 requires that available-for-sale securities
be carried at fair value. This is a critical accounting estimate in that the
fair value of a security is based on quoted market prices or if quoted market
prices are not available, fair values are extrapolated from the quoted prices
of similar instruments. Adjustments to the available-for-sale securities fair
value impact the consolidated financial statements by increasing or decreasing
assets and stockholders equity.

Servicing
AssetThe Company services SBA
and non-SBA loans for investors and records a related mortgage servicing asset.
The servicing calculations contain certain assumptions such as the expected
life of the loan and the discount rate used to compute the present value of
future cash flows. Exposure results from the loan life assumption if loans
prepay faster than expected. Exposures results from the discount rate
assumption if prime rate adjusts severely and permanently. Such exposures can
cause adjustments to the income statement.

Supplemental
Employee Retirement PlanThe Company has entered
into supplemental employee retirement agreements with certain executive
officers. The liability under these agreements is measured in accordance with
SFAS No. 87. The liability is based on estimates involving life expectancy,
length of time before retirement, appropriate discount rate, forfeiture rates
and expected benefit levels. Should these estimates prove materially different
from actual results, the Company could incur additional or reduced future
expense.

Deferred
Tax AssetsDeferred income taxes
reflect the estimated future tax effects of temporary differences between the
reported amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. The Company uses an
estimate of future earnings to support the position that the benefit of the
deferred tax assets will be realized. If future income should prove
non-existent or less than the amount of the deferred tax assets within the tax
years to which they may be applied, the asset may not be realized and the net
income will be reduced.



Accounting
ChangeFrom time to time, the
Financial Accounting Standards Board issues pronouncements which govern the
accounting treatment for the Companys financial statements. For a description
of the recent pronouncements applicable to the Company, see Note 1 to the
Consolidated Financial Statements included in this report.

SUMMARY

Results of Operations

Based on historical
results and recent investments in branches and TWA operations, management
anticipates that the Company will continue to grow in 2008. However, due to
risk factors that are beyond the control of the Company, actual results could
differ from managements estimates. Managements discussion and analysis of
financial condition and results of operations is intended to provide a better
understanding of the significant changes in trends relating to the Companys
financial condition, results of operations, liquidity and interest rate
sensitivity. The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements of the Company,
including the notes.

The Company reported on a
consolidated basis net income of $4,209,000 as compared to $3,928,000 for 2007,
an increase of $281,000, or 7.1%. Diluted earnings per share was $1.07 for the
twelve months ended December 31, 2007 as compared to $0.99 for the twelve
months ended December 31, 2007, an increase of 8.1%.

24

---



Total assets reached
$556,815,000 in 2007, an increase of $53,300,000 or 10.6% from the prior year.
Total deposits were $361,175,000 in 2007, a decrease of $8,630,000 or 2.3% from
the prior year. Total loans receivable, net were $464,699,000 in 2007 as
compared to $421,335,000 in 2006, representing an increase of $43,364,000 or
10.3%.

The increase in net
income and fully diluted earnings per share as of December 31, 2007 over the
prior year period was primarily the result of the following:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Interest income was $39,041,000, an increase of
  $3,227,000, or 9.0% over 2006. The increase in net income was largely due to
  the increased earning asset base as a result of an increase in the size of
  the Banks loan portfolio partially offset by a decreased net interest margin
  from 3.71% to 3.50% in 2007 versus 2006.                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | In 2007, non-interest income increased $370,000, or
  17.0% over 2006. The increase in 2007 as compared to the same period prior
  year was primarily attributable to the following: registered investment
  advisory services fee income generated by TWA increased $94,000, or 18.6%,
  loan servicing income increased $18,000, or 11.3%, and other income increased
  $462,000, or 64.4%. Partially offsetting these increases was a reduction of
  $207,000, or 26.2%, in the gain on sale of loans associated with the sale of
  the government guaranteed portion of Small Business Administration loans
  during 2007 as compared to 2006.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | · | The provision for loan losses in 2007 was $244,000,
  a decrease of $196,000, or 44.5% as compared to the same period prior year.
  This level is considered adequate by management for probable loan losses
  inherent in the portfolio.                                                                                                                                                                                                                                                                                                                                                                                                         

Partially offsetting the
increase in interest income and non-interest income and decrease in the
provision for loan losses, which had positive impacts on net income, were
increases in interest expense and non-interest expense as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Interest expense increased $3,297,000, or 18.1% from
  2006 to 2007. Interest expense on deposits increased $2,290,000, or 17.0%,
  from 2006 to 2007 and is primarily due to rising short-term interest rates
  and local market competition for deposits. Interest expense on borrowed funds
  increased $925,000, or 25.4%, in 2007 as compared to the same period prior
  year.                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | · | In 2007, non-interest expense increased $330,000, or
  2.5% to $13,365,000 in 2007 as compared to the same period prior year. This
  increase is primarily a result of an increase of $312,000, or 17.6%, in other
  administrative expenses, $401,000, or 118.9%, increase in professional fees
  and $105,000, or 28.9%, increase in data processing expenses partially offset
  by a decrease in salaries and benefits of $599,000, or 7.5%, in 2007 as
  compared to the same period prior year.

Financial Condition

In 2006 and 2007, the
Companys return on average assets (ROA) was 0.81%. The
Companys return on average equity (ROE) was 12.89% in 2007 compared to
13.81% in 2006. The decrease in ROE is due to the pressure on the net interest
margin in 2007. Management continues to balance the desire to increase the
return ratios with the desire to increase the Banks deposit penetration in
Marin County and loan growth throughout its lending territories while
maintaining superior credit quality. For the twelve month period from June 2006
to June 2007 (the latest date for which the information is available), the
Banks market share of total Marin County deposits increased from 4.52% to 4.76%,
or 5.0%.

As of December 31, 2007,
consolidated total assets were $556,815,000 as compared to $503,514,000 at
December 31, 2006, which represents an increase of 10.6%. Contributing to the
growth of assets in 2007 was an increase of $43,607,000, or 10.2% in gross
outstanding loans, an increase in total investment securities of $6,836,000, or
14.1%, the addition of the BOLI of $10,387,000, or 100% (policy obtained in
April 2007), and an increase in FHLB restricted stock of $994,000, or 16.9%
partially offset by a decrease in bank premises and equipment, net of $621,000,
or 11.8%. The Federal funds sold balance was $567,000 as of December 31, 2007
compared to $8,526,000 as of December 31, 2006.

25

---



As of December 31, 2007,
consolidated total liabilities were $523,882,000 as compared to $472,634,000 at
December 31, 2006, which represents an increase of 10.8%. Contributing to the
increase in liabilities in 2007 was an increase in FHLB advances of
$60,257,000, or 69.9% as compared to the same period in 2006. This increase is
primarily attributable to increased levels of borrowings to support loan
growth. Partially offsetting this increase was a decrease in total deposits of
$8,630,000, or 2.3% from December 31, 2007 to December 31, 2006 as a result of
heightened competition for deposits among banks in general and community banks
in particular. Additionally, accrued interest payable and other liabilities
decreased $378,000, or 11.9% in 2007 as compared to 2006.

Stockholders equity
increased $2,052,000, or 6.6% to $32,933,000 in 2007 as compared to the same
period prior year.

As of December 31, 2007,
TWA had approximately $281.0 million in assets under management as compared to
$270.0 million for the same period prior year.

Summary of Quarterly Results of
Operations

The following below sets forth the results of
operations for the four quarters of 2007 and 2006.

|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|--------------------------------------------------- |  | ------------------- | ----- | ------------------- | - | ------- |  | ------- | ----- | ------- | - | -------- | - | ------- | ----- | ------- | - | ----- | - | - | ----- |  | - | ----- | 
|                                                    |  | 2007 Quarters Ended |       | 2006 Quarters Ended |  
|                                                    |  | Dec. 31             |       | Sept. 30            |   | June 30 |  | Mar. 31 |       | Dec. 31 |   | Sept. 30 |   | June 30 |       | Mar. 31 |  
|                                                    |  |                     |       |                     |  
|Interest income                                     |  | $                   | 9,934 |                     | $ | 9,967   |  | $       | 9,624 |         | $ | 9,517    |   | $       | 9,616 |         | $ | 9,343 |   | $ | 8,820 |  | $ | 8,035 | 
|Interest expense                                    |  |                     | 5,393 |                     |   | 5,454   |  |         | 5,409 |         |   | 5,227    |   |         | 5,206 |         |   | 4,964 |   |   | 4,370 |  |   | 3,645 | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Net interest Income                                 |  |                     | 4,541 |                     |   | 4,513   |  |         | 4,215 |         |   | 4,290    |   |         | 4,410 |         |   | 4,379 |   |   | 4,450 |  |   | 4,390 | 
|Provision for loan losses                           |  |                     | 204   |                     |   | 116     |  |         | 10    |         |   | (86      | ) |         | 38    |         |   | (69   | ) |   | 327   |  |   | 143   | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Net interest income after provision for loan losses |  |                     | 4,337 |                     |   | 4,397   |  |         | 4,205 |         |   | 4,376    |   |         | 4,372 |         |   | 4,448 |   |   | 4,123 |  |   | 4,247 | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Noninterest income                                  |  |                     | 692   |                     |   | 609     |  |         | 746   |         |   | 500      |   |         | 485   |         |   | 558   |   |   | 639   |  |   | 494   | 
|Noninterst expense                                  |  |                     | 3,267 |                     |   | 3,552   |  |         | 3,272 |         |   | 3,275    |   |         | 3,116 |         |   | 3,294 |   |   | 3,282 |  |   | 3,341 | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Income before provision for income taxes            |  |                     | 1,762 |                     |   | 1,454   |  |         | 1,679 |         |   | 1,601    |   |         | 1,741 |         |   | 1,712 |   |   | 1,480 |  |   | 1,400 | 
|Provision for income taxes                          |  |                     | 623   |                     |   | 469     |  |         | 612   |         |   | 583      |   |         | 665   |         |   | 660   |   |   | 571   |  |   | 508   | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Net Income                                          |  | $                   | 1,139 |                     | $ | 985     |  | $       | 1,067 |         | $ | 1,018    |   | $       | 1,076 |         | $ | 1,052 |   | $ | 909   |  | $ | 892   | 
|Net Income per common share                         |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 
|Basic                                               |  | $                   | 0.30  |                     | $ | 0.25    |  | $       | 0.27  |         | $ | 0.26     |   | $       | 0.27  |         | $ | 0.26  |   | $ | 0.23  |  | $ | 0.22  | 
|Diluted                                             |  | $                   | 0.30  |                     | $ | 0.25    |  | $       | 0.27  |         | $ | 0.25     |   | $       | 0.27  |         | $ | 0.26  |   | $ | 0.23  |  | $ | 0.22  | 
|                                                    |  |                     |       |                     |   |         |  |         |       |         |   |          |   |         |       |         |   |       |   |   |       |  |   |       | 

The per-share amounts have been adjusted for the stock dividend
declared in January 2007.

26

---



Results of Operations

Net interest income is the difference between the
interest earned on loans, investments and other interest earning assets, and
its interest expense on deposits and other interest bearing liabilities and is
the most significant component of the Companys earnings.

Net interest income is impacted by changes in general
market interest rates and by changes in the amounts and composition of interest
earning assets and interest bearing liabilities. Comparisons of net interest
income are frequently made using net interest margin and net interest rate
spread. Net interest margin is expressed as net interest income divided by
average earning assets. Net interest rate spread is the difference between the
average rate earned on total interest earning assets and the average rate
incurred on total interest bearing liabilities. Both of these measures are
reported on a taxable equivalent basis. Net interest margin is the higher of
the two because it reflects interest income earned on assets funded with
non-interest bearing sources of funds, which includes demand deposits and
stockholders equity.

The following sets forth average daily balances of
assets, liabilities, and shareholders equity during 2007, 2006 and 2005, along
with total interest income earned and expense paid, and the average yields
earned or rates paid thereon and the net interest margin for the years ended
December 31, 2007, 2006 and 2005:

27

---



EPIC BANCORP AND SUBSIDIARIESAverage Balance Sheets
(Unaudited)

|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|--------------------------------------------------------- |  | --------------------------------- | ------- | -------- | - | ------- |  | ------- | ---- | -------- | - | ------- | - | ------- | ------ | -------- |  | ------- | - | - | ------- | - | - | ------ |  |  | ---- | -
|                                                          |  | For
  the Year Ended December 31, |        
|(dollars
  in thousands)                                  |  | 2007                              |         | 2006     |   | 2005    | 
|                                                          |  |                                   |         |          |   |         | 
|                                                          |  |                                   |         | Interest |   | Yields  |  |         |      | Interest |   | Yields  |   |         |        | Interest |  | Yields  |  
|                                                          |  | Average                           |         | Income/  |   | Earned/ |  | Average |      | Income/  |   | Earned/ |   | Average |        | Income/  |  | Earned/ |  
|                                                          |  | Balance                           |         | Expense  |   | Paid    |  | Balance |      | Expense  |   | Paid    |   | Balance |        | Expense  |  | Paid    |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |  
|Assets                                                    |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Investment securities - Munis
(1,2)                      |  | $                                 | 3,116   |          | $ | 123     |  |         | 5.57 | %        | $ |        |   | $       |       |          |  |        |   | $ |        |   | $ |       |  |  |     |  
|Investment securities - Taxable (2)                       |  |                                   | 49,496  |          | $ | 2,327   |  |         | 4.70 | %        |   | 46,893  |   |         | 1,902  |          |  | 4.06    | % |   | 55,828  |   |   | 1,811  |  |  | 3.24 | %
|Other investments                                         |  |                                   | 5,348   |          |   | 293     |  |         | 5.48 | %        |   | 6,035   |   |         | 324    |          |  | 5.37    | % |   | 6,519   |   |   | 286    |  |  | 4.39 | %
|Interest bearing deposits in other financial
institutions |  |                                   | 899     |          |   | 40      |  |         | 4.45 | %        |   | 1,167   |   |         | 44     |          |  | 3.77    | % |   | 936     |   |   | 43     |  |  | 4.59 | %
|Federal funds sold                                        |  |                                   | 3,129   |          |   | 161     |  |         | 5.15 | %        |   | 6,378   |   |         | 314    |          |  | 4.92    | % |   | 2,674   |   |   | 86     |  |  | 3.22 | %
|Loans (3)                                                 |  |                                   | 439,262 |          |   | 36,097  |  |         | 8.22 | %        |   | 415,368 |   |         | 33,230 |          |  | 8.00    | % |   | 371,024 |   |   | 26,497 |  |  | 7.14 | %
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Total Interest Earning Assets                             |  |                                   | 501,250 |          |   | 39,041  |  |         | 7.79 | %        |   | 475,841 |   |         | 35,814 |          |  | 7.53    | % |   | 436,981 |   |   | 28,723 |  |  | 6.57 | %
|Allowance for loan losses                                 |  |                                   | (4,663  | )        |   |         |  |         |      |          |   | (4,528  | ) |         |        |          |  |         |   |   | (4,017  | ) |   |        |  |  |      |  
|Cash and due from banks                                   |  |                                   | 4,425   |          |   |         |  |         |      |          |   | 5,377   |   |         |        |          |  |         |   |   | 5,623   |   |   |        |  |  |      |  
|Net premises, furniture and equipment                     |  |                                   | 4,998   |          |   |         |  |         |      |          |   | 4,927   |   |         |        |          |  |         |   |   | 3,198   |   |   |        |  |  |      |  
|Other assets                                              |  |                                   | 14,426  |          |   |         |  |         |      |          |   | 5,035   |   |         |        |          |  |         |   |   | 4,892   |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Total Assets                                              |  | $                                 | 520,436 |          |   |         |  |         |      |          | $ | 486,652 |   |         |        |          |  |         |   | $ | 446,677 |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Liabilities and Shareholders Equity                      |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Interest bearing checking                                 |  | $                                 | 7,513   |          |   | 46      |  |         | 0.61 | %        | $ | 7,301   |   |         | 45     |          |  | 0.62    | % | $ | 7,531   |   |   | 49     |  |  | 0.65 | %
|Savings deposits (4)                                      |  |                                   | 153,199 |          |   | 6,336   |  |         | 4.14 | %        |   | 155,426 |   |         | 6,176  |          |  | 3.97    | % |   | 127,622 |   |   | 3,292  |  |  | 2.58 | %
|Time deposits                                             |  |                                   | 183,671 |          |   | 9,415   |  |         | 5.13 | %        |   | 161,739 |   |         | 7,286  |          |  | 4.50    | % |   | 137,459 |   |   | 4,377  |  |  | 3.18 | %
|Other borrowings                                          |  |                                   | 103,088 |          |   | 4,562   |  |         | 4.43 | %        |   | 101,051 |   |         | 3,636  |          |  | 3.60    | % |   | 120,720 |   |   | 3,266  |  |  | 2.71 | %
|Junior Subordinated Debentures                            |  |                                   | 15,135  |          |   | 1,123   |  |         | 7.42 | %        |   | 11,524  |   |         | 1,041  |          |  | 9.03    | % |   | 10,310  |   |   | 743    |  |  | 7.21 | %
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Total Interest Bearing Liabilities                        |  |                                   | 462,606 |          |   | 21,482  |  |         | 4.64 | %        |   | 437,041 |   |         | 18,184 |          |  | 4.16    | % |   | 403,642 |   |   | 11,727 |  |  | 2.91 | %
|Noninterest deposits                                      |  |                                   | 20,764  |          |   |         |  |         |      |          |   | 17,874  |   |         |        |          |  |         |   |   | 15,610  |   |   |        |  |  |      |  
|Other liabilities                                         |  |                                   | 4,408   |          |   |         |  |         |      |          |   | 3,291   |   |         |        |          |  |         |   |   | 2,653   |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Total Liabilities                                         |  |                                   | 487,778 |          |   |         |  |         |      |          |   | 458,206 |   |         |        |          |  |         |   |   | 421,905 |   |   |        |  |  |      |  
|Shareholders Equity                                      |  |                                   | 32,660  |          |   |         |  |         |      |          |   | 28,446  |   |         |        |          |  |         |   |   | 24,772  |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Total Liabilities and Shareholders
Equity                |  | $                                 | 520,438 |          |   |         |  |         |      |          | $ | 486,652 |   |         |        |          |  |         |   | $ | 446,677 |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Net interest income                                       |  |                                   |         |          | $ | 17,559  |  |         |      |          |   |         |   | $       | 17,630 |          |  |         |   |   |         |   | $ | 16,996 |  |  |      |  
|                                                          |  |                                   |         |          |   |         |  |         |      |          |   |         |   |         |        |          |  |         |   |   |         |   |   |        |  |  |      |  
|Net interest spread (5)                                   |  |                                   |         |          |   |         |  |         | 3.15 | %        |   |         |   |         |        |          |  | 3.37    | % |   |         |   |   |        |  |  | 3.66 | %
|Net interest margin (6)                                   |  |                                   |         |          |   |         |  |         | 3.50 | %        |   |         |   |         |        |          |  | 3.71    | % |   |         |   |   |        |  |  | 3.89 | %

|                                                                                                                                                                                                                                                  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|(1) Yields on securities and
  certain loans have been adjusted upward to a fully taxable equivalent
  (FTE) basis in order to reflect the effect of income which is exempt from
  federal income taxation at the current statutory tax rate.
|                                                                                                                                                                                                                                                  | 
|(2) The yields for securities
  were computed using the average amortized cost and therefore do not give
  effect for changes in fair value.                                                                                                     
|                                                                                                                                                                                                                                                  | 
|(3) Loans, net of unearned
  income, include non-accrual loans but do not reflect average reserves for
  possible loan losses.                                                                                                                   
|                                                                                                                                                                                                                                                  | 
|(4) Savings deposits include
  Money Market accounts.                                                                                                                                                                                            
|                                                                                                                                                                                                                                                  | 
|(5) Net interest spread is the
  interest differential between total interest earning assets and total
  interest-bearing liabilities.                                                                                                           
|                                                                                                                                                                                                                                                  | 
|(6) Net interest margin is the
  net yield on average interest earning assets.                                                                                                                                                                   

In 2007, the Banks net interest income before the
provision for loan losses decreased $71,000 over 2006 and was impacted by a
higher cost of funds driven by competition for deposits, as well as increased
levels of borrowings to support loan growth. In 2006, the Banks net interest
income before provision for loan losses increased $634,000, or 3.7% as compared
to the same period in 2005. The increase is attributable to a strong growth in
loans as well as higher yields due to an increasing rate environment.

28

---



2007
Compared to 2006

In 2007, the Banks net interest margin (NIM) was
3.50%, a decrease from the NIM of 3.71% in 2006. The decrease in the NIM in
2007 as compared to the same period prior year is primarily attributable to
funding costs increases not being offset fully by rising yields on loans and
investments due to relatively stable intermediate and long-term interest rates.

The Banks yield on average interest earning assets
was favorably impacted by the increasing interest rate environment resulting in
a higher yield of 7.79% in 2007 as compared to 7.53% in 2006. The yield on the
loan portfolio increased twenty two basis points from 8.00% in 2006 to 8.22% in
2007 which is primarily a result of the growth in loans held in the portfolio
partially offset by the effect of competitive pressures on rates offered by the
Bank. The yield on the loan originations were at higher yields and maturities
and paydowns of loans at lower yields. The yield on the Banks Federal funds
sold increased to 5.15% in 2007 from 4.92% in 2006. The increase in the yield
for the Federal funds sold is the result of interest rate increases implemented
by the Federal Reserve Board by increasing the Federal funds interest rate (the
interest rate banks charge each other for short term borrowings) from June 2004
through June 2006. Partially offsetting these increases in the interest rates,
the Federal Reserve Board decreased the Federal funds interest rate by 50, 25
and 25 basis points in September, October and December 2007, respectively. The
average balance for investment securities in 2007 of $52,612,000, which
represents an increase of 12.2% from 2006, and an increase in yield from 4.06%
in 2006 to 5.14% in 2007. The yield increase primarily relates to purchasing
more securities with higher yields than the maturities and paydowns of
securities at lower yields. Other investments and interest bearing deposits in
other financial institutions increased eleven and sixty eight basis points,
respectively, from 2007 as compared to 2006.

The rate paid on average interest bearing liabilities
increased from 4.16% in 2006 to 4.64% in 2007 due to increased competition for
deposits. The rate paid on savings deposits increased from 3.97% to 4.14% from
2007 as compared to 2006 and time deposits increased sixty three basis points
from 4.50% to 5.13% from 2007 as compared to 2006. The increases are
attributable to higher rates offered on these products. The rate on other
borrowings increased eighty three basis points from 2006 as compared to 2007 as
a result of the previously discussed changes in market interest rates
originating from prior actions taken by the Federal Reserve Board as described
in the paragraph above. The Federal Reserve reduced rates by 125 basis points
in January 2008. The Company anticipates that the rates paid on these
liabilities will begin to decrease in the future as the certificates of
deposits mature and reprice with the current lower interest rates. The junior
subordinated debentures decreased one hundred sixty one basis points in 2007 as
compared to 2006. The decrease in the interest rate paid on debentures is
attributable to the Company obtaining a issuance of $10 million in new trust
preferred securities that bear a floating interest rate of three-month LIBOR
plus 1.44% as compared to the Companys existing securities which had bear a
floating interest rate of three-month LIBOR plus 3.65%, which was redeemed from
the proceeds of the new issuance.

2006
Compared to 2005

The Banks yield on interest earning assets was
favorably impacted by the increasing interest rate environment resulting in a
higher yield of 7.53% in 2006 as compared to 6.57% in 2005. The yield on the
loan portfolio increased eighty six basis points from 7.14% in 2005 to 8.00% in
2006. The yield on the Banks Federal funds sold increased to 4.92% in 2006
from 3.22% in 2005. The increase in the yield on loans and the Federal funds
sold is the result of interest rate increases implemented by the Federal
Reserve Board by increasing the Federal funds interest rate (the interest rate
banks charge each other for short term borrowings) from June 2004 through June 2006.
The average balance for investment securities in 2006 of $46,893,000, which
represents a decrease of 16.0% from 2005, had an increase in yield from 3.24%
in 2005 to 4.06% in 2006. Other investments increased ninety eight basis points
from 2006 as compared to 2005.

The rate paid on interest bearing liabilities
increased from 2.91% in 2005 to 4.16% in 2006. The rate paid on savings
deposits increased from 2.58% to 3.97% from 2006 as compared to 2005 and time
deposits increased one hundred thirty two basis points from 3.18% to 4.50% from
2006 as compared to 2005. The rate on other borrowings and junior subordinated
debentures increased eighty nine and one hundred eighty two basis points,
respectively, from 2005 as compared to 2006. These increases are primarily
attributable to the result of the previously discussed changes in market
interest rates originating from actions taken by the Federal Reserve from 2004
through 2006. In 2006, the Bank achieved a net interest margin (NIM) of
3.71%, a decrease from the NIM of 3.89% experienced in 2005. The decrease in
the margin is also affected by the changes to the market rates as described
above.

29

---



Analysis of Volume and Rate Changes
on Net Interest Income and Expenses

The following sets forth changes in interest income
and interest expense for each major category of average interest-earning assets
and interest-bearing liabilities, and the amount of change attributable to
volume and rate changes for the periods indicated. Changes not solely
attributable to volume or rate have been allocated to volume and rate changes
in proportion to the relationship of the absolute dollar amounts of the changes
in each.

|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|------------------------- |  | ------------------------------------------ | ----- | ------------------------------------------ | - | ----- | - | ------ | ----- | ---- | - | ----- | - | - | ------ | - | - | ----- | -
|                          |  | Year
  ended December 31, 2007             |       | Year
  ended December 31, 2006             |  
|                          |  | Compared
  to Year ended December 31, 2006 |       | Compared
  to Year ended December 31, 2005 |  
|                          |  |                                            |       |                                            |  
|                          |  | Volume                                     |       | Rate                                       |   | Total |   | Volume |       | Rate |   | Total |  
|                          |  | (Dollars
  in Thousands)                   |      
|Increase/(decrease) in    |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Interest Income           |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Investment securities     |  | $                                          | 247   |                                            | $ | 301   |   | $      | 548   |      | $ | (318  | ) | $ | 409    |   | $ | 91    |  
|Other investments         |  |                                            | (38   | )                                          |   | 7     |   |        | (31   | )    |   | (22   | ) |   | 60     |   |   | 38    |  
|Interest-bearing deposits |  |                                            | (11   | )                                          |   | 7     |   |        | (4    | )    |   | 10    |   |   | (9     | ) |   | 1     |  
|Federal Funds Sold        |  |                                            | (167  | )                                          |   | 14    |   |        | (153  | )    |   | 165   |   |   | 63     |   |   | 228   |  
|Loans                     |  |                                            | 1,947 |                                            |   | 920   |   |        | 2,867 |      |   | 3,357 |   |   | 3,374  |   |   | 6,731 |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|                          |  |                                            | 1,978 |                                            |   | 1,249 |   |        | 3,227 |      |   | 3,192 |   |   | 3,897  |   |   | 7,089 |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Increase/(decrease) in    |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Interest Expense          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Interest-bearing checking |  |                                            | 1     |                                            |   | (0    | ) |        | 1     |      | $ | (1    | ) | $ | (3     | ) |   | (4    | )
|Savings deposits          |  |                                            | (89   | )                                          |   | 249   |   |        | 160   |      |   | 829   |   |   | 2,053  |   |   | 2,882 |  
|Time Deposits             |  |                                            | 1,056 |                                            |   | 1,073 |   |        | 2,129 |      |   | 869   |   |   | 2,040  |   |   | 2,909 |  
|FHLB and other borrowings |  |                                            | 76    |                                            |   | 851   |   |        | 927   |      |   | (589  | ) |   | 960    |   |   | 371   |  
|Junior Subordinated Debt  |  |                                            | 289   |                                            |   | (208  | ) |        | 81    |      |   | 95    |   |   | 202    |   |   | 297   |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|                          |  |                                            | 1,333 |                                            |   | 1,965 |   |        | 3,298 |      |   | 1,203 |   |   | 5,252  |   |   | 6,455 |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Increase/(decrease) in    |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  
|Net Interest Income       |  | $                                          | 645   |                                            | $ | (716  | ) | $      | (71   | )    | $ | 1,989 |   | $ | (1,355 | ) | $ | 634   |  
|                          |  |                                            |       |                                            |   |       |   |        |       |      |   |       |   |   |        |   |   |       |  

Non-interest Income

Non-interest income is comprised of gain on sale of
loans, net, loss on sale of securities, net, fees generated by TWA and other
income. Non-interest income for the years ended December 31, 2007, 2006, and
2005 was $2,546,000, $2,176,000 and $1,634,000, respectively, for an increase
of $370,000, or 17.0% for the year ended December 31, 2007, as compared with
the same period in 2006, and an increase of $542,00 or 33.2% for the year ended
December 31, 2006 as compared with the same period in 2005.

The following table sets forth information regarding
the non-interest income for the periods shown.

|                                                     |  |                          |       |      |   |       |   |   |       | 
|---------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- | - | - | ----- | 
|                                                     |  | For the Year Ended       |       |      |  
|                                                     |  | 2007                     |       | 2006 |   | 2005  |  
|                                                     |  |                          |       |      |   |       |  
|                                                     |  | (Dollars
  in thousands) |      
|Gain on sale of loans, net                           |  | $                        | 585   |      | $ | 792   |   | $ | 581   | 
|Loss on sale of securities,
  net                    |  |                          |      |      |   | (2    | ) |   |      | 
|Loan servicing                                       |  |                          | 179   |      |   | 161   |   |   | 65    | 
|Registered Investment
  Advisory Services fee income |  |                          | 601   |      |   | 507   |   |   | 458   | 
|Other income                                         |  |                          | 1,181 |      |   | 718   |   |   | 529   | 
|                                                     |  |                          |       |      |   |       |   |   |       | 
|Total                                                |  | $                        | 2,546 |      | $ | 2,176 |   | $ | 1,633 | 
|                                                     |  |                          |       |      |   |       |   |   |       | 

30

---



In 2007, the gain on sale of loans, net, decreased
$207,000, or 26.1%. This decrease was primarily due to the $6.2 million sale of
the government guaranteed portion of seventeen Small Business Administration
(SBA) loans and one Business & Industry (B&I) loan for $1.6 million
that was sold through the United States Department of Agriculture (USDA) in
2007 versus the sale of $7.8 million of the government guaranteed portion of
eighteen SBA loans for the same period in 2006. The reason for the decline in
the gain on sale of loans was that the loans were sold at lower yields in 2007
as compared to 2006. In 2006 as compared to the same period prior year, the
increase in gain on sale of loans of $211,000 was due to the sale of the
government guaranteed portions of eighteen SBA loans versus the sale of the
government guaranteed portion of thirteen SBA loans.

Loan servicing in 2007 was $179,000, representing an
increase of $18,000, or 11.2% over the same period the prior year. Loan
servicing in 2006 was $161,000, representing an increase of $96,000, or 146.4%
over the same period prior year. These increases are attributable to the
increase in the number of loans that the Bank is servicing for others.

Advisory Services fee income increased $94,000, or
18.5% in 2007 as compared to the same period prior year. This increase is
primarily attributable to the growth provided by TWA in financial advisory
services inclusive of investment management and financial planning to high-net
worth individuals, families and institutions. In 2006, TWA generated investment
and advisory services fee income of $507,000, an increase of $49,000 from the
same period prior year. The increase is primarily attributable to the growth of
TWAs assets under management.

In 2007, TWA had approximately $281.0 million in assets
under management of which $55.2 million represents the Banks investment
portfolio. In 2006, TWA had approximately $270.0 million in assets under
management of which $48.1 million represents the Banks investment portfolio.
The Company anticipates that TWA will grow in 2008; however, due to the
uncertainties involved in staffing, marketing and growing the client base, the
Company makes no assurance that TWA will generate significant revenue in 2008
or that it will be profitable on a stand-alone basis.

TWA has required capital infusions from the Company.
In 2007, 2006 and 2005, capital infusions totaled $115,000, $436,000 and
$794,000, respectively.

Other income increased $463,000, or 64.5% in 2007 as
compared to the same period prior year. The increase is primarily attributable
to the Bank obtaining a BOLI policy in April 2007 which contributed $387,000 to
other income. NSF fees increased $119,000 as a result of managements efforts
to increase service charges on checks drawn against insufficient funds and
prepayment penalties on loans increased $117,000. Partially offsetting these
increases was a decrease in miscellaneous fee income of $61,000.

Other income increased $269,000 in 2006 as compared to
the same period prior year. The increase is primarily related to an increase in
miscellaneous fee income, NSF fees, miscellaneous income, debit card fee income
and late charges on loans partially offset by a decrease in prepayment
penalties on loans and loan brokerage fee income.

Non-interest Expense

Non-interest expense consists of salaries and employee
benefits, occupancy, advertising, professional, data processing, equipment and
depreciation and other administrative expenses. The Companys non-interest
expense for the years ended December 31, 2007, 2006 and 2005 was $13,365,000,
$13,036,000 and $11,262,000, respectively. The increase for the year ended
December 31, 2007 was $329,000, or 2.5% as compared with the same period in
2006 and the increase for the year ended December 31, 2006 was $1,774,000, or
15.7% as compared with the same period in 2005.

31

---



|                             |  |                        |        |      |   |        |  |   |        | 
|---------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                             |  | For the Year Ended     |       
|                             |  |                        |       
|                             |  | 2007                   |        | 2006 |   | 2005   | 
|                             |  |                        |        |      |   |        | 
|                             |  | (Dollars in thousands) |       
|Salaries and
  benefits      |  | $                      | 7,336  |      | $ | 7,935  |  | $ | 6,450  | 
|Occupancy                    |  |                        | 1,469  |      |   | 1,410  |  |   | 1,164  | 
|Advertising                  |  |                        | 369    |      |   | 368    |  |   | 357    | 
|Professional                 |  |                        | 738    |      |   | 337    |  |   | 488    | 
|Data
  processing            |  |                        | 469    |      |   | 364    |  |   | 698    | 
|Equipment
  and depreciation |  |                        | 900    |      |   | 851    |  |   | 571    | 
|Other
  administrative       |  |                        | 2,084  |      |   | 1,771  |  |   | 1,534  | 
|                             |  |                        |        |      |   |        |  |   |        | 
|Total                        |  | $                      | 13,365 |      | $ | 13,036 |  | $ | 11,262 | 
|                             |  |                        |        |      |   |        |  |   |        | 

Salaries and benefits are the largest components of
non-interest expense. In 2007, salaries and benefits decreased by $599,000, or
7.5% primarily due to the timing of when full time equivalent (FTE) employees
were hired during the respective periods as compared to the same period prior
year. The number of FTE employees increased to 77 as of December 31, 2007, up
from 75 at December 31, 2006. Partially offsetting these decreases, the Company
had regular salary adjustments and higher medical benefits and workers compensation
costs for 2007 as compared to 2006. Additionally, annual bonuses to certain
employees and officers of the Company were paid in 2007 whereas there were no comparable
bonus payouts in 2006.

In 2006, salaries and benefits costs increased by
$1,485,000, or 23.0% primarily due to the Bank hiring staff for its retail
branches including the opening of one new full service branch in 2006, the
opening of a loan production center, and the Company hiring additional staff to
support the longer term growth of the Company.

The 2007 increase of $59,000, or 4.2% in occupancy and
equipment costs is largely due to the Company occupying new leased spaces which
includes the addition of the Banks Tiburon/Belvedere branch which opened in
September 2006. Additionally, there were annual rent increases in the branch
and administrative facilities.

The 2006 increase of $246,000, or 21.1% in occupancy
and equipment costs is largely due to the Company and TWA occupying new leased
spaces which includes the addition of the Banks Corte Madera branch which
opened in September 2005, the Tiburon/Belvedere branch which opened in 2006 and
the new lease the Company signed which consolidates the loan, executive and
administrative personnel in one facility. Additionally, there were annual rent
increases in the branch and administrative facilities.

Advertising costs from 2006 to 2007 remained
relatively unchanged. The 2006 increase of $11,000, or 3.0% as compared to the
same period prior year is largely due to the growth of the Bank and the different
campaigns that the Bank as well as TWA held during the year.

Professional services increased $401,000, or 119% in
2007 compared to the same period prior year. The increase is largely
attributable to the Company obtaining additional outside consulting services
for compliance and marketing as a result of the growth of the Company compared
to the same period prior year. Professional services decreased $151,000, or
30.9% in 2006 compared to the same period prior year as a result of having less
outside consulting expenses in 2006 as a result of more services that were
needed in 2005 as a result of the 2005 data processing system conversion.

Data processing costs increased $105,000, or 28.8% in
2007 as compared to 2006 and is attributable to the additional data processing
costs as a result of the growth in the Company. In 2006 data processing costs
were $364,000, a decrease of $334,000, or 47.8%. The decrease is primarily
attributable to the core data processing systems conversion which occurred in
July 2005 from FPS Gold, of Provo, Utah to OSI, of Glastonbury, Connecticut.

The 2007 increase of $84,000, or 10.1% in depreciation
and amortization expense over the same period prior year is primarily
attributable to new purchase and leasehold improvements of the Company as a
result of the growth.

32

---



The 2006 increase of $287,000, or 53.2% in
depreciation and amortization expense over the same period prior year is
primarily attributable to new purchases and leasehold improvements of the
Company.

Other administrative expenses in 2007 of $2,084,000
represents an increase of $313,000, or 17.7% increase over 2006. The increase
is attributable to a nonrecurring expense of $200,000 for the expensing of
unamortized placement fees on the $10 million for the trust preferred
securities which were paid off on October 1, 2007, an increase in ATM/debit
card expenses of $28,000, FDIC insurance premiums of $28,000, amortization
expense of the Affordable Housing Project of $119,000 and loan loss reserve for
off balance sheet commitments of $73,000 partially offset by a decrease in
office supplies of $28,000 and compensation cost of $103,000.

Other administrative expenses in 2006 increased
$238,000, or 15.5% and is primarily attributable due to the growth in activity
of the Company.

The Companys efficiency ratio (the ratio of
non-interest expense divided by the sum of non-interest income and net interest
income) increased over the prior year and was at 66.5% for 2007. In 2006, the
Companys efficiency ratio was 65.8%.

Provision for Loan Losses

As of December 31, 2007, the provision for loan losses
was $244,000 as compared to $439,000 for the same period in 2006, representing
a decrease of $196,000, or 44.5%. The decrease in the provision was the result
of a continued strong asset quality as calculated through the Companys
internal loan grading system. The provision for loan losses was $439,000 as of
December 31, 2006, a $192,000, or 30.4% decrease as compared to the same period
prior year. The decrease primarily relates to managements calculation of the
adequacy of the allowance for loan losses and slower growth in the Banks loan
portfolio.

Income Taxes

The Company reported a provision for income taxes of
$2,287,000, $2,403,000 and $2,639,000 for years 2007, 2006 and 2005, respectively,
resulting in an effective tax rate of 35.2%, 37.9% and 39.2%, respectively.
These provisions reflect accruals for taxes at the applicable rates for federal
income and California franchise taxes based upon reported pre-tax income and
adjusted for the effects of all permanent differences between income for tax
and financial reporting purposes. The decrease of $116,000 from 2007 as
compared to 2006 is primarily attributable to the Company obtaining a BOLI
policy in April 2007 (the income from BOLI is tax-free), earnings on qualified
municipal securities which were tax-free and CRA investment credits. The
decrease of $237,000 from 2006 as compared to 2005 is primarily attributable to
a decreased pre-tax income in 2006 as compared to 2005. There are normal
fluctuations in the effective tax rate from year to year based on the
relationship of net permanent differences to income before taxes.

The Company has not been subject to an alternative
minimum tax (AMT). See Note 12 of the Notes to the Consolidated Financial
Statements for additional discussion of the Provision for Income Taxes.

FINANCIAL CONDITION

Investment Securities

The Company purchases mortgage-backed securities and other investments
as a source of interest income, credit risk diversification, manage rate
sensitivity, and maintain a reserve of readily saleable assets to meet
liquidity and loan requirements. Sales of Federal Funds, short-term loans to
other banks, are regularly utilized. Placement of funds in certificates of
deposit with other financial institutions may be made as alternative
investments pending utilization of funds for loans or other purposes.
Securities may be pledged to meet security requirements imposed as a condition
to secure Federal Home Loan Bank advances, the receipt of public fund deposits
and for other purposes. Investment securities are held in safekeeping by an
independent custodian.

33

---



As of
December 31, 2007 and 2006, the carrying values of securities pledged were
$55,175,000 and $48,339,000, respectively, representing the entire investment
securities portfolio. Not all of the securities pledged as collateral were
required to securitize existing borrowings. The Companys policy is to stagger
the maturities and to utilize the cash flow of the investments to meet the
overall liquidity requirements.

As of
December 31, 2007, the investment portfolio consisted of agency
mortgage-backed securities, U.S. agency securities, municipal securities and
agency collateralized mortgage obligations. As of December 31, 2006, the
investment portfolio consisted of agency mortgage-backed securities, U.S.
agency securities and agency collateralized mortgage obligations. The Company
also owned $6,886,000 and $5,892,000 in Federal Home Loan Bank stock and
$50,000 of Pacific Coast Bankers Bank stock as of December 31, 2007 and
December 31, 2006, respectively. Interest-bearing time deposits in other financial
institutions amounted to $627,000 and $987,000 as of December 31, 2007 and
December 31, 2006, respectively.

At
December 31, 2007, $14,515,000 of the securities were classified as
held-to-maturity and $40,661,000 of the securities were classified as available-for-sale.
At December 31, 2006, $21,823,000 of the securities were classified as
held-to-maturity and $26,516,000 of the Companys securities were classified as
available-for-sale. The Federal Home Loan Bank stock and the Pacific Coast
Bankers Bank stock are not classified since they have no stated maturities.
Available-for-sale securities are bonds, notes, debentures, and certain equity
securities that are not classified as trading securities or as held-to-maturity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of capital until realized. Gains and losses on the sale of
available-for-sale securities are determined using the specific identification
method. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity. Held-to-maturity securities
consist of bonds, notes and debentures for which the Company has the positive
intent and the ability to hold to maturity and are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.

The following
tables summarize the amounts and distribution of the Companys investment
securities, held as of the dates indicated, and the weighted average yields:

|                                    |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 
|----------------------------------- |  | ------------------------- | ------ | -------------------------- | - | --------------------------- |  | ------------------------ | ---- | - | - | ------ | 
|                                    |  | As
  of December 30, 2007 |       
|                                    |  |                           |       
|                                    |  | Amortized
  Cost          |        | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |     
|                                    |  |                           |        |                            |   |                             |  |                          |     
|                                    |  | (Dollars
  in Thousands)  |       
|Available-for-sale                  |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                         | 15,687 |                            | $ | 180                         |  | $                        | (132 | ) | $ | 15,735 | 
|U.S. Agency Securities              |  |                           | 7,409  |                            |   | 65                          |  |                          |     |   |   | 7,474  | 
|Municipal Securities                |  |                           | 5,799  |                            |   | 98                          |  |                          | (17  | ) |   | 5,880  | 
|Collateralized Mortgage Obligations |  |                           | 11,420 |                            |   | 152                         |  |                          |     |   |   | 11,572 | 
|                                    |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 
|Total Available-for-sale            |  | $                         | 40,315 |                            | $ | 495                         |  | $                        | (149 | ) | $ | 40,661 | 
|                                    |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 
|Held-to-maturity                    |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                         | 14,515 |                            | $ | 2                           |  | $                        | (192 | ) | $ | 14,325 | 
|                                    |  |                           |        |                            |   |                             |  |                          |      |   |   |        | 

34

---



|                                    |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|----------------------------------- |  | ------------------------- | ------ | ----------------------- | - | ------------------------ |  | ------------------------ | ---- | - | - | ------ | 
|                                    |  | As
  of December 30, 2006 |       
|                                    |  |                           |       
|                                    |  | Amortized
  Cost          |        | GrossUnrealized
  Gains |   | GrossUnrealized
  Losses |  | Estimated
  Fair
  Value |     
|                                    |  |                           |        |                         |   |                          |  |                          |     
|                                    |  | (Dollars
  in Thousands)  |       
|Available-for-sale                  |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                         | 13,202 |                         | $ | 27                       |  | $                        | (239 | ) | $ | 12,990 | 
|U.S. Agency Securities              |  |                           | 5,858  |                         |   | 6                        |  |                          |     |   |   | 5,864  | 
|Collateralized Mortgage Obligations |  |                           | 7,660  |                         |   | 10                       |  |                          | (8   | ) |   | 7,662  | 
|                                    |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Total Available-for-sale            |  | $                         | 26,720 |                         | $ | 43                       |  | $                        | (247 | ) | $ | 26,516 | 
|                                    |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Held-to-maturity                    |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Mortgage backed securities          |  | $                         | 21,823 |                         | $ |                         |  | $                        | (389 | ) | $ | 21,434 | 
|                                    |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 

|                           |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|-------------------------- |  | ------------------------- | ------ | ----------------------- | - | ------------------------ |  | ------------------------ | ---- | - | - | ------ | 
|                           |  | As
  of December 30, 2005 |       
|                           |  |                           |       
|                           |  | Amortized
  Cost          |        | GrossUnrealized
  Gains |   | GrossUnrealized
  Losses |  | Estimated
  Fair
  Value |     
|                           |  |                           |        |                         |   |                          |  |                          |     
|                           |  | (Dollars
  in Thousands)  |       
|Available-for-sale         |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Mortgage backed securities |  | $                         | 15,555 |                         | $ |                         |  | $                        | (437 | ) | $ | 15,118 | 
|                           |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Total Available-for-sale   |  | $                         | 15,555 |                         | $ |                         |  | $                        | (437 | ) | $ | 15,118 | 
|                           |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Held-to-maturity           |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 
|Mortgage backed securities |  | $                         | 28,844 |                         | $ | 24                       |  | $                        | (695 | ) | $ | 28,173 | 
|                           |  |                           |        |                         |   |                          |  |                          |      |   |   |        | 

|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|---------------------------------- |  | ------------------------ | ------ | ----- |  | ------- | - | ----- | ------ | ------- |  | ----- | - | - | ------ |  |  | ---- | -
|                                   |  | As
  of December 31,     |       
|                                   |  |                          |       
|                                   |  | 2007                     |        | 2006  |  | 2005    |  
|                                   |  |                          |        |       |  |         |  
|                                   |  | Balance                  |        | Yield |  | Balance |   | Yield |        | Balance |  | Yield |  
|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |  
|                                   |  | (Dollars
  in Thousands) |       
|Available for sale                 |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|Mortgage backed securities         |  | $                        | 15,735 |       |  | 4.76    | % | $     | 12,990 |         |  | 4.01  | % | $ | 15,555 |  |  | 3.34 | %
|U.S. Agency Securities             |  | $                        | 7,474  |       |  | 5.35    | % | $     | 5,864  |         |  | 5.20  | % |   |       |  |  |     | %
|Municipal Securities               |  | $                        | 5,880  |       |  | 3.98    | % | $     |       |         |  |      | % |   |       |  |  |     | %
|Collateralized Mortgage Obligation |  | $                        | 11,572 |       |  | 5.55    | % | $     | 7,662  |         |  | 5.66  | % |   |       |  |  |     | %
|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|                                   |  | $                        | 40,661 |       |  | 4.98    | % | $     | 26,516 |         |  | 5.09  | % | $ | 15,555 |  |  | 3.34 | %
|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|Held to maturity                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  
|Mortgage backed securities         |  | $                        | 14,515 |       |  | 4.17    | % | $     | 21,823 |         |  | 4.37  | % | $ | 28,844 |  |  | 3.76 | %
|                                   |  |                          |        |       |  |         |   |       |        |         |  |       |   |   |        |  |  |      |  

Loans

Loans, net, increased by
$43,364,000, or 10.3% as of December 31, 2007 as compared to the same period
prior year. During the last three years, the Company has emphasized the growth
of its commercial loan portfolio and has augmented its traditional commercial
and multifamily loans and services with small business lending. The Bank seeks
to maintain a loan portfolio that is well balanced in terms of borrowers,
collateral, geographies, industries and maturities.

35

---



The following
table sets forth components of total net loans outstanding in each category at
the dates indicated:

|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                   |  | At
  December 31,        |        
|                                                   |  |                          |        
|                                                   |  | 2007                     |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |  
|                                                   |  | (Dollars
  in thousands) |        
|                                                  
|One-to-four family residential                     |  | $                        | 22,098  |      | $ | 16,742  |   | $    | 16,995  |      | $ | 13,878  |   | $ | 11,403  |  
|Multifamily residential                            |  |                          | 123,077 |      |   | 120,287 |   |      | 121,176 |      |   | 126,099 |   |   | 97,941  |  
|Commercial real estate                             |  |                          | 246,258 |      |   | 220,049 |   |      | 183,288 |      |   | 147,357 |   |   | 112,217 |  
|Land                                               |  |                          | 9,369   |      |   | 8,316   |   |      | 9,777   |      |   | 9,150   |   |   | 8,039   |  
|Construction real estate                           |  |                          | 28,988  |      |   | 33,188  |   |      | 26,003  |      |   | 9,157   |   |   | 12,071  |  
|Consumer loans                                     |  |                          | 2,045   |      |   | 2,545   |   |      | 2,785   |      |   | 3,925   |   |   | 2,318   |  
|Commercial, non real estate                        |  |                          | 36,250  |      |   | 23,553  |   |      | 24,725  |      |   | 17,746  |   |   | 3,780   |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total gross loans                                  |  |                          | 468,085 |      |   | 424,680 |   |      | 384,749 |      |   | 327,312 |   |   | 247,769 |  
|Net deferred loan costs                            |  |                          | 1,529   |      |   | 1,327   |   |      | 1,907   |      |   | 1,939   |   |   | 1,375   |  
|Total loans receivable, net of deferred loan
costs |  |                          | 469,614 |      |   | 426,007 |   |      | 386,656 |      |   | 329,251 |   |   | 249,144 |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses                          |  |                          | (4,915  | )    |   | (4,672  | ) |      | (4,232  | )    |   | (3,600  | ) |   | (2,726  | )
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Loans receivable, net                              |  | $                        | 464,699 |      | $ | 421,335 |   | $    | 382,424 |      | $ | 325,651 |   | $ | 246,418 |  
|                                                   |  |                          |         |      |   |         |   |      |         |      |   |         |   |   |         |  

Outstanding
loan commitments at December 31, 2007 and December 31, 2006 primarily
consisted of undisbursed construction loans, lines of credit, and commitments
to originate commercial real estate and multifamily loans. Based upon past experience,
the outstanding loan commitments are expected to grow throughout the year as
loan demand continues to increase, subject to economic conditions. The Bank
does not have any concentrations in the loan portfolio by industry or group of
industries, however as of December 31, 2007 and December 31, 2006,
approximately 89.8% and 93.6%, respectively, of the loans were secured by real
estate. The Bank has pursued a strategy emphasizing small business lending and
commercial real estate loans and seeks real estate collateral when possible.
Although management believes this concentration to have no more than the normal
risk of collectibility, a substantial decline in the economy in general, or a
decline in real estate values in the Companys primary market areas in
particular, could have an adverse impact on the collectibility of these loans
and require an increase in the provision for loan losses which could adversely
affect the Companys future prospects, results of operations, profitability and
stock price. Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn; however there
is no assurance that losses will not occur under such circumstances.

In extending
credit and commitments to borrowers, the Company generally requires collateral
and/or guarantees as security. The repayment of such loans is expected to come
from cash flow or from proceeds from the sale of selected assets of the
borrowers. The Companys requirement for collateral and/or guarantees is
determined on a case-by-case basis in connection with managements evaluation
of the creditworthiness of the borrower. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, income-producing
properties, residences and other real property. The Company secures its
collateral by perfecting its security interest in business assets, obtaining
deeds of trust, or outright possession among other means.

Real estate
construction loans are primarily interim loans to finance the construction of
commercial and single family residential property. These loans are typically
short-term. Other real estate loans consist primarily of loans made based on
the property and/or the borrowers individual and business cash flows and which
are secured by deeds of trust on commercial and residential property to provide
another source of repayment in the event of default. Maturities on real estate
loans other than construction loans are generally restricted to fifteen years
(on an amortization of thirty years with a balloon payment due in fifteen
years). Any loans extended for greater than five years generally have
re-pricing provisions that adjust the interest rate to market rates at times
prior to maturity.

Commercial and
industrial loans and lines of credit are made for the purpose of providing
working capital, covering fluctuations in cash flows, financing the purchase of
equipment, or for other business purposes. Such loans and lines of credit
include loans with maturities ranging from one to five years.

36

---



Consumer loans
and lines of credit are made for the purpose of financing various types of
consumer goods and other personal purposes. Consumer loans and lines of credits
generally provide for the monthly payment of principal and interest or interest
only payments with periodic principal payments.

During the
second quarter of 2006, the Company purchased $16.6 million of participated
construction loans. These loans consisted of 23 participated construction loans
purchased with balances ranging from $382,000 to $1,392,000. All of the loans
are residential spec construction loans, and the majority of the loans are
located in the Southern California beach communities of Manhattan Beach,
Hermosa Beach, and Redondo Beach. The loan participations were purchased with
original terms of twelve to eighteen months. The loans have floating interest
rates equal to the Prime rate. As of December 31, 2007, the remaining balance
of the participated loans was $1.7 million.

As of December
31, 2007 and 2006, the loan portfolio was primarily comprised of floating and
adjustable interest rate loans. The following table sets for the repricing
percentages of the adjustable rate loans as of December 31, 2007 and 2006.

|                                   |  |                      |       |                      |  |       |  
|---------------------------------- |  | -------------------- | ----- | -------------------- |  | ----- | -
|                                   |  | December 31, 
  2007 |       | December 31, 
  2006 | 
|                                   |  |                      |       |                      | 
|                                   |  |                      |       |                      |  |       |  
|Reprice within one year            |  |                      | 44.8  | %                    |  | 56.4  | %
|Reprice within one to two years    |  |                      | 5.3   | %                    |  | 7.8   | %
|Reprice within two to three years  |  |                      | 12.3  | %                    |  | 5.0   | %
|Reprice within three to four years |  |                      | 8.8   | %                    |  | 10.5  | %
|Reprice within four to five years  |  |                      | 18.0  | %                    |  | 10.1  | %
|Reprice after five years           |  |                      | 10.7  | %                    |  | 10.2  | %
|                                   |  |                      |       |                      |  |       |  
|Total                              |  |                      | 100.0 | %                    |  | 100.0 | %
|                                   |  |                      |       |                      |  |       |  

The following table sets forth
the maturity distribution of loans as of December 31, 2007 and
December 31, 2006. At those dates, the Company had no loans with maturity
greater than thirty years. In addition, the table shows the distribution of
such loans between those loans with predetermined (fixed) interest rates and
those with adjustable (floating) interest rates. Adjustable interest rates
generally fluctuate with changes in the various pricing indices, primarily the
six-month constant maturity treasury index, six month LIBOR, and Prime Rate.

37

---



|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|-------------------------------------------------- |  | ---------------------------- | ------ | ------------------------------ | - | ----------------------------- |  | ----- | ------- |  | - | ------- | 
|                                                   |  | At
  December 31, 2007       |       
|                                                   |  |                              |       
|                                                   |  | Maturing
  Within
  One Year |        | Maturing
  One to
  Five Years |   | Maturing
  After
  Five Years |  | Total |        
|                                                   |  |                              |        |                                |   |                               |  |       |        
|                                                   |  | (Dollars
  in Thousands)     |       
|One-to-four family
  residential                   |  | $                            |       |                                | $ |                              |  | $     | 22,098  |  | $ | 22,098  | 
|Multifamily residential                            |  |                              |       |                                |   | 2,594                         |  |       | 120,483 |  |   | 123,077 | 
|Commercial real estate                             |  |                              | 6,878  |                                |   | 3,145                         |  |       | 236,235 |  |   | 246,258 | 
|Land                                               |  |                              | 1,290  |                                |   | 7,517                         |  |       | 562     |  |   | 9,369   | 
|Construction real estate                           |  |                              | 23,605 |                                |   | 5,383                         |  |       |        |  |   | 28,988  | 
|Consumer loans                                     |  |                              | 1,321  |                                |   | 699                           |  |       | 25      |  |   | 2,045   | 
|Commercial, non real estate                        |  |                              | 8,557  |                                |   | 23,239                        |  |       | 4,454   |  |   | 36,250  | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Total                                              |  | $                            | 41,651 |                                | $ | 42,577                        |  | $     | 383,857 |  | $ | 468,085 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Loans with predetermined
  interest rates          |  | $                            |       |                                | $ | 483                           |  | $     | 144     |  | $ | 627     | 
|Loans with floating or adjustable
  interest rates |  |                              | 41,651 |                                |   | 42,094                        |  |       | 383,713 |  |   | 467,458 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                   |  | $                            | 41,651 |                                | $ | 42,577                        |  | $     | 383,857 |  | $ | 468,085 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 

|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|-------------------------------------------------- |  | ---------------------------- | ------ | ------------------------------ | - | ----------------------------- |  | ----- | ------- |  | - | ------- | 
|                                                   |  | At
  December 31, 2006       |       
|                                                   |  |                              |       
|                                                   |  | Maturing
  Within
  One Year |        | Maturing
  One to
  Five Years |   | Maturing
  After
  Five Years |  | Total |        
|                                                   |  |                              |        |                                |   |                               |  |       |        
|                                                   |  | (Dollars
  in Thousands)     |       
|One-to-four family
  residential                   |  | $                            |       |                                | $ |                              |  | $     | 16,742  |  | $ | 16,742  | 
|Multifamily residential                            |  |                              | 2,304  |                                |   | 489                           |  |       | 117,494 |  |   | 120,287 | 
|Commercial real estate                             |  |                              | 870    |                                |   | 1,409                         |  |       | 217,770 |  |   | 220,049 | 
|Land                                               |  |                              | 1,895  |                                |   | 6,421                         |  |       |        |  |   | 8,316   | 
|Construction real estate                           |  |                              | 29,598 |                                |   | 3,590                         |  |       |        |  |   | 33,188  | 
|Consumer loans                                     |  |                              | 2,325  |                                |   | 220                           |  |       |        |  |   | 2,545   | 
|Commercial, non real estate                        |  |                              | 15,896 |                                |   | 4,082                         |  |       | 3,575   |  |   | 23,553  | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Total                                              |  | $                            | 52,888 |                                | $ | 16,211                        |  | $     | 355,581 |  | $ | 424,680 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|Loans with predetermined
  interest rates          |  | $                            | 945    |                                | $ |                              |  | $     | 644     |  | $ | 1,589   | 
|Loans with floating or
  adjustable interest rates |  |                              | 51,943 |                                |   | 16,211                        |  |       | 354,937 |  |   | 423,091 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 
|                                                   |  | $                            | 52,888 |                                | $ | 16,211                        |  | $     | 355,581 |  | $ | 424,680 | 
|                                                   |  |                              |        |                                |   |                               |  |       |         |  |   |         | 

Allowance for Loan Losses

The Company assesses and
manages credit risk on an ongoing basis through a credit culture that
emphasizes excellent credit quality, extensive internal monitoring and
established formal lending policies. Additionally, the Company contracts with
an outside loan review consultant to periodically review the existing loan
portfolio. Management believes its ability to identify and assess risk and
return characteristics of the Companys loan portfolio is critical for
profitability and growth. Management strives to continue its emphasis on credit
quality in the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio.

38

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The Bank maintains an
allowance for loan losses to provide for potential losses in the loan
portfolio. Additions to the allowance are made by charges to operating expenses
in the form of a provision for loan losses. All loans that are judged to be
uncollectible are charged against the allowance while any recoveries are
credited to the allowance. Management has instituted loan policies which
includes using grading standards and criteria similar to those employed by bank
regulatory agencies, to adequately evaluate and assess the analysis of risk
factors associated with its loan portfolio and to enable management to assess
such risk factors prior to granting new loans and to assess the sufficiency of
the allowance. Management conducts a critical evaluation of the loan portfolio
quarterly. This evaluation includes an assessment of the following factors: the
results of the internal loan review, any external loan review and any
regulatory examination, loan loss experience, estimated potential loss exposure
on each credit, concentrations of credit, value of collateral, any known
impairment in the borrowers ability to repay and present economic conditions.

There are limitations to any
credit risk grading process. The volume of loans makes it impractical to
re-grade every loan every quarter. Therefore, it is possible that some
currently performing loans not recently graded will not be as strong as their
last grading and an insufficient portion of the allowance will have been
allocated to them. Grading and loan review often must be done without knowing
whether all relevant facts are at hand. Troubled borrowers may deliberately or
inadvertently omit information from reports or conversations with lending officers
regarding their financial condition and the diminished strength of repayment
sources.

Each month the Bank also
reviews the allowance and makes additional transfers to the allowance as
needed. At December 31, 2007 and December 31, 2006 the allowance for loan
losses was 1.05% and 1.10%, respectively of loans outstanding. As of December
31, 2007 and 2006, charge-offs of loans totaled $1,000 and $0, respectively,
and there were no recoveries on previously charged-off loans. There was one
nonperforming loan as of December 31, 2007 and there were no nonperforming
loans as of December 31, 2006. The ratio of the allowance for loan losses to
nonperforming loans was 1054.7% as of December 31, 2007. Although the Company
deems these levels adequate, no assurance can be given that further economic
difficulties or other circumstances which would adversely affect the borrowers
and their ability to repay outstanding loans will not occur. These losses would
be reflected in increased losses in the loan portfolio, which losses could
possibly exceed the amount then reserved for loan losses.

The following table
summarizes the loan loss experience, transactions in the allowance for loan
losses and certain pertinent ratios for the periods indicated:

|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                         |  | For
  the year ended December 31, |        
|                                                                                                         |  | 2007                              |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |  
|                                                                                                         |  | (Dollars
  In Thousands)          |        
|Gross Loans Outstanding, Period End                                                                      |  | $                                 | 469,613 |      | $ | 426,007 |   | $    | 386,657 |      | $ | 329,251 |   | $ | 249,144 |  
|Average Amount of Loans Outstanding                                                                      |  |                                   | 439,262 |      |   | 415,368 |   |      | 371,024 |      |   | 291,999 |   |   | 215,041 |  
|Period end non-performing loans outstanding                                                              |  |                                   | 466     |      |   |        |   |      | 35      |      |   | 393     |   |   |        |  
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Loans Loss Reserve Balance, Beginning of Period                                                          |  | $                                 | 4,671   |      | $ | 4,232   |   | $    | 3,600   |      | $ | 2,726   |   | $ | 1,942   |  
|Net Charge-offs                                                                                          |  |                                   | (1      | )    |   |        |   |      |        |      |   |        |   |   |        |  
|Recoveries                                                                                               |  |                                   |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Additions/(Reductions) charged to operations                                                             |  |                                   | 245     |      |   | 439     |   |      | 632     |      |   | 874     |   |   | 784     |  
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for Loan and Lease Loss, End of Period                                                         |  | $                                 | 4,915   |      | $ | 4,671   |   | $    | 4,232   |      | $ | 3,600   |   | $ | 2,726   |  
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Ratio of Net Charge-offs/(Recoveries) During the
  Period to Average Loans Outstanding During the Period |  |                                   | 0.00    | %    |   | 0.00    | % |      | 0.00    | %    |   | 0.00    | % |   | 0.00    | %
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Ratio of Allowance for Loan Losses to Loans at Period
  End                                              |  |                                   | 1.05    | %    |   | 1.10    | % |      | 1.09    | %    |   | 1.09    | % |   | 1.09    | %
|                                                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  

Nonperforming Loans

The Banks loan quality
remains strong with one nonperforming loan of $466,000 at December 31, 2007 and
$0 at December 31, 2006. The Companys policy is to place loans on non-accrual
status when, for any reason, principal or interest is past due for ninety days
or more unless they are both well secured and in the process of collection. Any
interest accrued, but unpaid, is reversed against current income. Interest
received on non-accrual loans is credited to income only upon receipt and in
certain circumstances may be applied to principal until the loan has been
repaid in full, at which time the interest received is credited to income. When
appropriate or necessary to protect the Companys interests, real estate taken
as collateral on a loan may be taken by the Company through foreclosure or a
deed in lieu of foreclosure. Real property acquired in this manner is known as
other real estate owned, or OREO. OREO would be carried on the books as an
asset, at the lesser of the recorded investment or the fair value less
estimated costs to sell. OREO represents an additional category of
nonperforming assets. For the period commencing January 1, 1998 through
December 31, 2007, the Company has not had any OREO.

39

---



The following table provides
information with respect to the components of the nonperforming assets at the
dates indicated.

|                                                            |  |                             |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|----------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                            |  | Balances as of December 31, |      
|                                                            |  |                             |      
|                                                            |  | 2007                        |       | 2006 |   | 2005  |   | 2004 |       | 2003 |  
|                                                            |  |                             |       |      |   |       |   |      |       |      |  
|                                                            |  | (Dollars in Thousands)      |      
|Non-accrual loans                                           |  |                             |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|One-to-four family residential                              |  | $                           |      |      | $ |      |   | $    |      |      | $ |      |   | $ |      |  
|Multifamily residential                                     |  |                             |      |      |   |      |   |      |      |      |   | 393   |   |   |      |  
|Consumer                                                    |  |                             |      |      |   |      |   |      | 35    |      |   |      |   |   |      |  
|Commercial real estate                                      |  |                             | 466   |      |   |      |   |      |      |      |   |      |   |   |      |  
|                                                            |  |                             |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|                                                            |  | $                           | 466   |      | $ |      |   | $    | 35    |      | $ | 393   |   | $ |      |  
|                                                            |  |                             |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|Restructured Loans                                          |  |                             |      |      |   |      |   |      |      |      |   |      |   |   |      |  
|Nonperforming assets as a percent of total
  loans          |  |                             | 0.10  | %    |   | 0.00  | % |      | 0.01  | %    |   | 0.12  | % |   | 0.00  | %
|                                                            |  |                             |       |      |   |       |   |      |       |      |   |       |   |   |       |  
|Nonperforming assets as a percent of total
  assets         |  |                             | 0.08  | %    |   | 0.00  | % |      | 0.01  | %    |   | 0.09  | % |   | 0.00  | %
|Allowance for Loan Losses                                   |  | $                           | 4,915 |      | $ | 4,671 |   | $    | 4,232 |      | $ | 3,600 |   | $ | 2,726 |  
|Allowance for Loan Losses/loans outstanding
  at period end |  |                             | 1.05  | %    |   | 1.10  | % |      | 1.09  | %    |   | 1.09  | % |   | 1.09  | %

As of December 31, 2007,
there was one commercial real estate loan on non-accrual status for $466,000
which is located in the Banks primary market area. This loan is sixty days
delinquent and the property is being marketed for sale. Due to the estimated
loan-to-value ratio of less than 55%, the Bank does not expect to recognize a
loss on this loan and anticipates recovering all principal and interest. As of
December 31, 2006, there were no loans classified as non-accrual.

In addition, as of December
31, 2007, there were three loans totaling $1,563,000 which have been placed on
the internal watch list for special mention and loss potential and are being
closely monitored. These loans have been categorized as Special Mention of
which $606,000 was a multifamily loan and $957,000 were commercial real estate
loans. These loans are in various stages of collection; however, no assurance
can be given that the Company will be successful in collecting all of these
loans or that there is adequate loan loss reserves established for these loans.
As of December 31, 2006, there were no loans classified as non-accrual and
$3,280,000 in loans were categorized as Special Mention. As of December 31,
2006 and 2007 there were no restructured loans.

40

---



The following table provides
information with respect to delinquent but still accruing loans at the dates
indicated.

|                                                                     |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 
|-------------------------------------------------------------------- |  | ----------------------------- | --- | ---- | - | ----- |  | ---- | --- | ---- | - | -- |  | - | --- | 
|                                                                     |  | Balances
  as of December 31, |    
|                                                                     |  |                               |    
|                                                                     |  | 2007                          |     | 2006 |   | 2005  |  | 2004 |     | 2003 |  
|                                                                     |  |                               |     |      |   |       |  |      |     |      |  
|                                                                     |  | (Dollars
  in Thousands)      |    
|Loans delinquent 60-89 days and accruing                             |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 
|Commercial real estate                                               |  | $                             | 139 |      | $ | 1,137 |  | $    | 308 |      | $ |   |  | $ |    | 
|Consumer loans                                                       |  |                               |    |      |   |      |  |      |    |      |   |   |  |   |    | 
|Multifamily                                                          |  |                               | 414 |      |   | 268   |  |      |    |      |   |   |  |   |    | 
|Land and Construction                                                |  |                               |    |      |   | 531   |  |      | 534 |      |   |   |  |   |    | 
|Commercial, non real estate                                          |  |                               |    |      |   |      |  |      |    |      |   | 62 |  |   |    | 
|                                                                     |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 
|                                                                     |  | $                             | 553 |      | $ | 1,936 |  | $    | 842 |      | $ | 62 |  | $ |    | 
|                                                                     |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 
|Loans delinquent 90 days or more and accruing Commercial real estate |  | $                             |    |      | $ |      |  | $    |    |      | $ |   |  | $ |    | 
|Land and Construction                                                |  |                               |    |      |   |      |  |      |    |      |   |   |  |   | 121 | 
|                                                                     |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 
|                                                                     |  | $                             |    |      | $ |      |  | $    |    |      | $ |   |  | $ | 121 | 
|                                                                     |  |                               |     |      |   |       |  |      |     |      |   |    |  |   |     | 

Management believes the
overall credit quality of the loan portfolio continues to be strong; however,
total nonperforming assets could fluctuate in the future. The performance of
any individual loan can be impacted by external factors such as the economy and
interest rate environment, or factors particular to the borrower.

Criticized and Classified Assets

The following table presents
the Companys criticized and classified assets as of the dates indicated:

|                                                       |  |                      |       |      |   |       |   |   |       |  
|------------------------------------------------------ |  | -------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                       |  | As
  of December 31, |      
|                                                       |  |                      |      
|                                                       |  | 2007                 |       | 2006 |   | 2005  |  
|                                                       |  |                      |       |      |   |       |  
|Criticized
  Assets                                    |  |                      |       |      |   |       |   |   |       |  
|One-to-four family
  residential                       |  | $                    |      |      | $ |      |   | $ |      |  
|Multifamily residential                                |  |                      | 606   |      |   | 2,572 |   |   | 755   |  
|Commercial real estate                                 |  |                      | 957   |      |   | 706   |   |   | 1,041 |  
|Land                                                   |  |                      |      |      |   |      |   |   |      |  
|Construction real estate                               |  |                      |      |      |   |      |   |   |      |  
|Consumer, non real estate                              |  |                      |      |      |   |      |   |   |      |  
|Commercial, non real
  estate                          |  |                      |      |      |   | 3     |   |   | 3,283 |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|Special
  mention                                      |  | $                    | 1,563 |      | $ | 3,281 |   | $ | 5,079 |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|Classified
  Assets                                    |  |                      |       |      |   |       |   |   |       |  
|One-to-four family
  residential                       |  | $                    |      |      | $ |      |   | $ |      |  
|Multifamily residential                                |  |                      | 736   |      |   |      |   |   |      |  
|Commercial real estate                                 |  |                      | 2,110 |      |   | 162   |   |   | 163   |  
|Consumer, non real estate                              |  |                      |      |      |   |      |   |   | 35    |  
|Construction real estate                               |  |                      |      |      |   |      |   |   | 3,755 |  
|Land                                                   |  |                      |      |      |   | 531   |   |   | 534   |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|Substandard
  loans                                    |  | $                    | 2,846 |      | $ | 693   |   | $ | 4,487 |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|Total
  classified assets                              |  | $                    | 2,846 |      | $ | 693   |   | $ | 4,487 |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|                                                       |  |                      |       |      |   |       |   |   |       |  
|Classified assets to total
  assets                    |  |                      | 0.51  | %    |   | 0.14  | % |   | 0.97  | %
|Classified assets to
  stockholders equity            |  |                      | 8.64  | %    |   | 2.24  | % |   | 16.71 | %
|Allowance for loan losses
  to total classified assets |  |                      | 173   | %    |   | 674   | % |   | 94    | %

41

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As of December
31, 2007, the Company identified two loans totaling $2,846,000 has a higher
than normal risk of loss and has been classified as substandard. Substandard
loans that are still performing include a $2,110,000 commercial real estate
loan and $736,000 in a multifamily loan. Both of these loans are located in the
Banks primary market areas. As of December 31, 2006, the Company identified
two loans totaling $693,000 and were classified as substandard. The land loan
for $531,000 is a performing loan which was previously in foreclosure and is
located in the Banks primary market area. The commercial real estate loan for
$162,000 is a performing loan and is located in the Banks primary market area.

With the
exception of these loans, management is not aware of any loans as of December
31, 2007 where the known credit problems of the borrower would cause it to have
serious doubts as to the ability of such borrowers to comply with their present
loan repayment terms. Management cannot predict the extent to which the current
economic environment may persist or worsen or the full impact such environment
may have on the Companys loan portfolio. Furthermore, management cannot
predict the results of any subsequent examinations of the Companys loan
portfolio by the banking regulatory agencies. Accordingly, there can be no
assurance that other loans will be classified as discussed above.Refer to Note
3 and 4 of the Consolidated Financial Statements and the Business section of
this Annual Report for additional information concerning loans.

Deposits

The principal
source of funds for the Bank are core deposits (non-interest and
interest-bearing transaction accounts, money market accounts, savings accounts,
and certificates of deposits) from the Banks market areas. At December 31,
2007, total deposits were $361,175,000 representing a decrease of $8,630,000,
or 2.33% over the December 31, 2006 balance. The Companys deposit growth plan
for 2007 was to concentrate its efforts on increasing noninterest-bearing demand
accounts. As of December 31, 2007, these accounts increased $5,120,000, or
28.2% as compared to the same period prior year. However, due to the
competitive rate environment, the company experienced decreases in the interest
bearing demand, money market and savings and time deposits greater than
$100,000 accounts.

The Company
obtained wholesale deposits through deposit brokers of $32.1 million (8.9% of
deposits) and $13.1 million (3.5% of deposits) and through non-brokered
wholesale sources of $46.2 million (12.8% of deposits) and $28.4 million (7.7%
of deposits) as of December 31, 2007 and 2006, respectively. These deposits,
some of which were certificates of deposit of $100,000 or more, were obtained
for generally longer terms than can be acquired through retail sources as a
means to control interest rate risk or were acquired to fund all short term
differences between loan and deposit growth rates. However, based on the amount
of wholesale funds maturing in each month, the Company may not be able to replace
all wholesale deposits with retail deposits upon maturity. To the extent that
the Company needs to renew maturing wholesale deposits at then current interest
rates, the Company incurs the risk of paying higher interest rates for these
potentially volatile sources of funds

In 2004, the Bank established a
relationship with Reserve Funds, an institutional money manager that offers a
money market savings based sweep product to community banks. Under this
program, end investors use the Reserve Funds as a conduit to invest money
market savings deposits in a consortium of community banks. The end investors
receive a rate of interest that is generally higher than alternative money
market funds, the community banks receive large money market savings balances,
and the Reserve Funds receives a fee by acting as the conduit. The Bank began
accepting deposits from this program in November 2004. As of December 31, 2007,
Reserve Fund deposits were $16.0 million as compared to deposit balance of
$15.4 million as of December 2006. The Bank pays an interest rate equivalent to
the effective Federal Funds rate plus 20 basis points. As of December 31, 2007
the rate was 4.73% as compared to a rate of 5.64% as of December 31, 2006.

On
November 1, 2007, the Bank renewed a $15.0 million time deposit from the State
of California through the State Treasurer. The time deposit bears interest at
the rate of 4.03% and matures on January 31, 2008. On September 4, 2007, the
Bank renewed a $5.0 million time deposit from the State of California through
the State Treasurer. The time deposit bears interest at the rate of 4.62% and
matures on February 27, 2008. Assets pledged as collateral to the State
consists of $22.9 million of the investment securities portfolio as of December
31, 2007.

42

---



In an effort
to expand the Companys market share, the Company is continuing a business plan
to develop the retail presence in Marin County through an expanding network of
full service branches. The Company operated three branches during the first
quarter of 2004, opened two new branches in the second quarter of 2004, one new
branch in 2005, and one new branch in the third quarter 2006.

The following
table summarizes the distribution of deposits and the period ending rates paid
for the periods indicated:

|                                           |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|------------------------------------------ |  | ------------------------ | ------- | ------------------- |  | ------------------------- | - | ------- | ---- | ------------- | - | ------------------------- |  | ------- | ----- | ------------- |  | ------------------------- | - | - | ------- |  |  | ----- | - |  | ---- | -
|                                           |  | December
  31, 2007      |         | December
  31, 2006 |  | December
  31, 2005       |  
|                                           |  |                          |         |                     |  |                           |  
|                                           |  | Balance                  |         | Deposit
  Mix       |  | Weighted
  Average
  Rate |   | Balance |      | Deposit
  Mix |   | Weighted
  Average
  Rate |  | Balance |       | Deposit
  Mix |  | Weighted
  Average
  Rate |  
|                                           |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |  
|                                           |  | (Dollars
  in Thousands) |         |                     |  |                           |   |         |      |               |   |                          
|                                           |  |                          |        
|Noninterest-bearing deposits               |  | $                        | 23,255  |                     |  | 6.4                       | % |         | 0.00 | %             | $ | 18,135                    |  |         | 4.9   | %             |  | 0.00                      | % | $ | 17,310  |  |  | 5.5   | % |  | 0.00 | %
|Interest-bearing checking deposits         |  |                          | 6,874   |                     |  | 1.9                       | % |         | 0.18 | %             |   | 8,433                     |  |         | 2.3   | %             |  | 0.61                      | % |   | 7,519   |  |  | 2.4   | % |  | 0.30 | %
|Money Market and savings deposits          |  |                          | 138,276 |                     |  | 38.3                      | % |         | 3.55 | %             |   | 150,012                   |  |         | 40.6  | %             |  | 4.48                      | % |   | 148,371 |  |  | 47.3  | % |  | 3.38 | %
|Certificates of deposit $100,000 or more   |  |                          | 110,588 |                     |  | 30.6                      | % |         | 4.72 | %             |   | 129,011                   |  |         | 34.9  | %             |  | 5.14                      | % |   | 58,856  |  |  | 18.8  | % |  | 3.56 | %
|Certificates of deposit less than $100,000 |  |                          | 82,182  |                     |  | 22.8                      | % |         | 4.77 | %             |   | 64,214                    |  |         | 17.4  | %             |  | 4.97                      | % |   | 81,343  |  |  | 26.0  | % |  | 3.69 | %
|                                           |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|Total deposits                             |  | $                        | 361,175 |                     |  | 100.0                     | % |         | 3.89 | %             | $ | 369,805                   |  |         | 100.0 | %             |  | 4.49                      | % | $ | 313,399 |  |  | 100.0 | % |  | 3.23 | %
|                                           |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  

The following
table summarizes the distribution and original source of certificates of
deposit for the periods indicated:

|                                               |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|---------------------------------------------- |  | ------------------------ | ------- | ------------------- |  | ------------------------- | - | ------- | ---- | ------------- | - | ------------------------- |  | ------- | ----- | ------------- |  | ------------------------- | - | - | ------- |  |  | ----- | - |  | ---- | -
|                                               |  | December
  31, 2007      |         | December
  31, 2006 |  | December
  31, 2006       |  
|                                               |  |                          |         |                     |  |                           |  
|                                               |  | Balance                  |         | Deposit
  Mix       |  | Weighted
  Average
  Rate |   | Balance |      | Deposit
  Mix |   | Weighted
  Average
  Rate |  | Balance |       | Deposit
  Mix |  | Weighted
  Average
  Rate |  
|                                               |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |  
|                                               |  | (Dollars
  in Thousands) |         |                     |  |                           |   |         |      |               |   |                          
|                                               |  |                          |        
|Retail certificates of deposit                 |  | $                        | 114,469 |                     |  | 59.4                      | % |         | 4.85 | %             | $ | 151,692                   |  |         | 78.5  | %             |  | 5.11                      | % | $ | 116,786 |  |  | 83.3  | % |  | 3.80 | %
|Brokered certificates of deposit               |  |                          | 32,082  |                     |  | 16.6                      | % |         | 4.76 | %             |   | 13,124                    |  |         | 6.8   | %             |  | 4.72                      | % |   | 15,492  |  |  | 11.1  | % |  | 2.68 | %
|Non-brokered wholesale certificates of deposit |  |                          | 46,219  |                     |  | 24.0                      | % |         | 4.47 | %             |   | 28,409                    |  |         | 14.7  | %             |  | 5.10                      | % |   | 7,921   |  |  | 5.6   | % |  | 3.06 | %
|                                               |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  
|Total time deposits                            |  | $                        | 192,770 |                     |  | 100.0                     | % |         | 4.74 | %             | $ | 193,225                   |  |         | 100.0 | %             |  | 5.08                      | % | $ | 140,199 |  |  | 100.0 | % |  | 3.63 | %
|                                               |  |                          |         |                     |  |                           |   |         |      |               |   |                           |  |         |       |               |  |                           |   |   |         |  |  |       |   |  |      |  

The following
schedule shows the maturity of our time deposits as of December 31, 2007:

|                                 |  |                        |         |                    |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  
|-------------------------------- |  | ---------------------- | ------- | ------------------ |  | ------------------------- | - | ------ | ---- | ------------- | - | ------------------------- |  |  | ----- | - |  | ---- | -
|                                 |  | $100,000 or more       |         | Less than $100,000 | 
|                                 |  |                        |         |                    | 
|                                 |  | Amount                 |         | Deposit
  Mix      |  | Weighted
  Average
  Rate |   | Amount |      | Deposit
  Mix |   | Weighted
  Average
  Rate | 
|                                 |  |                        |         |                    |  |                           |   |        |      |               |   |                           | 
|                                 |  | (Dollars in thousands) |        
|Three months
  or less           |  | $                      | 56,112  |                    |  | 50.7                      | % |        | 4.65 | %             | $ | 23,362                    |  |  | 28.4  | % |  | 4.75 | %
|Over 3
  through 6 months        |  |                        | 25,183  |                    |  | 22.8                      | % |        | 4.93 | %             |   | 18,963                    |  |  | 23.1  | % |  | 4.86 | %
|Over 6
  through 12 months       |  |                        | 24,044  |                    |  | 21.7                      | % |        | 4.80 | %             |   | 20,915                    |  |  | 25.4  | % |  | 4.72 | %
|Over 12
  months through 2 years |  |                        | 1,984   |                    |  | 1.8                       | % |        | 4.83 | %             |   | 8,106                     |  |  | 9.9   | % |  | 4.77 | %
|Over 2
  through 3 years         |  |                        | 1,116   |                    |  | 1.0                       | % |        | 4.71 | %             |   | 3,559                     |  |  | 4.3   | % |  | 4.74 | %
|Over 3
  through 4 years         |  |                        | 849     |                    |  | 0.8                       | % |        | 5.45 | %             |   | 4,174                     |  |  | 5.1   | % |  | 4.79 | %
|Over 4
  through 5 years         |  |                        | 1,300   |                    |  | 1.2                       | % |        | 4.71 | %             |   | 3,103                     |  |  | 3.8   | % |  | 4.68 | %
|                                 |  |                        |         |                    |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  
|Total                            |  | $                      | 110,588 |                    |  | 100.0                     | % |        | 4.76 | %             | $ | 82,182                    |  |  | 100.0 | % |  | 4.77 | %
|                                 |  |                        |         |                    |  |                           |   |        |      |               |   |                           |  |  |       |   |  |      |  

43

---



Contractual Obligations

The Company
has entered into non-cancelable contracts for leased premises and other
agreements. The Company has no capital leases. The following table summarizes
our significant contractual obligation and commitments as of December 31, 2007.

|                                          |  |            |            |             |   |             |  |             |            |       |   |            |  |   |             | 
|----------------------------------------- |  | ---------- | ---------- | ----------- | - | ----------- |  | ----------- | ---------- | ----- | - | ---------- |  | - | ----------- | 
|Contractual Obligations at
  December 31, |  | <
  1 year |            | 1-3
  years |   | 3-5
  years |  | >
  5 years |            | Total |  
|                                          |  |            |            |             |   |             |  |             |            |       |  
|                                         
|Operating leases                          |  | $          | 909,000    |             | $ | 1,642,000   |  | $           | 1,609,000  |       | $ | 1,728,000  |  | $ | 5,888,000   | 
|Borrowings                                |  |            | 34,422,500 |             |   | 90,090,000  |  |             | 21,995,000 |       |   |           |  |   | 146,507,500 | 
|Subordinated debt                         |  |            |           |             |   |            |  |             |           |       |   | 13,403,000 |  |   | 13,403,000  | 
|                                          |  |            |            |             |   |             |  |             |            |       |   |            |  |   |             | 
|                                          |  | $          | 35,331,500 |             | $ | 91,732,000  |  | $           | 23,604,000 |       | $ | 15,131,000 |  | $ | 165,798,500 | 
|                                          |  |            |            |             |   |             |  |             |            |       |   |            |  |   |             | 

Borrowed Funds

In response to
the current markets strong competition for deposit accounts, the Company has
supplemented its funding base by increasing FHLB borrowings. The borrowings
obtained in 2007 have generally been at lower rates and longer terms than
alternative retail certificate of deposits. The average term of FHLB borrowings
has also been extended as a means to control interest rate risk.

The Company
has secured advances from the Federal Home Loan Bank at December 31, 2007 and
December 31, 2006 amounting to $146.5 million and $86.3 million, respectively,
a 69.9% increase. The increase in FHLB borrowings was primarily due to funding
the temporary differences of funds generated from retail deposits versus the
rate of growth of the loan portfolio. As of December 31, 2007, unused borrowing
capacity at the FHLB was $107.0 million. Assets pledged as collateral to the FHLB
consisted of $228.2 million of the loan portfolio and $25.3 million of the
investment securities portfolio as of December 31, 2007. As of December 31,
2006, the unused borrowing capacity at the FHLB was $127.0 million and assets
pledged as collateral to the FHLB consisted of $188.3 million of our loan
portfolio and $25.0 million of our investment securities portfolio as of
December 31, 2006. The advances have been outstanding at varying levels as of
December 31, 2007. Total interest expense on FHLB borrowings as of December 31,
2007 and 2006 was $4,561,000 and $3,636,000, respectively.

The Company
will utilize FHLB borrowings to accommodate temporary differences in the rate
of growth of the loan and deposit portfolios and to minimize interest rate
risk. Over time the Company expects that funds provided by retail deposits
obtained through the increasing branch network will be utilized to decrease
FHLB borrowings during periods when the growth in deposits exceeds the growth
in loans.

Included in
the FHLB borrowings of $146.5 million, as of December 31, 2007, the Company has
borrowings outstanding of $99.1 million with FHLB for Advances for Community
Enterprise (ACE) program. ACE provides funds for projects and activities that
result in the creation or retention of jobs or provides services or other
benefits for lowand-moderate-income people and communities. ACE funds may be
used to support community lending and economic development, including small
business, community facilities, and public works projects. An advantage to
using this program is that interest rates and fees are generally lower than
rates and fees on regular FHLB advances. The maximum amount of advances that a
bank may borrow under the ACE program depends on a banks total assets as of
the previous year end. For the Bank, the maximum amount of advances that can be
borrowed for the 2007 year is 5% of total assets as of previous year end.

44

---



The following
table sets forth certain information regarding our FHLB advances at or for the
dates indicated:

|                                 |  |                        |         |                           |  |        |   |                           |        |  |  |      |  
|-------------------------------- |  | ---------------------- | ------- | ------------------------- |  | ------ | - | ------------------------- | ------ |  |  | ---- | -
|                                 |  | At December 31, 2007   |         | At December 31, 2006      | 
|                                 |  |                        |         |                           | 
|                                 |  | Amount                 |         | Weighted
  Average
  Rate |  | Amount |   | Weighted
  Average
  Rate |       
|                                 |  |                        |         |                           |  |        |   |                           |       
|                                 |  | (Dollars in Thousands) |        
|Three months
  or less           |  | $                      | 22,423  |                           |  | 3.69   | % | $                         | 14,000 |  |  | 3.66 | %
|Over 3
  through 6 months        |  |                        | 4,000   |                           |  | 3.65   | % |                           | 9,000  |  |  | 3.12 | %
|Over 6
  through 12 months       |  |                        | 8,000   |                           |  | 4.03   | % |                           | 19,256 |  |  | 3.35 | %
|Over 12
  months through 2 years |  |                        | 42,000  |                           |  | 4.55   | % |                           | 16,000 |  |  | 3.81 | %
|Over 2
  through 3 years         |  |                        | 48,090  |                           |  | 4.52   | % |                           | 10,000 |  |  | 4.85 | %
|Over 3
  through 4 years         |  |                        | 19,995  |                           |  | 4.69   | % |                           | 17,995 |  |  | 4.84 | %
|Over 4
  through 5 years         |  |                        | 2,000   |                           |  | 4.64   | % |                           |       |  |  | 0.00 | %
|                                 |  |                        |         |                           |  |        |   |                           |        |  |  |      |  
|Total                            |  | $                      | 146,508 |                           |  | 4.38   | % | $                         | 86,251 |  |  | 3.95 | %
|                                 |  |                        |         |                           |  |        |   |                           |        |  |  |      |  
|                                 |  |                        |         |                           |  |        |   |                           |        |  |  |      |  
|One year                         |  | $                      | 34,423  |                           |  |        |   |                           |        |  |  |      |  
|Two years                        |  |                        | 42,000  |                           |  |        |   |                           |        |  |  |      |  
|Three years                      |  |                        | 48,090  |                           |  |        |   |                           |        |  |  |      |  
|Four years                       |  |                        | 19,995  |                           |  |        |   |                           |        |  |  |      |  
|Five Years                       |  |                        | 2,000   |                           |  |        |   |                           |        |  |  |      |  
|                                 |  |                        |         |                           |  |        |   |                           |        |  |  |      |  
|3 months                         |  | $                      | 22,423  |                           |  |        |   |                           |        |  |  |      |  
|3 to 12 months                   |  |                        | 12,000  |                           |  |        |   |                           |        |  |  |      |  
|1 to 5                           |  |                        | 112,085 |                           |  |        |   |                           |        |  |  |      |  

|                                                                |  |                                       |         |      |   |         |   |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                |  | At or For the Year Ended December 31, |        
|                                                                |  |                                       |        
|                                                                |  | 2007                                  |         | 2006 |   | 2005    |  
|                                                                |  |                                       |         |      |   |         |  
|                                                                |  | (Dollars in thousands)                |        
|                                                                |  |                                       |        
|FHLB
  advances:                                                |  |                                       |         |      |   |         |   |   |         |  
|Average balance outstanding                                     |  | $                                     | 103,088 |      | $ | 101,051 |   | $ | 120,720 |  
|Maximum amount outstanding at any month-end
  during the period |  |                                       | 146,508 |      |   | 126,088 |   |   | 130,068 |  
|Balance outstanding at end of period                            |  |                                       | 146,508 |      |   | 86,251  |   |   | 107,812 |  
|Average interest rate during the period                         |  |                                       | 4.43    | %    |   | 3.60    | % |   | 2.71    | %
|Average interest rate at end of period                          |  |                                       | 4.38    | %    |   | 3.95    | % |   | 3.02    | %

During 2002,
the Bank issued a 30-year, $10,310,000 variable rate junior subordinated
debentures. The security matures on June 30, 2032 but was callable after
September 30, 2007. The interest rate on the debentures was paid quarterly at
the three-month LIBOR plus 3.65%. The debenture was subordinated to the claims
of depositors and other creditors of the Bank. In October 2007, the Company
paid off the $10 million debentures.

During the
second quarter of 2006, the Bank issued a 30-year, $3,093,000 variable rate
junior subordinated debentures. The security matures on September 1, 2036 but
is callable after September 1, 2011. The interest rate on the debentures is
paid quarterly at the three-month LIBOR plus 175 basis points. As of December
31, 2007, the interest rate was 6.87%. The debenture is subordinated to the
claims of depositors and other creditors of the Bank.

During the
third quarter of 2007, the Bank issued a 30-year, $10,310,000 variable rate
junior subordinated debentures. The security matures on December 1, 2037 but is
callable on December 1, 2012. The interest rate on the debenture is paid
quarterly at the three-month LIBOR plus 144 basis points. As of December 30,
2007, the interest rate was 6.56%. The debenture is subordinated to the claims
of deposits and other creditors of the Bank. The proceeds were used to pay off
the debenture issued in 2002.

Total interest
expense attributable to the junior subordinated debentures as of December 31,
2007 and 2006 was $1,123,000 and $1,041,000 respectively.

45

---



Capital Resources

Stockholders
equity increased by $2,052,000 to $32,933,000 as of December 31, 2007 as
compared to $30,881,000 as of December 31, 2006. The increase was attributable
to net income of $4,209,000, stock options exercised of $248,000, amortization
of deferred compensation  incentive stock options of $265,000, excess tax
benefits from share-based compensation of $17,000 and unrealized security
holding gains of $330,000 partially offset by $561,000 dividends declared
during the year and $2,456,000 in redemption and retirement of stock.Under
regulatory capital adequacy guidelines, capital adequacy is measured as a
percentage of risk-adjusted assets in which risk percentages are applied to
assets on the balance sheet as well as off-balance sheet, such as unused loan
commitments. The guidelines require that a portion of total capital be core, or
Tier 1 capital consisting of common stockholders equity and perpetual
preferred stock, less goodwill and certain other deductions. Tier 2 capital
consists of other elements, primarily non-perpetual preferred stock, subordinated
debt and mandatory convertible debt, plus the allowance for loan losses,
subject to certain limitations. The guidelines also evaluate the leverage
ratio, which is Tier 1 capital divided by average assets.

As of December
31, 2007 and 2006, the Banks capital exceeded all minimum regulatory
requirements and were considered to be well capitalized as defined in the
regulations issued by the FDIC. The Banks capital ratios have been computed in
accordance with regulatory accounting guidelines.

|                                       |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|-------------------------------------- |  | ------------------------ | ------ | --------------------------------- | ---- | ------------------------------------------------------------------------ |  | ----- | ------ | ------ | --- | ----- |  | - | ------ |  | ---- | - | 
|                                       |  | Actual
  Capital         |        | For
  Capital
  Adequacy Purposes |      | To
  Be Well
  Capitalized Under
  Prompt Corrective
  Action Provisions | 
|                                       |  |                          |        |                                   |      |                                                                          | 
|                                       |  | Amount                   |        | Ratio                             |      | Amount                                                                   |  | Ratio |        | Amount |     | Ratio | 
|                                       |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       | 
|                                       |  | (Dollars
  In Thousands) |       
|As of December 31, 2007:               |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|                                       |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|Total capital to risk-weighted assets  |  | $                        | 49,971 |                                   | 10.2 | %                                                                        |  | $     | 39,386 |        | 8.0 | %     |  | $ | 49,233 |  | 10.0 | % | 
|Tier 1 capital to risk-weighted assets |  |                          | 45,056 |                                   | 9.2  | %                                                                        |  |       | 19,697 |        | 4.0 | %     |  |   | 29,545 |  | 6.0  | % | 
|Tier 1 capital to average assets       |  |                          | 45,056 |                                   | 8.3  | %                                                                        |  |       | 21,636 |        | 4.0 | %     |  |   | 27,044 |  | 5.0  | % | 
|                                       |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|As of December 31, 2006:               |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|                                       |  |                          |        |                                   |      |                                                                          |  |       |        |        |     |       |  |   |        |  |      |   | 
|Total capital to risk-weighted assets  |  | $                        | 47,676 |                                   | 10.8 | %                                                                        |  | $     | 35,316 |        | 8.0 | %     |  | $ | 44,350 |  | 10.0 | % | 
|Tier 1 capital to risk-weighted assets |  |                          | 43,004 |                                   | 9.7  | %                                                                        |  |       | 17,734 |        | 4.0 | %     |  |   | 26,600 |  | 6.0  | % | 
|Tier 1 capital to average assets       |  |                          | 43,004 |                                   | 8.6  | %                                                                        |  |       | 19,955 |        | 4.0 | %     |  |   | 24,944 |  | 5.0  | % | 

Liquidity

Liquidity
management for banks requires that funds always be available to pay anticipated
deposit withdrawals and maturing financial obligations such as certificates of
deposit promptly and fully in accordance with their terms and to fund new
loans. The major source of the funds required is generally provided by payments
and maturities of loans, sale of loans, liquidation of assets, deposit inflows,
investment security maturities and paydowns, Federal funds lines, FHLB
advances, other borrowings and the acquisition of additional deposit
liabilities. One method that banks utilize for acquiring additional liabilities
is through the acceptance of brokered deposits (defined to include not only
deposits received through deposit brokers, but also deposits bearing interest
in excess of 75 basis points over market rates), typically attracting large certificates
of deposit at high interest rates. The Banks primary use of funds are for
origination of loans, the purchase of investment securities, maturing CDs,
demand and saving deposit withdrawals, repayment of borrowings and dividends to
common shareholders.

To meet
liquidity needs, the Company maintains a portion of funds in cash deposits in
other banks, Federal funds sold, and investment securities. As of December 31,
2007, liquid assets were comprised of $567,000 in Federal funds sold, $627,000
in interest-bearing deposits in other financial institutions, $4,458,000 in
cash and due from banks, and $40,661,000 in available-for-sale securities.
Those liquid assets equaled 8.3% of total assets at December 31, 2007. As of
December 31, 2006, liquid assets were comprised of $8,526,000 in Federal funds
sold, $987,000 in interest-bearing deposits in other financial institutions,
$3,750,000 in cash and due from banks, and $26,516,000 in available-for-sale
securities. The liquid assets equaled 7.9% of total assets at December 31,
2006.

46

---



In addition to
liquid assets, liquidity can be enhanced, if necessary, through short or long
term borrowings. The Bank anticipates that the Federal funds lines and FHLB
advances will continue to be important sources of funding in the future, and
management expects there to be adequate collateral for such funding
requirements. A decline in the Banks credit rating would adversely affect the
Banks ability to borrow and/or the related borrowing costs, thus impacting the
Banks liquidity. As of December 31, 2007, the Bank had lines of credit
totaling $127.0 million available. These lines of credit consist of $20.0
million in unsecured lines of credit with two correspondent banks, and
approximately $107.0 million in a line of credit through pledged loans and
securities with the FHLB San Francisco. In addition, there is a line of credit
with the Federal Reserve Bank of San Francisco, although currently no loans or
securities have been pledged.

For
non-banking functions, the Company is dependent upon the payment of cash
dividends from the Bank to service its commitments. The FDIC and DFI have
authority to prohibit the Bank from engaging in activities that, in their
opinion, constitute unsafe or unsound practices in conducting its business. It
is possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the DFI could assert that the payment of
dividends or other payments might, under some circumstances, be an unsafe or
unsound practice. Furthermore, the FDIC has established guidelines with respect
to the maintenance of appropriate levels of capital by banks under its
jurisdiction. The Company expects cash dividends paid by the Bank to the
Company to be sufficient to meet payment schedules. As of December 31, 2007 and
December 31, 2006, there were $561,000 and $592,000 in dividends paid by the
Company to the shareholders, respectively.

Net cash
provided by operating activities totaled $4.9 million as of December 31, 2007,
compared to $4.2 million for the same period in 2006. The increase was
primarily the result of an increase in net income, an increase in proceeds from
loan sales, and a change in accrued interest receivable and other assets
partially offset by a decrease in the cash surrender value of life insurance.

Net cash used
in investing activities totaled $61.0 million as of December 31, 2007, compared
to $45.5 million used by investing activities for the same period in 2006. The
increase was primarily the result of the purchase of bank owned life insurance
and purchase of FHLB stock in 2007 partially offset by a decrease in proceeds
from maturities of investment securities available for sale and purchase of
property and equipment.

Funds used by
financing activities totaled $48.9 million as of December 31, 2007, compared to
funds provided by financing activities of $37.5 million for the same period in
2006. Funds used by financing activities was primarily the result of a decrease
in deposits and stock repurchases in 2007 as compared to 2006 partially offset
by an increase in FHLB borrowings.

The Company
anticipates maintaining its cash levels in 2008 mainly through profitability
and retained earnings. It is anticipated that loan demand will be moderate
during 2008, although such demand will be dictated by economic and competitive
conditions. The Company aggressively solicits non-interest bearing demand
deposits and money market checking deposit, which are the least sensitive to
interest rates. However, higher costing products, including money market
savings and certificates of deposits, have been less stable during the recent
period of increased rate competition from banks affected by the subprime and mortgage lending crisis. The growth of deposit balances is
subject to heightened competition and the success of the Companys sales
efforts and delivery of superior customer service. Depending on economic
conditions, interest rate levels, and a variety of other conditions, deposit
growth may be used to fund loans, purchase investment securities or to reduce
short term borrowings. However, due to concerns regarding uncertainty in the
general economic environment, competition, and political uncertainty, loan
demand and levels of customer deposits are not certain.

47

---



Market Risk Management

Market risk is
the risk of loss from adverse changes in market prices and rates. The Banks
market risk arises primarily from interest rate risk inherent in its loan and
deposit functions. The careful planning of asset and liability maturities and
the matching of interest rates to correspond with this maturity matching is an
integral part of the active management of an institutions net yield. To the
extent maturities of assets and liabilities do not match in a changing interest
rate environment, net yields may be affected. Even with perfectly matched
repricing of assets and liabilities, risks remain in the form of prepayment of
assets, timing lags in adjusting certain assets and liabilities that have
varying sensitivities to market interest rates and basis risk. In an overall
attempt to match assets and liabilities, the Company takes into account rates
and maturities to be offered in connection with the certificates of deposit and
variable rate loans. Because of the ratio of rate sensitive assets to rate
sensitive liabilities, the Company is negatively affected by the increasing
interest rates. Conversely, the Company would be positively affected in a
decreasing rate environment.

The Company
has generally been able to control the exposure to changing interest rates by
maintaining a large percentage of adjustable interest rate loans and the
majority of the time certificates in relatively short maturities. The majority
of the loans have periodic and lifetime interest rate caps and floors. The
Company has also controlled the interest rate risk exposure by locking in
longer term fixed rate liabilities, including FHLB borrowings, brokered
certificates of deposit, and non-brokered wholesale certificates of deposit.

Since interest
rate changes do not affect all categories of assets and liabilities equally or
simultaneously, a cumulative gap analysis alone cannot be used to evaluate the
interest rate sensitivity position. To supplement traditional gap analysis, the
Company performs simulation modeling to estimate the potential effects of
changing interest rates. The process allows the Company to explore the complex
relationships within the gap over time and various interest rate environments.

The following
table shows the Banks cumulative gap analysis as of December 31, 2007:

|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | -------- | ---------------------------- | - | --------------------- | - | ----------------- | ------- | ----- | - | ------ | - | - | ------- | -
|                                                                                       |  | At
  December 31, 2007   |         
|                                                                                       |  |                          |         
|                                                                                       |  | Within
  Three
  Months  |          | Three
  to
  Twelve
  Months |   | One
  to
  Five Years |   | Over
  Five Years |         | Total |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |  
|                                                                                       |  | (Dollars
  in Thousands) |         
|Interest Earning Assets                                                                |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Securities                                                                             |  | $                        | 7,088    |                              | $ | 13,453                |   | $                 | 22,455  |       | $ | 19,115 |   | $ | 62,111  |  
|Federal Funds                                                                          |  |                          | 567      |                              |   |                      |   |                   |        |       |   |       |   |   | 567     |  
|Interest-bearing deposits in other financial
institutions                              |  |                          |         |                              |   | 97                    |   |                   | 530     |       |   |       |   |   | 627     |  
|Loans                                                                                  |  |                          | 107,136  |                              |   | 138,374               |   |                   | 185,851 |       |   | 38,252 |   |   | 469,613 |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Total                                                                                  |  | $                        | 114,791  |                              | $ | 151,924               |   | $                 | 208,836 |       | $ | 57,367 |   | $ | 532,918 |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Interest-Bearing Liabilities                                                           |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Interest-bearing checking                                                              |  |                          | 6,874    |                              |   |                      |   |                   |        |       |   |       |   |   | 6,874   |  
|Money market and savings                                                               |  |                          | 114,768  |                              |   |                      |   |                   | 23,507  |       |   |       |   |   | 138,275 |  
|Time deposits                                                                          |  |                          | 79,474   |                              |   | 89,105                |   |                   | 24,191  |       |   |       |   |   | 192,770 |  
|FHLB advances                                                                          |  |                          | 22,423   |                              |   | 12,000                |   |                   | 112,085 |       |   |       |   |   | 146,508 |  
|Junior Subordinated Debentures                                                         |  |                          | 13,403   |                              |   |                      |   |                   |        |       |   |       |   |   | 13,403  |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Total                                                                                  |  | $                        | 236,942  |                              | $ | 101,105               |   | $                 | 159,783 |       | $ |       |   | $ | 497,830 |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Interest rate sensitivity gap                                                          |  | $                        | (122,151 | )                            | $ | 50,819                |   | $                 | 49,053  |       | $ | 57,367 |   | $ | 35,088  |  
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  
|Cummulative interest rate sensitivity gap as a percentage of
  interest-earning assets |  |                          | -22.9    | %                            |   | -13.4                 | % |                   | -4.2    | %     |   | 6.6    | % |   | 6.6     | %
|                                                                                       |  |                          |          |                              |   |                       |   |                   |         |       |   |        |   |   |         |  

48

---



The target
cumulative one-year gap ratio is -15% to 15%. The policy limit for net earnings
at risk for a +/- 200 basis points change in rates is 25%, indicating a worst
case 25% decrease in earnings given a 200 basis point change in interest rates.
The policy limit for a +/- 200 basis points change in rates is 15%, indicating
a 15% decrease in net interest income. Management strives to maintain rate
sensitive assets on its books.

Management
also evaluates the use of FHLB products including longer-term bullet advances,
amortizing advances, and interest rate swaps as tools to control interest rate
risk. If one of the interest rate risk measures exceeds the policy limits
management adjusts product offerings and repositions assets and liabilities to
bring the interest rate risk measure back within policy limits within a
reasonable timeframe. The current one year gap ratio is -36.3%. A negative gap
indicates that in an increasing interest rate environment, it is expected that
net interest margin would decrease, and in a decreasing interest rate
environment, net interest margin would increase.

The Company
believes that there are some inherent weaknesses in utilizing the cumulative
gap analysis as a means of monitoring and controlling interest rate risk.
Specifically, the cumulative gap analysis does not address loans at their floor
rates that cannot reset as rates change and does not incorporate varying
prepayment speeds as interest rates change. The Company, therefore, relies more
heavily on the dynamic simulation model to monitor and control interest rate
risk.

Interest Rate Sensitivity

The Company
uses a dynamic simulation model to forecast the anticipated impact of changes
in market interest rates on its net interest income and economic value of
equity. Sensitivity of Net Interest Income (NII) and Capital to interest rate
changes arises when yields on loans and investments change in a different time
frame or amount from that of rates on deposits and other interest-bearing
liability. To mitigate interest rate risk, the structure of the Statement of
Condition is managed with the objective of correlating the movements of
interest rates on loans and investments with those of deposits. The asset and
liability policy sets limits on the acceptable amount of change to NII and
Capital in changing interest rate environments. The Bank uses simulation models
to forecast NII and Capital.

Simulation of
NII and Capital under various scenarios of increasing or decreasing interest
rates is the primary tool used to measure interest rate risk. Using licensed
software developed for this purpose, management is able to estimate the
potential impact of changing rates. A simplified statement of condition is
prepared on a quarterly basis as a starting point, using as inputs, actual
loans, investments and deposits.

In the
simulation of NII and Capital under various interest rate scenarios, the
simplified statement of condition is processed against two interest rate change
scenarios. Each of these scenarios assumes that the change in interest rates is
immediate and interest rates remain at the new levels. The model is used to
assist management in evaluating and in determining and adjusting strategies
designed to reduce its exposure to these market risks, which may include, for
example, changing the mix of earning assets or interest-bearing deposits. The
current net interest earnings at risk given a +200 basis point rate shock is-9.97% and the current estimated change in the economic value of equity given a
+200 basis point rate shock is -12.54%.

|                         |  |                                                 |   |                                                      |        |   | 
|------------------------ |  | ----------------------------------------------- | - | ---------------------------------------------------- | ------ | - | 
|Simulated
  Rate Changes |  | Estimated Net
  Interest
  Income
  Sensitivity |   | Estimated
  Change in
  Economic
  Value of
  Equity |       
|                         |  |                                                 |   |                                                      |       
|                         |  |                                                 |   |                                                      |       
|+ 200 basis
  points     |  | -9.97                                           | % |                                                      | -12.54 | % | 
|- 200 basis
  points     |  | 11.49                                           | % |                                                      | 24.18  | % | 

As illustrated
in the above table, the Company is currently liability sensitive. The
implication of this is that the Companys earnings will increase in a falling
rate environment, as there are more rate-sensitive liabilities subject to
reprice downward than rate-sensitive assets; conversely, earnings would
decrease in a rising rate environment.

49

---



Therefore, an
increase in market rates could adversely affect net interest income. In
contrast, a decrease in market rates may improve net interest income.

Management
believes that all of the assumptions used in the analysis to evaluate the
vulnerability of its projected net interest income and economic value of equity
to changes in interest rates approximate actual experiences and considers them
to be reasonable. However, the interest rate sensitivity of the Banks assets
and liabilities and the estimated effects of changes in interest rates on the
Banks projected net interest income and economic value of equity may vary
substantially if different assumptions were used or if actual experience
differs from the projections on which they are based.

The Asset Liability
Committee meets quarterly to monitor the investments, liquidity needs and
oversee the asset-liability management. In between meetings of the Committee,
management oversees the liquidity management.

Return on equity and assets

The following
table sets forth key ratios for the periods ending December 31, 2007, 2006, and
2005.

|                                                                       |  |                    |       |      |  |       |   |  |       |  
|---------------------------------------------------------------------- |  | ------------------ | ----- | ---- |  | ----- | - |  | ----- | -
|                                                                       |  | As of December 31, |      
|                                                                       |  |                    |      
|                                                                       |  | 2007               |       | 2006 |  | 2005  |  
|                                                                       |  |                    |       |      |  |       |  
|                                                                       |  |                    |       |      |  |       |   |  |       |  
|Net income as a percentage of average
  assets                         |  |                    | 0.81  | %    |  | 0.81  | % |  | 0.92  | %
|Net income as a percentage of average equity                           |  |                    | 12.89 | %    |  | 13.81 | % |  | 16.53 | %
|Average equity as a percentage of average
  assets                     |  |                    | 6.28  | %    |  | 5.85  | % |  | 5.55  | %
|Dividends declared per share as a
  percentage of net income per share |  |                    | 4.67  | %    |  | 3.77  | % |  | 10.00 | %

In 2007, the
Company grew its earning asset base and produced additional fee income through
investment advisory services fee income. Also, in 2007, the Company increased
the dividends declared from $0.0374 in 2006 as compared to $0.045 declared in
August 2007 to $.0.05 dividend declared in October 2007.

Inflation

The impact of
inflation on a financial institution can differ significantly from that exerted
on other companies. Banks, as financial intermediaries, have many assets and
liabilities that may move in concert with inflation both as to interest rates
and value. However, financial institutions are affected by inflations impact

on noninterest expenses, such as salaries, benefits and occupancy expenses.

Because of the ratio of rate sensitive assets to rate sensitive liabilities,
the Bank tends to benefit slightly in the short-term from a decreasing interest
rate market and suffer in an increasing interest rate market. The management of
Federal Funds rate by the Federal Reserve has an impact on the Companys
earnings such that changes in interest rates may have a corresponding impact on
ability of borrowers to repay loans with the Bank.

Off-Balance Sheet Arrangements

In the normal
course of business, the Company is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments to
extend credit and letters of credit. To varying degrees, these instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. The Companys exposure to
credit loss in the event of non-performance by the other party to the financial
instruments for undisbursed loan funds and letters of credit is represented by
the contractual amount of those instruments. At December 31, 2007 and December
31, 2006, the amounts of the Companys undisbursed loan and line of credit
funds were $27.7 million and $21.9 million, respectively, and there were no
obligations under standby and commercial letters of credit in either period.
Refer to the Consolidated Financial Statements for more qualitative and
quantitative disclosures about financial instruments with off-balance sheet
risk.

50

---



ITEM 7A  QUANTITATIVE AND QUALITATIVE
DISCLOSURE AOBUT MARKET RISK

Quantitative and Qualitative Disclosure About Market Risk

Market risk is
the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates, commodity prices and equity prices. Although the Company
manages other risks, for example, credit quality and liquidity risk in the
normal course of business, management considers interest rate risk to be a
principal market risk. Other types of market risks, such as foreign currency exchange
rate risk, do not arise in the normal course of the Companys business
activities. The majority of the Companys interest rate risk arises from
instruments, positions and transactions entered into for purposes other than
trading. They include loans, securities available-for-sale, deposit
liabilities, short-term borrowings and long-term debt. Interest rate risk
occurs when assets and liabilities reprice at different times as interest rates
change.

The Company
manages interest rate risk through its Asset Liability Committee (ALCO). The
ALCO monitors exposure to interest rate risk on a quarterly basis using both a
traditional gap analysis and simulation analysis. Traditional gap analysis
identifies short and long-term interest rate positions or exposure. Simulation
analysis uses an income simulation approach to measure the change in interest
income and expense under rate shock conditions. The model considers the three
major factors of (a) volume differences, (b) repricing differences and (c)
timing in its income simulation. The model begins by disseminating data into
appropriate repricing buckets based on internally supplied algorithms (or
overridden by calibration). Next, each major asset and liability type is
assigned a multiplier or beta to simulate how much that particular balance
sheet category type will reprice when interest rates change. The model uses
numerous asset and liability multipliers consisting of bank-specific or default
multipliers. The remaining step is to simulate the timing effect of assets and
liabilities by modeling a month-by-month simulation to estimate the change in
interest income and expense over the next 12-month period. The results are then
expressed as the change in pre-tax net interest income over a 12-month period
for +1%, +2% and +3% shocks.

ITEM 8  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

Contents

|                                                                                                                 |  |   
|---------------------------------------------------------------------------------------------------------------- |  | --
|Managements Report on
  Internal Control Over Financial Reporting                                               |  | 52
|                                                                                                                 |  |   
|Report of Independent
  Registered Public Accounting Firm                                                        |  | 53
|                                                                                                                 |  |   
|Financial Statements                                                                                             |  |   
|                                                                                                                 |  |   
|Consolidated Balance Sheets
December 31,
  2007 and 2006                                                         |  | 54
|                                                                                                                 |  |   
|Consolidated Statements of
Income For the
  Years Ended December 31, 2007, 2006 and 2005                         |  | 55
|                                                                                                                 |  |   
|Consolidated Statement of
Changes in
  Stockholders Equity For the Years Ended December 31, 2007, 2006 and 2005 |  | 56
|                                                                                                                 |  |   
|Consolidated Statements of Cash
Flows For
  the Years Ended December 31, 2007, 2006 and 2005                     |  | 57
|                                                                                                                 |  |   
|Notes to Consolidated Financial
Statements                                                                       |  | 58

51

---



Managements
Report on Internal Control Over Financial Reporting

Management of
Epic Bancorp (the Company) is responsible for establishing and maintaining
adequate internal control over financial reporting. The Companys internal
control system was designed to provide reasonable assurance to the Companys
management and Board of Directors regarding the preparation and fair
presentation of published financial statements. The internal control system
contains monitoring mechanisms, and appropriate actions taken to correct
identified deficiencies.

All internal
control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. In addition, because of changes in conditions and circumstances,
the effectiveness of internal control over financial reporting may vary over
time and controls may become adequate, and the degree of compliance with the
policies and procedures may deteriorate, over time.

The Companys management
assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2007. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control  Integrated
Framework. Based on our assessment we believe that, as of December
31, 2007, the Companys internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f), is effective based on those
criteria.

This annual
report does not include an attestation report of the Companys registered
public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report
on this annual report.

52

---



Report of
Independent Registered Public Accounting Firm

Board of
Directors 
Epic Bancorp 
San Rafael, California

We have
audited the accompanying consolidated balance sheets of Epic Bancorp and
Subsidiaries (the Company) as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders equity and cash
flows for each of the three years in the period ended December 31, 2007. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Epic Bancorp and
Subsidiaries as of December 31, 2007 and 2006, and the results of its
operations, changes in its stockholders equity, and its cash flows for each of
the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.

|                                            
|--------------------------------------------
|/s/ Vavrinek,
Trine, Day & Co., LLP         
|                                            
|Rancho Cucamonga, California 
March 25, 2008

53

---



EPIC BANCORP AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006

|                                                                                                                                                                   |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                   |  | 2007 |             | 2006 |  
|                                                                                                                                                                   |  |      |             |      |  
|Assets                                                                                                                                                             |  |      |             |      |   |             |  
|Cash and cash equivalents:                                                                                                                                         |  |      |             |      |   |             |  
|Cash and due from banks                                                                                                                                            |  | $    | 4,457,959   |      | $ | 3,750,262   |  
|Federal funds sold                                                                                                                                                 |  |      | 566,541     |      |   | 8,525,772   |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Cash and Cash Equivalents                                                                                                                                    |  |      | 5,024,500   |      |   | 12,276,034  |  
|Interest-bearing time deposits in other financial
institutions                                                                                                     |  |      | 627,387     |      |   | 987,305     |  
|Investment securities:                                                                                                                                             |  |      |             |      |   |             |  
|Available-for-sale                                                                                                                                                 |  |      | 40,660,856  |      |   | 26,515,887  |  
|Held-to-maturity, at cost                                                                                                                                          |  |      | 14,514,528  |      |   | 21,823,305  |  
|Federal Home Loan Bank restricted stock, at cost                                                                                                                   |  |      | 6,885,900   |      |   | 5,891,900   |  
|Pacific Coast Bankers Bank stock, at cost                                                                                                                         |  |      | 50,000      |      |   | 50,000      |  
|Loans receivable                                                                                                                                                   |  |      | 469,613,486 |      |   | 426,006,504 |  
|Less: Allowance for loan losses                                                                                                                                    |  |      | (4,914,553  | )    |   | (4,671,596  | )
|                                                                                                                                                                   |  |      |             |      |   |             |  
|                                                                                                                                                                   |  |      | 464,698,933 |      |   | 421,334,908 |  
|Bank premises and equipment, net                                                                                                                                   |  |      | 4,653,871   |      |   | 5,274,915   |  
|Accrued interest receivable                                                                                                                                        |  |      | 3,221,249   |      |   | 3,297,170   |  
|Cash surrender value of bank-owned life insurance                                                                                                                  |  |      | 10,387,374  |      |   |            |  
|Other assets                                                                                                                                                       |  |      | 6,090,187   |      |   | 6,062,952   |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Assets                                                                                                                                                       |  | $    | 556,814,785 |      | $ | 503,514,376 |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Liabilities
  and Stockholders Equity                                                                                                                             |  |      |             |      |   |             |  
|Liabilities                                                                                                                                                        |  |      |             |      |   |             |  
|Deposits:                                                                                                                                                          |  |      |             |      |   |             |  
|Noninterest-bearing deposits                                                                                                                                       |  | $    | 23,254,723  |      | $ | 18,134,565  |  
|Interest-bearing checking deposits                                                                                                                                 |  |      | 6,874,465   |      |   | 8,432,730   |  
|Money market and saving deposits                                                                                                                                   |  |      | 138,275,392 |      |   | 150,011,698 |  
|Certificates of deposit greater than or equal to
$100,000                                                                                                          |  |      | 110,587,625 |      |   | 129,011,093 |  
|Certificates of deposit less than
$100,000                                                                                                                         |  |      | 82,182,492  |      |   | 64,214,598  |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Deposits                                                                                                                                                     |  |      | 361,174,697 |      |   | 369,804,684 |  
|Federal Home Loan Bank Advances                                                                                                                                    |  |      | 146,507,500 |      |   | 86,250,777  |  
|Junior Subordinated Debentures                                                                                                                                     |  |      | 13,403,000  |      |   | 13,403,000  |  
|Accrued interest payable and other liabilities                                                                                                                     |  |      | 2,797,051   |      |   | 3,175,055   |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Liabilities                                                                                                                                                  |  |      | 523,882,248 |      |   | 472,633,516 |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Commitment and Contingencies(Note 14)                                                                                                                              |  |      |            |      |   |            |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Stockholders Equity                                                                                                                                               |  |      |             |      |   |             |  
|Common stock,  no par value;
  10,000,000 shares authorized;
  3,818,284 and 3,960,852 shares issued and outstanding at December 31,
  2007 and 2006, respectively |  |      | 11,977,473  |      |   | 10,384,816  |  
|Additonal Paid-In-Capital                                                                                                                                          |  |      | 663,213     |      |   | 381,993     |  
|Retained earnings                                                                                                                                                  |  |      | 20,084,667  |      |   | 20,236,571  |  
|Accumulated other comprehensive
income/(loss)                                                                                                                      |  |      | 207,184     |      |   | (122,520    | )
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Stockholders Equity                                                                                                                                         |  |      | 32,932,537  |      |   | 30,880,860  |  
|                                                                                                                                                                   |  |      |             |      |   |             |  
|Total Liabilities and Stockholders
Equity                                                                                                                         |  | $    | 556,814,785 |      | $ | 503,514,376 |  
|                                                                                                                                                                   |  |      |             |      |   |             |  

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

54

---



EPIC
BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|                                                     |  |      |            |      |   |            |   |   |            | 
|---------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | 
|                                                     |  | 2007 |            | 2006 |   | 2005       |  
|                                                     |  |      |            |      |   |            |  
|Interest Income                                      |  |      |            |      |   |            |   |   |            | 
|Interest and fees on loans                           |  | $    | 36,096,493 |      | $ | 33,228,862 |   | $ | 26,497,787 | 
|Interest on investment securities                    |  |      | 2,450,353  |      |   | 1,902,396  |   |   | 1,811,067  | 
|Interest on Federal funds sold                       |  |      | 161,022    |      |   | 314,126    |   |   | 86,104     | 
|Interest on other investments                        |  |      | 293,064    |      |   | 324,485    |   |   | 285,759    | 
|Interest on deposits in other financial institutions |  |      | 40,081     |      |   | 44,342     |   |   | 43,096     | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Total Interest Income                                |  |      | 39,041,013 |      |   | 35,814,211 |   |   | 28,723,813 | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Interest Expense                                     |  |      |            |      |   |            |   |   |            | 
|Interest expense on deposits                         |  |      | 15,797,174 |      |   | 13,507,085 |   |   | 7,718,981  | 
|Interest expense on borrowed funds                   |  |      | 4,561,481  |      |   | 3,636,467  |   |   | 3,266,083  | 
|Interest expense on Junior Subordinated Debentures   |  |      | 1,123,231  |      |   | 1,040,962  |   |   | 743,214    | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Total Interest Expense                               |  |      | 21,481,886 |      |   | 18,184,514 |   |   | 11,728,278 | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Net Interest Income Before Provision For Loan Losses |  |      | 17,559,127 |      |   | 17,629,697 |   |   | 16,995,535 | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Provision for Loan Losses                            |  |      | 243,956    |      |   | 439,472    |   |   | 631,691    | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Net Interest Income After Provision for Loan Losses  |  |      | 17,315,171 |      |   | 17,190,225 |   |   | 16,363,844 | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Noninterest Income                                   |  |      |            |      |   |            |   |   |            | 
|Gain on sale or brokerage of loans                   |  |      | 584,748    |      |   | 791,966    |   |   | 581,397    | 
|Net loss on sale of securities, net                  |  |      |           |      |   | (1,820     | ) |   |           | 
|Loan servicing                                       |  |      | 179,422    |      |   | 161,142    |   |   | 65,403     | 
|Registered Investment Advisory Services fee income   |  |      | 601,429    |      |   | 507,192    |   |   | 457,833    | 
|Other income                                         |  |      | 1,180,409  |      |   | 717,977    |   |   | 528,998    | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Total Noninterest Income                             |  |      | 2,546,008  |      |   | 2,176,457  |   |   | 1,633,631  | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Noninterest Expenses                                 |  |      |            |      |   |            |   |   |            | 
|Salaries and benefits                                |  |      | 7,335,918  |      |   | 7,934,800  |   |   | 6,449,886  | 
|Occupancy                                            |  |      | 1,468,659  |      |   | 1,409,557  |   |   | 1,164,053  | 
|Advertising                                          |  |      | 369,291    |      |   | 367,768    |   |   | 357,213    | 
|Professional                                         |  |      | 738,090    |      |   | 337,172    |   |   | 487,682    | 
|Data processing                                      |  |      | 469,495    |      |   | 364,223    |   |   | 698,329    | 
|Equipment and depreciation                           |  |      | 900,072    |      |   | 850,820    |   |   | 571,324    | 
|Other administrative                                 |  |      | 2,083,693  |      |   | 1,771,318  |   |   | 1,533,519  | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Total Noninterest Expense                            |  |      | 13,365,218 |      |   | 13,035,658 |   |   | 11,262,006 | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Income Before Income Taxes                           |  |      | 6,495,961  |      |   | 6,331,024  |   |   | 6,735,469  | 
|Provision for Income Taxes                           |  |      | 2,286,847  |      |   | 2,402,575  |   |   | 2,639,300  | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Net Income                                           |  | $    | 4,209,114  |      | $ | 3,928,449  |   | $ | 4,096,169  | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Earnings Per Share                                   |  |      |            |      |   |            |   |   |            | 
|Basic                                                |  | $    | 1.07       |      | $ | 0.99       |   | $ | 1.04       | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|                                                     |  |      |            |      |   |            |   |   |            | 
|Diluted                                              |  | $    | 1.07       |      | $ | 0.99       |   | $ | 1.01       | 
|                                                     |  |      |            |      |   |            |   |   |            | 

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

55

---



EPIC
BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY

FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|------------------------------------------------------------------------------------------- |  | -------------- | --------- | ---------- | - | ----------------- | - | -------- | ------- | ----------------------------- | - | ------------------ | - | ------ | ---------- | - | - | -------- | - | - | ---------- | -
|                                                                                            |  |                |           |            |   |                   |   |          |         | AccumulatedOtherComprehensive |   | TotalStockholders |  
|                                                                                            |  | Common
  Stock |           |            |   |                   |   |          |         |                               |  
|                                                                                            |  |                |           | Additional |   | Comprehensive     |   | Retained |         |                               |  
|                                                                                            |  | Shares         |           | Amount     |   | Paid
  in Capital |   | Income   |         | Earnings                      |   | Income/(Loss)      |   | Equity |           
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |           
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Balance,January 1,
2005                                                                     |  |                | 3,665,702 |            |   | 10,159,239        |   |          |        |                               |   |                   |   |        | 13,244,716 |   |   | (229,277 | ) |   | 23,174,678 |  
|                                                                                           
|Stock options exercised                                                                     |  |                | 13,961    |            |   | 48,449            |   |          |        |                               |   |                   |   |        |           |   |   |         |   |   | 48,449     |  
|Cash Dividends                                                                              |  |                |          |            |   |                  |   |          |        |                               |   |                   |   |        | (441,050   | ) |   |         |   |   | (441,050   | )
|Comprehensive income                                                                        |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Net Income for the period                                                                   |  |                |          |            |   |                  |   |          |        |                               | $ | 4,096,169          |   |        | 4,096,169  |   |   |         |   |   | 4,096,169  |  
|Unrealized security holding losses (net of
$22,112 tax benefit)                             |  |                |          |            |   |                  |   |          |        |                               |   | (33,168            | ) |        |           |   |   | (33,168  | ) |   | (33,168    | )
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |                |           |            |   |                   |   |          |         |                               | $ | 4,063,001          |   |        |            |   |   |          |   |   |            |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Balance,December 31,
2005                                                                   |  |                | 3,679,663 |            |   | 10,207,688        |   |          |        |                               |   |                   |   |        | 16,899,835 |   |   | (262,445 | ) |   | 26,845,078 |  
|                                                                                           
|Stock options exercised                                                                     |  |                | 22,068    |            |   | 177,128           |   |          |        |                               |   |                   |   |        |           |   |   |         |   |   | 177,128    |  
|Cash Dividends                                                                              |  |                |          |            |   |                  |   |          |        |                               |   |                   |   |        | (591,713   | ) |   |         |   |   | (591,713   | )
|Share-based compensatione expense                                                           |  |                |          |            |   |                  |   |          | 381,993 |                               |   |                   |   |        |           |   |   |         |   |   | 381,993    |  
|Comprehensive income                                                                        |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Net Income for the period                                                                   |  |                |          |            |   |                  |   |          |        |                               | $ | 3,928,449          |   |        | 3,928,449  |   |   |         |   |   | 3,928,449  |  
|Unrealized security holding gains (net of
$92,556 tax benefit)                              |  |                |          |            |   |                  |   |          |        |                               |   | 138,833            |   |        |           |   |   | 138,833  |   |   | 138,833    |  
|Stock issued on 7% stock dividend declared on
January 26, 2007                              |  |                | 259,121   |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Less reclassification adjustment for realized
holding losses (net of
  tax benefit of $728) |  |                |          |            |   |                  |   |          |        |                               |   | 1,092              |   |        |           |   |   | 1,092    |   |   | 1,092      |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |                |           |            |   |                   |   |          |         |                               | $ | 4,068,374          |   |        |            |   |   |          |   |   |            |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Balance,December 31,
2006                                                                   |  |                | 3,960,852 |            | $ | 10,384,816        |   | $        | 381,993 |                               |   |                    |   | $      | 20,236,571 |   | $ | (122,520 | ) | $ | 30,880,860 |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Stock options exercised                                                                     |  |                | 53,966    |            |   | 248,138           |   |          |        |                               |   |                   |   |        |           |   |   |         |   |   | 248,138    |  
|Redemption and retirement of stock                                                          |  |                | (196,216  | )          |   | (2,455,627        | ) |          |        |                               |   |                   |   |        |           |   |   |         |   |   | (2,455,627 | )
|Cash Dividends                                                                              |  |                |           |            |   |                   |   |          |        |                               |   |                   |   |        | (559,710   | ) |   |         |   |   | (559,710   | )
|Cash paid in lieu of fractional shares of stock
dividend                                    |  |                | (318      | )          |   |                   |   |          |        |                               |   |                   |   |        | (1,162     | ) |   |         |   |   | (1,162     | )
|7% stock dividend declared on January 26,
2007                                              |  |                |           |            |   | 3,800,146         |   |          |         |                               |   |                    |   |        | (3,800,146 | ) |   |          |   |   |           |  
|Share-based compensation expense                                                            |  |                |          |            |   |                  |   |          | 264,531 |                               |   |                   |   |        |           |   |   |         |   |   | 264,531    |  
|Excess tax benefits fromshare-based
compensation                                            |  |                |          |            |   |                  |   |          | 16,689  |                               |   |                   |   |        |           |   |   |         |   |   | 16,689     |  
|Comprehensive income                                                                        |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Net Income for the period                                                                   |  |                |          |            |   |                  |   |          |        |                               | $ | 4,209,114          |   |        | 4,209,114  |   |   |         |   |   | 4,209,114  |  
|Unrealized security holding gains (net of
$219,803 tax expense)                             |  |                |          |            |   |                  |   |          |        |                               |   | 329,704            |   |        |           |   |   | 329,704  |   |   | 329,704    |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Total Comprehensive Income                                                                  |  |                |           |            |   |                   |   |          |         |                               | $ | 4,538,818          |   |        |            |   |   |          |   |   |            |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  
|Balance,December 31,
2007                                                                   |  |                | 3,818,284 |            | $ | 11,977,473        |   | $        | 663,213 |                               |   |                    |   | $      | 20,084,667 |   | $ | 207,184  |   | $ | 32,932,537 |  
|                                                                                            |  |                |           |            |   |                   |   |          |         |                               |   |                    |   |        |            |   |   |          |   |   |            |  

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

56

---



EPIC BANCORP AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007,
2006 AND 2005

|                                                                |  |      |             |      |   |             |   |   |             |  
|--------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                |  | 2007 |             | 2006 |   | 2005        |  
|                                                                |  |      |             |      |   |             |  
|Cash Flows From Operating
Activities                            |  |      |             |      |   |             |   |   |             |  
|Net Income                                                      |  | $    | 4,209,114   |      | $ | 3,928,449   |   | $ | 4,096,169   |  
|Adjustments to Reconcile Net Income to
Net                      |  |      |             |      |   |             |   |   |             |  
|Cash Provided by Operating Activities:                          |  |      |             |      |   |             |   |   |             |  
|Depreciation and amortization of premises and
equipment         |  |      | 908,862     |      |   | 825,128     |   |   | 538,495     |  
|Provision for loan losses                                       |  |      | 243,956     |      |   | 439,472     |   |   | 631,691     |  
|Change in Deferred income taxes                                 |  |      | (223,000    | )    |   | 173,000     |   |   | (212,000    | )
|Change in deferred costs, net of
amortization                   |  |      | 413,072     |      |   | 995,356     |   |   | 800,664     |  
|Change in loan servicing asset, net of
amortization             |  |      | (23,607     | )    |   | (94,845     | ) |   | (73,775     | )
|Net amortization of investment
securities                       |  |      | 79,215      |      |   | 215,688     |   |   | 532,471     |  
|Share Based Compensation                                        |  |      | 264,531     |      |   | 381,993     |   |   |            |  
|FHLB stock dividends                                            |  |      | (281,400    | )    |   | (313,000    | ) |   | (282,300    | )
|Gain on Sale of Loans                                           |  |      | (584,748    | )    |   | (791,966    | ) |   | (581,397    | )
|Loans Originated for Sale                                       |  |      | (11,383,875 | )    |   | (9,883,375  | ) |   | (7,238,504  | )
|Proceeds from Loan Sales                                        |  |      | 11,994,373  |      |   | 10,675,341  |   |   | 8,033,651   |  
|Loss on sale of investment securities                           |  |      |            |      |   | 1,820       |   |   |            |  
|Net change in bank owned life
insurance                         |  |      | (387,374    | )    |   |            |   |   |            |  
|Net change in accrued interest receivable and
other assets      |  |      | (438,819    | )    |   | (2,077,510  | ) |   | (2,497,328  | )
|Excess tax benefits from share-based
compensation               |  |      | (16,689     | )    |   |            |   |   |            |  
|Net change in accrued interest payable and
other liabilities    |  |      | 81,489      |      |   | (297,264    | ) |   | 1,747,936   |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Net
  Cash Provided By Operating Activities                     |  |      | 4,855,100   |      |   | 4,178,287   |   |   | 5,495,773   |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Cash Flows From Investing
Activities                            |  |      |             |      |   |             |   |   |             |  
|Loans originated or purchased, net of
repayments                |  |      | (43,975,298 | )    |   | (40,345,292 | ) |   | (58,419,952 | )
|Principal reduction in mortgage-backed
securities               |  |      | 12,951,039  |      |   | 11,794,080  |   |   | 18,341,689  |  
|Purchase of investment securities available for
sale            |  |      | (19,316,939 | )    |   | (18,191,843 | ) |   |            |  
|Net change in interest earning
deposits                         |  |      | 359,918     |      |   | (44,341     | ) |   | 56,682      |  
|Purchase of Federal Home Loan Bank
stock                        |  |      | (2,246,500  | )    |   | (117,500    | ) |   | 1,018,200   |  
|Redemption of Federal Home Loan Bank
stock                      |  |      | 1,533,900   |      |   | 736,200     |   |   |            |  
|Proceeds from sales of investment securities
available for sale |  |      |            |      |   | 2,036,120   |   |   |            |  
|Purchase of bank owned life insurance                           |  |      | (10,000,000 | )    |   |            |   |   |            |  
|Purchase of property and equipment                              |  |      | (287,818    | )    |   | (1,393,945  | ) |   | (2,539,341  | )
|                                                                |  |      |             |      |   |             |   |   |             |  
|Net
  Cash Used By Investing Activities                         |  |      | (60,981,698 | )    |   | (45,526,521 | ) |   | (41,542,722 | )
|                                                                |  |      |             |      |   |             |   |   |             |  
|Cash Flows From Financing
Activities                            |  |      |             |      |   |             |   |   |             |  
|Net increase in deposits                                        |  |      | (8,629,987  | )    |   | 56,405,265  |   |   | 38,779,445  |  
|Net change in FHLB advances                                     |  |      | 60,256,723  |      |   | (21,561,275 | ) |   | (7,968,584  | )
|Issuance of junior subordinated
debentures                      |  |      | 10,310,000  |      |   | 3,093,000   |   |   |            |  
|Redemption of junior subordinated
debentures                    |  |      | (10,310,000 | )    |   |            |   |   |            |  
|Cash Dividends paid                                             |  |      | (559,710    | )    |   | (591,713    | ) |   | (441,050    | )
|Cash paid in lieu of fractional shares of stock
dividend        |  |      | (1,162      | )    |   |            |   |   |            |  
|Excess tax benefits from share-based
compensation               |  |      | 16,689      |      |   |            |   |   |            |  
|Stock repurchases                                               |  |      | (2,455,627  | )    |   |            |   |   |            |  
|Stock option exercise proceeds                                  |  |      | 248,138     |      |   | 177,128     |   |   | 48,449      |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Net
  Cash Provided By Financing Activities                     |  |      | 48,875,064  |      |   | 37,522,405  |   |   | 30,418,260  |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Net Decrease in Cash and Cash
Equivalents                       |  | $    | (7,251,534  | )    | $ | (3,825,829  | ) | $ | (5,628,689  | )
|Cash and Cash Equivalents, Beginning of
Year                    |  |      | 12,276,034  |      |   | 16,101,863  |   |   | 21,730,552  |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Cash and Cash Equivalents, End of
Year                          |  | $    | 5,024,500   |      | $ | 12,276,034  |   | $ | 16,101,863  |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Supplemental Disclosure of Cash Flow
Information                |  |      |             |      |   |             |   |   |             |  
|Cash paid during the year for:                                  |  |      |             |      |   |             |   |   |             |  
|Interest paid                                                   |  | $    | 16,320,856  |      | $ | 18,145,932  |   | $ | 11,617,757  |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Income taxes paid                                               |  | $    | 2,200,000   |      | $ | 3,247,700   |   | $ | 3,035,000   |  
|                                                                |  |      |             |      |   |             |   |   |             |  
|Non-Cash Investing Activities                                   |  |      |             |      |   |             |   |   |             |  
|Net change in accumulated other comprehensive
income            |  | $    | 329,704     |      | $ | 138,934     |   | $ | (33,168     | )
|                                                                |  |      |             |      |   |             |   |   |             |  

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

57

---



EPIC
BANCORP AND SUBSIDIARIESNOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

Note 1: Summary of Significant Accounting Policies

Nature
of Operations

Epic Bancorp (the Company) was incorporated on
December 20, 1988 and is headquartered in San Rafael, California and has
two wholly owned subsidiaries, Tamalpais Bank (the Bank) and Tamalpais Wealth
Advisors  (TWA).  The Bank conducts business as an industrial
bank under the California State Banking Law and operates seven branches in
Marin County, California. The Bank provides a variety of financial services to
small-to-medium sized businesses and individuals and offers a full range of
commercial banking services.  The Bank
does not have any significant concentrations to any one industry or customer.  TWA offers investment advisory services and
financial planning to the general community and to clients of the Bank.

The consolidated financial statements of the Company
and subsidiaries are prepared in conformity with accounting principles and
reporting policies generally accepted in the United States of America and
prevailing practices within the banking industry. The more significant
accounting and reporting policies are discussed below.

Principles
of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.  All material intercompany transactions and
accounts have been eliminated in consolidation.

Investment
in Nonconsolidated Subsidiary

The Company accounts for its investments in its wholly
owned special purpose entities, San Rafael Capital Trust I, II and III, using
the equity method under which the subsidiaries net earnings are recognized in
the Companys statement of income.

Accounting
Estimates

Certain accounting policies underlying the preparation
of these financial statements require management to make estimates and
judgments.  These estimates and
judgments may affect reported amounts of assets and liabilities, revenues and
expenses, and disclosures of contingent assets and liabilities.  The most significant of these involve the
Allowance for Loan Losses, as discussed below under Allowance for Loan
Losses.

Cash
and Cash Equivalents

For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, Federal funds sold,
money market mutual funds, and other investments with original maturities of
less than 90 days, presenting insignificant risk of changes in value due to
interest rate changes.

Investment
Securities

Investments in debt and equity securities are
classified as either held-to-maturity, trading, or available-for-sale.  Investments classified as held-to-maturity
are those that the Company has the ability and intent to hold until maturity
and are reported at their remaining unpaid principal balance, net of
unamortized premiums or nonaccreted discounts.
Investments that are bought and held principally for the purposes of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings.  Investments that will be held for indefinite
periods of time, including securities that may be sold in response to changes
in market interest or prepayment rates, needs for liquidity, and changes in the
availability of and the yield of alternative investments, are classified as
available-for-sale. These investments are carried at market value which is
determined using published quotes as of the close of business. Unrealized gains
and losses are excluded from earnings and reported net of related tax and
recorded as other comprehensive income and included in shareholders equity
until realized.

58

---



EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

The amortized cost of investment securities are
adjusted for amortization of premiums and accretion of discounts to maturity
or, in the case of mortgage-backed securities, over the estimated life of the
security, using a method that approximates the effective interest method. Such
amortization and accreted interest are included in interest income.  Gains and losses on sales of investments are
recognized based on specific identification and are included in noninterest
income.

Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
other than temporary result in write-downs of the individual securities to
their fair value.  The related
write-downs are included in earnings as realized losses.  In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery of fair value.

Loans

Loans are reported at their outstanding principal
balances net of any unearned income, charge-offs, unamortized deferred fees and
costs on originated loans and premiums and discounts on purchases loans.  The Banks decision to hold these loans for
investment is based on the Banks intent and ability to hold the portfolio for
the foreseeable future or until maturity or payoff.

The Banks loans are reported at the principal amount
outstanding net of deferred fees and the allowance for loan losses.  Interest income is accrued daily on the
outstanding loan balances using the simple interest method.  Loans are placed on nonaccrual status when
management believes that there is serious doubt as to the collection of
principal or interest, or when they become contractually past due by 90 days or
more with respect to principal or interest, except for loans that are well
secured and in the process of collection.
When loans are placed on nonaccrual status, any accrued but uncollected
interest is reversed from current period interest income, and additional income
is recorded only as payments are received.
Loans are generally charged off at such time as the loan is classified
as a loss.   Loan origination fees, net
of direct underwriting costs, are deferred and amortized to income by use of a
method that approximates a level yield over the contractual lives of the
related loans. If a loan is paid off prior to maturity, then the remaining
unamortized deferred fee is immediately recognized to interest income.

The Bank defines a loan as impaired when it is
probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loans original effective interest rate or
based on the loans observable market price or the fair value of the collateral
if the loan is collateral dependent.
Since most of the Banks loans are collateral dependent, the calculation
of the impaired loans is generally based on the fair value of the collateral.
Income recognition on impaired loans conforms to the method the Bank uses for
income recognition on nonaccrual loans.
When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.   Nonaccrual loans are
reinstated to accrual status when improvements in the credit quality eliminate
doubt as to the full collectibility of both interest and principal.

59

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EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

Loans
Held for Sale

Loans held for sale are reported at the lower of cost
or estimated market value.  Gains or
losses on loan sales are recognized at the time of the sale and are determined
by the difference between net sale proceeds and the net book value of the loans
less the estimated fair value of any retained mortgage servicing rights.

Allowance
for Loan Losses

The allowance for loan losses is maintained at a level
deemed appropriate by management to provide for known losses as well as
unidentified losses in the loan portfolio. The allowance is based upon
managements assessment of various factors affecting the collectibility of the
loans, including current and projected economic conditions, past credit
experience, delinquency status, the value of the underlying collateral, if any,
and review of  the portfolio of loans
and commitments.

The allowance for loan losses is based on estimates,
and ultimate losses may vary from the current estimates. These estimates are
reviewed periodically and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. The allowance is
increased by provisions charged to expense and is reduced by net charge-offs.

Other
Real Estate Owned

Other real estate owned represents real estate
acquired through foreclosure and is carried at the lower of cost or fair value
less estimated selling costs.  There
were no other real estate held by the Company at December 31, 2007 and 2006.

Investment
in Affordable Housing

The Company is a limited partner in a limited
partnership that invests in low-income housing projects that qualify for
Federal and/or State income tax credits.
The investment is recorded in other assets on the balance sheet and is
accounted for using the equity method of accounting.

Loan
Sales and Servicing of SBA Loans

Servicing rights are recognized separately when they
are acquired through sale of loans.  For
sales of SBA loans prior to January 1, 2007, a portion of the cost of the loan
was allocated to the servicing right based on relative fair values.  The Company adopted SFAS No. 156, Accounting
for Servicing of Financial Assets, on January 1, 2007, for sales of SBA loans
beginning in 2007.  Servicing rights are
initially recorded at fair value with the income statement effect recorded in
gain on sale of loans.  Fair value is
based on a valuation that calculates the present value of estimated future cash
flows from the servicing assets.  The
valuation model uses assumptions that market participants would use in
estimating cash flows from servicing assets, such as the cost to service,
discount rates and prepayment speeds.
The Company compares the valuation model inputs and results to published
industry data in order to validate the model results and assumptions.  All classes of servicing assets are
subsequently measured using the amortization method which requires servicing
rights to be amortized into noninterest income in proportion to, and over the
period of, the estimate future net servicing income of the underlying
loans.

Servicing assets are evaluated for impairment based
upon the fair value of the rights as compared to the carrying amount.  Impairment is determined by stratifying
rights into groupings based on predominant risk characteristics, such as
interest rate, loan type and investor type.
For purposes of measuring impairment, the Company has identified each
servicing asset with the underlying loan being serviced.  A valuation allowance is recorded where the
fair value is below the carrying amount of the asset.  If the Company later determines that all or a portion of the
impairment no longer exists for a particular grouping, a reduction of the
allowance may be recorded as an increase to income.  The fair values of servicing rights are subject to significant
fluctuations as a result of changes in estimated and actual prepayment speeds
and changes in the discount rates.

60

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EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

Servicing fee income which is reported on the income
statement as servicing income is recorded for fees earned for servicing
loans.  The fees are based on a
contractual percentage of the outstanding principal and recorded as income when
earned.  The amortization of servicing

Premises
and Equipment

Furniture, equipment, and leasehold improvements are
recorded at cost and depreciated by the straight-line method over the shorter
of the estimated useful lives of the assets or lease terms.  Furniture and fixtures are depreciated over
5 to 8 years, and equipment is generally depreciated over 3 to 10 years.  Leasehold improvements are amortized over
the terms of the leases or their estimated useful lives, whichever is
shorter.  When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts, and any resulting gain or loss is
recognized in income for the period.
The cost of maintenance and repairs is charged to expense as
incurred.

Income
Taxes

The Company files its income taxes on a consolidated
basis with its subsidiaries.  The
Company accounts for income taxes in accordance with FAS 109, Accounting for
Income Taxes, as interpreted by FIN 48, resulting in two components of income
tax expense:  current and deferred.  Current income tax expense approximates taxes
to be paid or refunded for the current period.
The Company determines deferred income taxes using the balance sheet
method.  Under this method, the net
deferred tax asset or liability is based on the tax effects of the differences
between the book and tax bases of assets and liabilities, and recognizes
enacted changes in tax rates and laws in the period in which they occur.  Deferred income tax expense results from
changes in deferred tax assets and liabilities between periods.  Deferred tax assets are recognized subject
to management judgment that realization is more likely than not.  A tax position that meets the more likely
than not recognition threshold is measured to determine the amount of benefit
to recognize.  The tax position is
measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement.
Interest and penalties are recognized as a component of income tax
expense.

Comprehensive
Income

Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of comprehensive
income.

Off-Balance
Sheet Financial Instruments

Derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities are required
to be recognized as either assets or liabilities in the statements of financial
position and measures those instruments at fair value.  The Company does not currently utilize
derivative instruments in its operations and does not engage in hedging
activities.  However, in the ordinary
course of business, the Bank enters into off-balance sheet financial
instruments consisting of commitments to extend credit. These financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.

61

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EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

Earnings
Per Share (EPS)

Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company.

Salary
Continuation Plan

The Company has entered into salary continuation plans
with certain executive officers.    The
liability is based on estimates involving life expectancy, length of time
before retirement, appropriate discount rate, forfeiture rates and expected
benefit levels.  Should these estimates
prove materially different from actual results, the Company could incur
additional or reduced future expense.

Share-Based
Compensation

On January 1, 2006, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment, or SFAS No. 123R, using the modified prospective method which
requires that compensation cost be recognized for all share-based payment
awards, (i.e., unvested stock options), based on the grant-date fair
value.  Prior to January 1, 2006, the
Company accounted for share-based payments, under the recognition and
measurement provisions of Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, or Opinion 25, as permitted by SFAS
No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123.  Under the provisions of Opinion 25,
compensation cost for stock options was not recognized for periods prior to
January 1, 2006, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.

Reclassifications

Certain amounts in prior years financial statements
have been reclassified to conform with the current presentation.  These reclassifications have no effect on
previously reported net income.

Current
Accounting Pronouncements

In February 2006, the Financial Accounting Standards
Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140.  SFAS No. 155 simplifies accounting for
certain hybrid instruments currently governed by SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, by allowing fair value remeasurement
of hybrid instruments that contain an embedded derivative that otherwise would
require bifurcation.  SFAS No. 155 also
eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets, which provides such beneficial interests are not subject to SFAS No.
133.  SFAS No. 155 amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities  a Replacement of FASB Statement No. 125, by eliminating the
restriction on passive derivative instruments that qualify special-purpose
entity may hold.  This statement was
effective for financial instruments acquired or issued after the beginning of
the fiscal year 2007 and was adopted January 1, 2007.  The adoption of this statement did not have a material impact on
the financial condition, results of operations or cash flows.

62

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EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

In March 2006, FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets (SFAS No. 156), which amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.  SFAS No. 156 requires
an entity to separately recognize servicing assets and servicing liabilities
and to report these balances at fair value upon inception.  Future methods of assessing values can be
performed using either the amortization or fair value measurement
techniques.  SFAS No. 156 was adopted on
January 1, 2007 and did not have a material impact on the financial condition,
results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation
(FIN) No. 48, Accounting for Uncertainty in Income Taxes  an interpretation
of SFAS No. 109.  FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing in
the financial statements tax positions taken or expected to be taken on a tax
return, including a decision whether to file or not to file in a particular
jurisdiction.  FIN 48 was adopted on
January 1, 2007 and did not have a material impact on the Companys financial
condition.

In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157).  SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements.  SFAS 157 is
effective for the Company on January 1, 2008 and is not expected to have a significant
impact on the Companys financial statements.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of SFAS No. 87, 88 106, and 132 (R) (SFAS 158).  SFAS 158 requires an employer to recognize
the overfunded or underfunded status of defined benefit postretirement plans as
an asset or a liability in its statement of financial position.  The funded status is measured as the
difference between plan assets at fair value and the benefit obligation (the
projected benefit obligation for pension plans or the accumulated benefit
obligation for other postretirement benefit plans).  An employer is also required to measure the funded status of a
plan as of the date of its year-end statement of financial position with
changes in the funded status recognized through comprehensive income.  SFAS 158 also requires certain disclosures
regarding the effects on net periodic benefit cost for the next fiscal year
that arise from delayed recognition of gains or losses, prior service costs or
credits, and the transition asset or obligation.  The Company was required to recognize the funded status of its
defined benefit postretirement benefit plans in its financial statements for
the year ended December 31, 2006.  The
requirement to measure plan assets and benefit obligations as of the date of
the year-end statement of financial position is effective for the Companys
financial statements beginning with the year ended after December 31,
2008.  SFAS 158 is not expected to have
a significant impact on the Companys financial statements.

In September 2006, the SEC staff issued Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements.  SAB 108 provides guidance
on quantifying and evaluating the materiality of unrecorded misstatements.  It requires the use of both the iron
curtain and rollover approaches in quantifying and evaluating the
materiality of a misstatement.  Under
the iron curtain approach the error is quantified as the cumulative amount by
which the current year balance sheet is misstated.  The rollover approach quantifies the error as the amount by which
the current year income statement is misstated.  If either approach results in a material misstatement, financial
statement adjustments are required.  SAB
108 was effective for the year ended December 31, 2006.  At adoption, there was no impact on the
Companys financial position or results of operations.

63

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EPIC
BANCORP AND SUBSIDIARIES

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

DECEMBER
31, 2007 AND 2006

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of SFAS No. 115 (SFAS 159).
This standard permits entities to choose to measure many financial
assets and liabilities and certain other items at fair value.  An enterprise will report unrealized gains
and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date.
The fair value option may be applied on an instrument-by-instrument
basis, with several exceptions, such as those investments accounted for by the
equity method, and once elected, the option is irrevocable unless a new
election date occurs.  The fair value
option can be applied only to entire instruments and not to portions
thereof.  SFAS 159 is effective as of
the beginning of an entitys fiscal year beginning after November 15,
2007.  Early adoption is permitted as of
the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS  No. 157, Fair Value
Measurements.  Management is currently
evaluating the effects of adopting SFAS No. 159 on its consolidated financial
statements.

In November 2007, the Securities and Exchange
Commission staff issued Staff Accounting bulletin No. 109 (SAB 109).  SAB 109 provides revised guidance on the
valuation of written loan commitments accounted for at fair value through
earnings.  Former guidance under SAB 105
indicated that the expected net future cash flows related to the associated
servicing of the loan should not be incorporated into the measurement of the
fair value of a derivative loan commitment.
The new guidance under SAB 109 requires these cash flows to be included
in the fair value measurement, and the SAB requires this view to be applied on
a prospective basis to derivative loan commitments issued or modified in the
first quarter of 2008.  The Company does
not expect the application of SAB 109 in 2008 will have a significant effect on
its consolidated financial statements.

In December 2007, the FASB issued SFAS 141, Revised
2007 (SFAS 141R), Business Combinations.
SFAS 141Rs objective is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its
effects.  SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after December 31, 2008.  The Company
does not expect the implementation of SFAS 141R to have a material impact on
its consolidated financial statements.

In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements.  SFAS 160s objective is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 shall be effective for fiscal years
and interim periods within those fiscal years, beginning on or after December
15, 2008.  The Company does not expect
the implementation of SFAS 160 to have a material impact on its consolidated
financial statements.

Note 2: Investment Securities

At December 31, 2007 and 2006 the investment securities portfolio
was comprised of securities classified as available-for-sale and
heldto-maturity, in accordance with SFAS No. 115, resulting in investment
securities available-for-sale being carried at fair value and investment
securities held-to-maturity being carried at cost, adjusted for amortization of
premiums and accretions of discounts.

64

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The amortized cost, unrealized gains and
losses, and estimated fair value of the available-for-sale investment  securities as of  December 31, 2007, follows:

|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|---------------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                                   |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|Mortgage backed securities         |  | $                | 15,687,485 |                            | $ | 179,925                     |  | $                        | (132,168 | ) | $ | 15,735,242 | 
|U.S. Agency Securities             |  |                  | 7,409,372  |                            |   | 64,657                      |  |                          |         |   |   | 7,474,029  | 
|Municipal Securities               |  |                  | 5,798,501  |                            |   | 98,107                      |  |                          | (17,223  | ) |   | 5,879,385  | 
|Collateralized Mortgage Obligation |  |                  | 11,420,191 |                            |   | 152,009                     |  |                          |         |   |   | 11,572,200 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Total Available-for-sale           |  | $                | 40,315,549 |                            | $ | 494,698                     |  | $                        | (149,391 | ) | $ | 40,660,856 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

The amortized
cost, unrealized gains and losses, and estimated fair value of the
held-to-maturity investment securities as of December 31, 2007, follows:

|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|-------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                           |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                           |  |                  |            |                            |   |                             |  |                          |         
|                           |  |                  |            |                            |   |                             |  |                          |         
|Mortgage backed securities |  | $                | 14,514,528 |                            | $ | 6,973                       |  | $                        | (196,695 | ) | $ | 14,324,806 | 
|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

The amortized
cost, unrealized gains and losses, and estimated fair value of the
available-for-sale investment securities as of December 31, 2006, follows:

|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|---------------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                                   |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|                                   |  |                  |            |                            |   |                             |  |                          |         
|Available-for-sale                 |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Mortgage backed securities         |  | $                | 13,201,781 |                            | $ | 26,842                      |  | $                        | (239,121 | ) | $ | 12,989,502 | 
|U.S. Agency Securities             |  |                  | 5,858,456  |                            |   | 5,698                       |  |                          |         |   |   | 5,864,154  | 
|Collateralized Mortgage Obligation |  |                  | 7,659,852  |                            |   | 10,345                      |  |                          | (7,966   | ) |   | 7,662,231  | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|Total Available-for-sale           |  | $                | 26,720,089 |                            | $ | 42,885                      |  | $                        | (247,087 | ) | $ | 26,515,887 | 
|                                   |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

The amortized
cost, unrealized gains and losses, and estimated fair value of the
held-to-maturity investment securities as of December 31, 2006, follows:

|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 
|-------------------------- |  | ---------------- | ---------- | -------------------------- | - | --------------------------- |  | ------------------------ | -------- | - | - | ---------- | 
|                           |  | Amortized
  Cost |            | Gross
  Unrealized
  Gains |   | Gross
  Unrealized
  Losses |  | Estimated
  Fair
  Value |         
|                           |  |                  |            |                            |   |                             |  |                          |         
|                           |  |                  |            |                            |   |                             |  |                          |         
|Mortgage backed securities |  | $                | 21,823,305 |                            | $ |                            |  | $                        | (388,828 | ) | $ | 21,434,477 | 
|                           |  |                  |            |                            |   |                             |  |                          |          |   |   |            | 

65

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

The amortized
cost and fair values of investment securities availablefor-sale and
held-to-maturity at December 31, 2007, by expected maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. In addition, such factors as prepayments and interest
rates may affect the yield on the carrying value of mortgage-backed securities.
At December 31, 2007 and 2006, the Company had no high-risk collateralized
mortgage obligations as defined by regulatory guidelines.

|                          |  |                |  |                  |            |              |   |            | 
|------------------------- |  | -------------- |  | ---------------- | ---------- | ------------ | - | ---------- | 
|                          |  |                |  | Securities       |           
|                          |  |                |  |                  |           
|                          |  | Maturity       |  | Amortized
  Cost |            | Fair
  Value |  
|                          |  |                |  |                  |            |              |  
|Available-for-Sale        |  | 1 year or less |  | $                | 3,996,343  |              | $ | 4,012,251  | 
|                          |  | 1 to 5 years   |  |                  | 11,640,848 |              |   | 11,697,695 | 
|                          |  | 5 to 10 years  |  |                  | 15,508,880 |              |   | 15,639,866 | 
|                          |  | Over 10 years  |  |                  | 9,169,478  |              |   | 9,311,044  | 
|                          |  |                |  |                  |            |              |   |            | 
|                          |  |                |  | $                | 40,315,549 |              | $ | 40,660,856 | 
|                          |  |                |  |                  |            |              |   |            | 
|                          |  |                |  |                  |            |              |   |            | 
|Held-to-maturity, at cost |  | 1 year or less |  | $                | 503,249    |              | $ | 506,485    | 
|                          |  | 1 to 5 years   |  |                  | 9,877,366  |              |   | 9,746,724  | 
|                          |  | 5 to 10 years  |  |                  |           |              |   |           | 
|                          |  | Over 10 years  |  |                  | 4,133,913  |              |   | 4,071,597  | 
|                          |  |                |  |                  |            |              |   |            | 
|                          |  |                |  | $                | 14,514,528 |              | $ | 14,324,806 | 
|                          |  |                |  |                  |            |              |   |            | 

The Company
held sixteen and twenty one investment securities that were in a loss position
and are summarized and classified according to the duration of the loss period
for 2007 and 2006, respectively, as outlined below.

66

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|-------------------------- |  | ---------------------- | --------- | ---------------------- | - | ---------- | - | --------------- | --------- |  | - | -------- | -
|                           |  | December 31, 2007      |          
|                           |  |                        |          
|                           |  | < 12 continuous months |           | > 12 continuous months |  
|                           |  |                        |           |                        |  
|                           |  | Fair Value             |           | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |          
|                           |  |                        |           |                        |   |            |   |                 |          
|Available-for-Sale         |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|Mortgage backed securities |  | $                      |          |                        | $ |           |   | $               | 7,566,919 |  | $ | (132,168 | )
|Municipal Securities       |  |                        | 1,036,240 |                        |   | (17,223    | ) |                 |          |  |   |         |  
|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  
|Total Available-for-Sale   |  | $                      | 1,036,240 |                        | $ | (17,223    | ) | $               | 7,566,919 |  | $ | (132,168 | )
|                           |  |                        |           |                        |   |            |   |                 |           |  |   |          |  

|                           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  
|-------------------------- |  | ---------------------- | ------ | ---------------------- | - | ---------- | - | --------------- | ---------- |  | - | -------- | -
|                           |  | December 31, 2007      |       
|                           |  |                        |       
|                           |  | < 12 continuous months |        | > 12 continuous months |  
|                           |  |                        |        |                        |  
|                           |  | Fair Value             |        | Unrealized Loss        |   | Fair Value |   | Unrealized Loss |           
|                           |  |                        |        |                        |   |            |   |                 |           
|Held-to-Maturity           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  
|Mortgage-Backed Securities |  | $                      | 81,241 |                        | $ | (108       | ) | $               | 12,251,385 |  | $ | (196,587 | )
|                           |  |                        |        |                        |   |            |   |                 |            |  |   |          |  

|                                   |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|---------------------------------- |  | ------------------------ | - | ------------------------ | - | ------------ |  | ----------------- | ---------- |  | - | -------- | -
|                                   |  | December
  31, 2006      |  
|                                   |  |                          |  
|                                   |  | <
  12 continuous months |   | >
  12 continuous months |  
|                                   |  |                          |   |                          |  
|                                   |  | Fair
  Value             |   | Unrealized
  Loss        |   | Fair
  Value |  | Unrealized
  Loss |           
|                                   |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|Available-for-Sale                 |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|U.S. Agency Securities             |  |                          |   |                          |   |              |  | $                 | 1,994,923  |  | $ | (154     | )
|Mortgage backed securities         |  |                          |   |                          |   |              |  |                   | 9,187,054  |  |   | (230,969 | )
|Collateralized Mortgage Obligation |  |                          |  |                          |   |             |  |                   | 4,119,628  |  |   | (15,964  | )
|                                   |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|                                   |  | $                        |  |                          | $ |             |  | $                 | 15,301,605 |  | $ | (247,087 | )
|                                   |  |                          |   |                          |   |              |  |                   |            |  |   |          |  

|                           |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|-------------------------- |  | ------------------------ | - | ------------------------ | - | ------------ |  | ----------------- | ---------- |  | - | -------- | -
|                           |  | December
  31, 2006      |  
|                           |  |                          |  
|                           |  | <
  12 continuous months |   | >
  12 continuous months |  
|                           |  |                          |   |                          |  
|                           |  | Fair
  Value             |   | Unrealized
  Loss        |   | Fair
  Value |  | Unrealized
  Loss |           
|                           |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|Held-to-Maturity           |  |                          |   |                          |   |              |  |                   |            |  |   |          |  
|Mortgage-Backed Securities |  | $                        |  |                          | $ |             |  | $                 | 21,434,477 |  | $ | (388,828 | )
|                           |  |                          |   |                          |   |              |  |                   |            |  |   |          |  

67

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Management
periodically evaluates each investment security in an unrealized loss position
to determine if the impairment is temporary or other than temporary. Management
has determined that no investment security is impaired due to credit quality
and no investment security is other-than-temporally impaired. This temporary
impairment is attributable to general changes in short-term interest rates as
measured by the U.S. Treasury yield curve. The duration of this impairment was
for a period of less than twelve months.

Proceeds from sales of investment
securities available-for-sale during 2007, 2006 and 2005 were $0, $2,036,120
and $0, respectively. In 2007, 2006 and 2005, gross gains on those sales were
$0, respectively and gross losses on those sales were $0, $1,820 and $0,
respectively. Proceeds from principal reductions of mortgage-backed securities
in 2007, 2006 and 2005 were $12,951,039, $11,794,080 and $18,341,690,
respectively. Included in stockholders equity at December 31, 2007 and 2006
were $207,184 and $122,520 of net unrealized gains and net unrealized losses
(net of $219,803 estimated tax expense for 2007 and net of $66,391 estimated
tax benefit for 2006).

Note 3: Loans and Allowance for Loan Losses

The majority
of the Banks loan activity is with customers located in California, primarily
in the Northern California region. Although the Bank has a diversified loan
portfolio, primarily all mortgage loans are collateralized by real estate
located in Northern California. Approximately 89.8% of the loans are secured by
real estate.

Outstanding
loans at December 31 consisted of the following:

|                                 |  |      |             |      |   |             | 
|-------------------------------- |  | ---- | ----------- | ---- | - | ----------- | 
|                                 |  | 2007 |             | 2006 |  
|                                 |  |      |             |      |  
|                                 |  |      |             |      |   |             | 
|One-to-four
  family residential |  | $    | 22,098,395  |      | $ | 16,742,085  | 
|Multifamily
  residential        |  |      | 123,077,151 |      |   | 120,286,485 | 
|Commercial
  real estate         |  |      | 246,256,927 |      |   | 220,048,837 | 
|Land                             |  |      | 9,369,137   |      |   | 8,316,330   | 
|Construction
  real estate       |  |      | 28,987,172  |      |   | 33,188,054  | 
|Consumer
  loans                 |  |      | 2,045,327   |      |   | 2,544,672   | 
|Commercial,
  non real estate    |  |      | 36,250,405  |      |   | 23,553,356  | 
|                                 |  |      |             |      |   |             | 
|                                 |  |      | 468,084,514 |      |   | 424,679,819 | 
|Net deferred loan costs          |  |      | 1,528,972   |      |   | 1,326,685   | 
|                                 |  |      |             |      |   |             | 
|                                 |  | $    | 469,613,486 |      | $ | 426,006,504 | 
|                                 |  |      |             |      |   |             | 

At December
31, 2007 and 2006 the Bank had two and three, respectively, loans with fixed
rates of interest. There were no loans held for sale at December 31, 2007 and
2006.

Net
unamortized premiums on purchased loans amounted to $305,961 and $340,450 for
2007 and 2006, respectively.

The Bank also
originates Small Business Administration (SBA) loans. Depending on its
current asset/liability strategy, the Bank may sell the guaranteed portion of
the SBA loans to governmental agencies and institutional investors. The Bank
generally receives a premium in excess of the adjusted carrying value of the
loan at the time of sale. At December 31, 2007 and 2006 the unpaid balance of
SBA loans not sold totaled $52,624,535 and $35,395,000, respectively and are
included in commercial real estate loans.

68

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Nonaccruing
loans totaled $466,000 and $0 at December 31, 2007 and 2006, respectively. As
of December 31, 2007, the one loan on nonaccrual was classified as impaired. If
interest on nonaccrual loans had been recognized at the original interest rates,
interest income would have increased $10,188, $0 and $14,123 for the years
ended 2007, 2006 and 2005, respectively. No additional funds are committed to
be advanced in connection with impaired loans.

The following is a summary of
information pertaining to impaired loans:

|                                                  |  |      |         |      |   |      |  |   |        | 
|------------------------------------------------- |  | ---- | ------- | ---- | - | ---- |  | - | ------ | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|                                                  |  | 2007 |         | 2006 |   | 2005 | 
|                                                  |  |      |         |      |   |      | 
|Impaired loans with a valuation allowance         |  | $    |        |      | $ |     |  | $ |       | 
|Impaired loans without a valuation allowance      |  |      | 466,080 |      |   |     |  |   | 35,096 | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|Total impaired loans                              |  | $    | 466,080 |      | $ |     |  | $ | 35,096 | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|Valuation allowance related to impaired loans     |  | $    |        |      | $ |     |  | $ |       | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|Average recorded investment in impaired loans     |  | $    | 729,355 |      | $ |     |  | $ | 91,500 | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|Cash receipts applied to reduce principal balance |  | $    |        |      | $ |     |  | $ |       | 
|                                                  |  |      |         |      |   |      |  |   |        | 
|Interest income recognized for cash payments      |  | $    |        |      | $ |     |  | $ |       | 
|                                                  |  |      |         |      |   |      |  |   |        | 

At December
31, 2007 and 2006, the Bank had no loans past due 90 days or more in principal
or interest and still accruing interest. The Bank had no loans classified as
troubled debt restructuring for December 31, 2007 and 2006.

A summary of
activity in the allowance for loan losses is as follows:

|                           |  |      |           |      |   |           |  |   |           | 
|-------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                           |  | 2007 |           | 2006 |   | 2005      | 
|                           |  |      |           |      |   |           | 
|Balance, Beginning of Year |  | $    | 4,671,596 |      | $ | 4,232,124 |  | $ | 3,600,433 | 
|Provision for loan losses  |  |      | 243,956   |      |   | 439,472   |  |   | 631,691   | 
|Charge Offs                |  |      | (999      | )    |   |          |  |   |          | 
|                           |  |      |           |      |   |           |  |   |           | 
|Balance, End of Year       |  | $    | 4,914,553 |      | $ | 4,671,596 |  | $ | 4,232,124 | 
|                           |  |      |           |      |   |           |  |   |           | 

Note 4: Loan Servicing

Loans serviced
for others are not included in the accompanying balance sheets. The unpaid
principal balances of loans serviced for others were $31,282,950 and
$28,982,541 at December 31, 2007 and 2006, respectively. Included in these
amounts are SBA loans sold to governmental agencies and institutional
investors. At December 31, 2007 and 2006, the unpaid principal balance of SBA
loans serviced for others totaled $22,784,269 and $19,446,201, respectively.

Activity for
SBA servicing rights, included with other assets on the balance sheet, that are
measured at amortized cost and related valuation allowance, fair value and key
assumptions used to estimate the fair value are as follows:

69

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EPIC BANCORP AND SUBSIDIARIESNOTES TO
CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2007 AND 2006

The following
summarizes servicing assets capitalized and amortized:

|                                       |  |                                   |         |                    |   |                    |   |   |         |  
|-------------------------------------- |  | --------------------------------- | ------- | ------------------ | - | ------------------ | - | - | ------- | -
|                                       |  | For
  the year ended December 31, |         |                    |  
|                                       |  |                                   |         |                    |  
|                                       |  | 2007                              |         | 2006               |   | 2005               |  
|                                       |  |                                   |         |                    |   |                    |  
|                                      
|Carrying Amount at
  Beginning of Year |  | $                                 | 250,031 |                    | $ | 155,186            |   | $ | 81,411  |  
|Additions from SBA Loan
  Sales        |  |                                   | 84,234  |                    |   | 116,665            |   |   | 111,901 |  
|Amortization                           |  |                                   | (60,627 | )                  |   | (21,820            | ) |   | (38,126 | )
|                                       |  |                                   |         |                    |   |                    |   |   |         |  
|                                       |  |                                   | 273,638 |                    |   | 250,031            |   |   | 155,186 |  
|Less Valuation Allowance               |  |                                   |        |                    |   |                   |   |   |        |  
|Carrying Amount at End of
  Year       |  | $                                 | 273,638 |                    | $ | 250,031            |   | $ | 155,186 |  
|                                       |  |                                   |         |                    |   |                    |   |   |         |  
|Fair Value, Beginning of
  Year        |  |                                   | 392,344 |                    |   | 228,434            |   |   | 97,902  |  
|Fair Value, End of Year                |  |                                   | 367,789 |                    |   | 392,344            |   |   | 228,434 |  
|                                       |  |                                   |         |                    |   |                    |   |   |         |  
|Discount Rates                         |  | 8.00%
  to 8.75%                  |         | 8.50%
  to 9.25%   |   | 6.50%
  to 8.25%   |  
|Prepayment Speeds                      |  | 15.00%
  to 20.00%                |         | 15.00%
  to 20.00% |   | 15.00%
  to 20.00% |  
|                                       |  |                                   |         |                    |   |                    |   |   |         |  

Note 5: Premises and Equipment

Premises and
equipment at December 31, 2007 and 2006 consisted of the following:

|                                                 |  |      |           |      |   |           | 
|------------------------------------------------ |  | ---- | --------- | ---- | - | --------- | 
|                                                 |  | 2007 |           | 2006 |  
|                                                 |  |      |           |      |  
|Furniture
  and equipment                        |  | $    | 2,615,503 |      | $ | 2,615,044 | 
|Leasehold
  improvements                         |  |      | 5,392,318 |      |   | 5,248,527 | 
|                                                 |  |      |           |      |   |           | 
|                                                 |  |      | 8,007,821 |      |   | 7,863,571 | 
|Less
  accumulated depreciation and amortization |  |      | 3,357,057 |      |   | 2,588,656 | 
|Construction-in-progress                         |  |      | 3,107     |      |   |          | 
|                                                 |  |      |           |      |   |           | 
|Total                                            |  | $    | 4,653,871 |      | $ | 5,274,915 | 
|                                                 |  |      |           |      |   |           | 

Depreciation
and amortization expense included in noninterest expense amounted to $908,862,
$825,128 and $538,495 in 2007, 2006 and 2005, respectively.

Note 6: Investment in Affordable Housing

In 2006, the
Company agreed to invest $2,000,000 in a limited liability partnership operating
qualified affordable housing project to receive tax benefits. In 2007, the
Company agreed to invest $2,000,000 for another limited liability partnership
operating qualified affordable housing project to receive tax benefits. These
low-income housing credit (LIHC) investments provide tax benefits to
investors in the form of tax deductions from operating losses and tax credits.
Based upon the Companys contribution as stated above, in 2006 and 2007 the
Company will receive 3.84% and 6.13%, respectively interest in these
investments.

70

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

As of December
31, 2007 and 2006 $2,217,379 and $561,088, respectively, has been funded with a
commitment to fund an additional $1,221,533 and $1,438,912, respectively for
the purposes of obtaining tax credits and for Community Reinvestment Act
purposes. The investment is recorded in other assets on the balance sheet and
is accounted for using the equity method of accounting. Under the equity method
of accounting, the Company recognizes its ownership share of the profits and
losses of the fund. This investment is regularly evaluated for impairment by
comparing the carrying value to the remaining tax credits expected to be
received. Tax credits received from the fund are accounted for in the period
earned (the flow-through method) and are included in income as a reduction of
income tax expense.

The
partnership must meet regulatory requirements for affordable housing for a
minimum 15-year compliance period to fully utilize the tax credits. If the
partnership ceases to qualify during the compliance period, the credits may be
denied for any period in which the projects are not in compliance and a portion
of the credits previously taken is subject to recapture with interest.

Note 7: Deposits

Following is a
summary of deposits at December 31, 2007 and 2006:

|                                        |  |         |             |               |       |                           |  |      |         |  |               |   |                           |  |       |   |  |      |   | 
|--------------------------------------- |  | ------- | ----------- | ------------- | ----- | ------------------------- |  | ---- | ------- |  | ------------- | - | ------------------------- |  | ----- | - |  | ---- | - | 
|                                        |  | 2007    |             |               | 2006  |                          
|                                        |  |         |             |               |       |                          
|                                        |  | Balance |             | Deposit
  Mix |       | Weighted
  Average
  Rate |  |      | Balance |  | Deposit
  Mix |   | Weighted
  Average
  Rate | 
|                                        |  |         |             |               |       |                           |  |      |         |  |               |   |                           | 
|Noninterest-bearing
  deposits          |  | $       | 23,254,723  |               | 6.4   | %                         |  | 0.00 | %       |  |               | $ | 18,134,565                |  | 4.9   | % |  | 0.00 | % | 
|Interest-bearing checking
  deposits    |  |         | 6,874,465   |               | 1.9   | %                         |  | 0.18 | %       |  |               |   | 8,432,730                 |  | 2.3   | % |  | 0.61 | % | 
|Money Market and savings
  deposits     |  |         | 138,275,392 |               | 38.3  | %                         |  | 3.55 | %       |  |               |   | 150,011,698               |  | 40.6  | % |  | 4.48 | % | 
|Certificates of deposit
  over $100,000 |  |         | 110,587,625 |               | 30.6  | %                         |  | 4.72 | %       |  |               |   | 129,011,093               |  | 34.9  | % |  | 5.14 | % | 
|Certificates of deposit
  < $100,000    |  |         | 82,182,492  |               | 22.8  | %                         |  | 4.77 | %       |  |               |   | 64,214,598                |  | 17.4  | % |  | 4.97 | % | 
|                                        |  |         |             |               |       |                           |  |      |         |  |               |   |                           |  |       |   |  |      |   | 
|Total deposits                          |  | $       | 361,174,697 |               | 100.0 | %                         |  | 3.89 | %       |  |               | $ | 369,804,684               |  | 100.0 | % |  | 4.49 | % | 
|                                        |  |         |             |               |       |                           |  |      |         |  |               |   |                           |  |       |   |  |      |   | 
|                                        |  |         |             |               |       |                           |  |      |         |  |               |   |                           |  |       |   |  |      |   | 

Interest
expense on time certificates of deposits greater than $100,000 was $4,673,578,
$4,711,278 and $1,319,296 for 2007, 2006 and 2005, respectively.

At December
31, 2007, the scheduled maturities of total time deposits are as follows:

|               |  |  |       |             | 
|-------------- |  |  | ----- | ----------- | 
|Year
  Ending  |  |  |       |             | 
|December
  31, |  |  | Total |            
|               |  |  |       |            
|2008           |  |  | $     | 168,578,697 | 
|2009           |  |  |       | 10,090,166  | 
|2010           |  |  |       | 4,675,388   | 
|2011           |  |  |       | 5,023,029   | 
|2012           |  |  |       | 4,402,837   | 
|               |  |  |       |             | 
|               |  |  | $     | 192,770,117 | 
|               |  |  |       |            

71

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Brokered
deposits totaled $32,082,206 and $13,123,962 at December 31, 2007 and 2006,
respectively, and are included as a component of certificates of deposit.

Note 8: Borrowings

Total FHLB
borrowings were $146,507,500 and $86,250,777 at December 31, 2007 and 2006. The
following table summarizes the borrowings:

|                              |  |  |                         |      |         |   |             | 
|----------------------------- |  |  | ----------------------- | ---- | ------- | - | ----------- | 
|Year
  Ending 
  December 31, |  |  | Weighted
  Average Rate |      | Balance |  
|                              |  |  |                         |      |         |  
|2008                          |  |  |                         | 3.77 | %       | $ | 34,422,500  | 
|2009                          |  |  |                         | 4.55 | %       |   | 42,000,000  | 
|2010                          |  |  |                         | 4.52 | %       |   | 48,090,000  | 
|2011                          |  |  |                         | 4.69 | %       |   | 19,995,000  | 
|2012                          |  |  |                         | 4.64 | %       |   | 2,000,000   | 
|                              |  |  |                         |      |         |   |             | 
|                              |  |  |                         | 4.43 | %       | $ | 146,507,500 | 
|                              |  |  |                         |      |         |   |             | 

The maximum
amount outstanding at any month end for FHLB borrowings was $146,507,500 and
$130,068,000, during 2007 and 2006, respectively.

Short-term
borrowings consist of Federal Funds purchased and borrowings from the Federal
Home Loan Bank of San Francisco (FHLB). The Company maintains collateralized
lines of credit with the FHLB. The Company pledges both loans and investment
securities to FHLB as needed to secure borrowings. Loans with a borrowing
capacity of $228,158,068 have been pledged to secure advances of $128,085,000
and investment securities with a borrowing capacity of $25,309,353 have been
pledged to secure advances of $18,422,500. Advances have a fixed rate of
interest and bear interest at a weighted-average rate of 4.38% percent and
range in maturity from within one day to five years. At December 31, 2007 and
2006, the Bank had unused capacity with the FHLB of $106,959,921 and
$127,049,327, respectively. The Company also has available unused unsecured
lines of credit totaling $20.0 million for Federal Funds transactions at
December 31, 2007.

On June 27,
2002, the Company issued 30-year, $10,310,000 junior subordinated debentures.
The variable rate debentures (dividends issued at a quarterly LIBOR rate plus
3.65%, not to exceed 12% prior to June 30, 2007) matures June 30, 2032 but is
callable after September 30, 2007. The debentures were issued in concurrence
with the Cumulative Trust Preferred Securities (the Trust Preferred Securities)
of the San Rafael Capital Trust I, a wholly owned non-consolidated subsidiary
of the Company. Proceeds of the Trust Preferred Securities were invested in the
junior subordinated debentures issued by the Company. The Company has the
right, assuming no default has occurred, to defer payments of interest on the
junior subordinated debentures at any time for a period not to exceed ten
consecutive semi-annual periods. The debenture is subordinated to the claims of
depositors and other creditors of the Bank. In October 2007, the Company paid
off the $10.3 million of the debentures.

During the
second quarter of 2006, the Bank issued a 30-year, $3,093,000 variable rate
junior subordinated debentures. The debentures were issued in concurrence with
the Cumulative Trust Preferred Securities (the Trust Preferred Securities) of
the San Rafael Capital Trust II, a wholly owned non-consolidated subsidiary of
the Company. The securities mature on September 1, 2036. The junior
subordinated debentures issued by the Trust is redeemable in whole or in part
on or after September 1, 2011, or at any time in whole, but not in part, upon
the occurrence of certain events. The interest rate on the debentures is paid
quarterly at the three-month LIBOR plus 175 bps. The debenture is subordinated
to the claims of depositors and other creditors of the Bank. As of December 31,
2007, the interest rate on the junior subordinated debenture was 6.87%.

72

---



EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

During the
third quarter of 2007, the Bank issued a 30-year, $10,310,000 variable rate
junior subordinated debentures. The debentures were issued in concurrence with
the Cumulative Trust Preferred Securities (the Trust Preferred Securities) of
the San Rafael Capital Trust III, a wholly owned non-consolidated subsidiary of
the Company. The proceeds for this security was used to pay off the debentures
issued in 2002. The security matures on December 1, 2037 but is callable on
December 1, 2012. The interest rate on the debenture is paid quarterly at the
three-month LIBOR plus 144 basis points. The debenture is subordinated to the
claims of deposits and other creditors of the Bank. As of December 30, 2007,
the interest rate was 6.56%.

The Securities
are included in Tier 1 capital for regulatory capital adequacy determination
purposes, subject to certain limitations. The debentures are subordinated to
the claims of depositors and other creditors of the Bank. The Company fully and
unconditionally guarantees the obligations of the Trust with respect to the
issuance of the Securities.

Note 9: Benefit Plans

Salary Continuation Plan

The Salary
Continuation Plan was established in 2002 for a key employee to provide
incentive for the employee to continue the employees current capacity. The
Plan is intended to be an unfunded deferred compensation plan for a select
group of management or highly compensated employees. In 2003, an additional
employee was added to the Plan. The benefit under this plan for the two key
employees would be equal to payments of $100,000 each per year commencing on
January 1, 2005 and January 1, 2015, respectively, for a period of 15 years.
The Bank has determined the net present value of both obligations to be
$1,177,910 and $1,142,224 for 2007 and 2006, respectively, assuming a discount
rate of seven percent, and has a recorded current year expense of $75,900 for
2007, 2006 and 2005, respectively.

401(k) Savings Plan

The Company
has a 401(k) tax deferred savings plan which commenced on January 1996 and is
available to all employees. Under the plan, all eligible employees may elect to
defer a percentage of their annual salary, subject to limitations imposed by
federal tax law. The Company matches the employee deferrals at a rate set by
the Board of Directors. Matching contributions vest immediately after 90 days
of employment with the Company. The Bank contributed $182,465, $193,695, and
$131,104 to the plan in 2007, 2006 and 2005, respectively and are included in
salaries and benefits.

Note 10: Bank Owned Life Insurance

In April 2007,
the Bank has purchased life insurance policies on the lives of certain officers
of the Bank ($10,387,374 cash surrender value at December 31, 2007) to finance
employee benefit programs. The investment in the Bank owned life insurance
(BOLI) policies are reported in other assets at the cash surrender value of
the policies. The cash surrender value includes both the Banks original
premiums invested in the life insurance policies and the accumulated accretion
of policy income since inception of the policies. Income of $387,374 was
recognized on the life insurance policies during 2007 and is reported in other
non-interest income.

73

---



EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Note 11: Fair Value of Financial Instruments

SFAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 2007 and 2006. SFAS No. 107 defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.          The
estimated fair values of the Companys financial instruments were as follows:

|                                                          |  |                   |             |              |   |                   |  |              |             |  |   |             | 
|--------------------------------------------------------- |  | ----------------- | ----------- | ------------ | - | ----------------- |  | ------------ | ----------- |  | - | ----------- | 
|                                                          |  | 2007              |             | 2006         |  
|                                                          |  |                   |             |              |  
|                                                          |  | Carrying
  Amount |             | Fair
  Value |   | Carrying
  Amount |  | Fair
  Value |            
|                                                          |  |                   |             |              |   |                   |  |              |            
|Financial assets:                                         |  |                   |             |              |   |                   |  |              |             |  |   |             | 
|Cash and cash equivalents                                 |  | $                 | 5,024,500   |              | $ | 5,024,500         |  | $            | 12,276,034  |  | $ | 12,276,034  | 
|Investment securities                                     |  |                   | 55,175,384  |              |   | 61,922,000        |  |              | 48,339,192  |  |   | 47,950,365  | 
|Interest-bearing deposits in other financial
institutions |  |                   | 627,387     |              |   | 627,387           |  |              | 987,305     |  |   | 987,305     | 
|Federal Home Loan Bank restricted
stock                   |  |                   | 6,885,900   |              |   | 6,885,900         |  |              | 5,891,900   |  |   | 5,891,900   | 
|Pacific Coast Bankers Bank stock                         |  |                   | 50,000      |              |   | 50,000            |  |              | 50,000      |  |   | 50,000      | 
|Loans receivable, net                                     |  |                   | 464,698,933 |              |   | 479,687,447       |  |              | 421,334,908 |  |   | 424,595,404 | 
|Bank Owned Life Insurance                                 |  |                   | 10,387,374  |              |   | 10,387,374        |  |              |            |  |   |            | 
|Accrued interest receivable                               |  |                   | 3,221,249   |              |   | 3,221,249         |  |              | 3,297,170   |  |   | 3,297,170   | 
|                                                          |  |                   |             |              |   |                   |  |              |             |  |   |             | 
|Financial liabilities:                                    |  |                   |             |              |   |                   |  |              |             |  |   |             | 
|Deposits                                                  |  |                   | 361,174,697 |              |   | 363,873,000       |  |              | 369,804,684 |  |   | 369,916,993 | 
|Federal Home Loan Advances                                |  |                   | 146,507,500 |              |   | 149,422,000       |  |              | 86,250,777  |  |   | 85,596,000  | 
|Junior subordinated debentures                            |  |                   | 13,403,000  |              |   | 13,403,000        |  |              | 13,403,000  |  |   | 13,403,000  | 
|Accrued interest payable                                  |  |                   | 30,287      |              |   | 30,287            |  |              | 317,709     |  |   | 317,709     | 

|                              |  |                   |            |                            |   |                   |  |                            |            |  |   |         | 
|----------------------------- |  | ----------------- | ---------- | -------------------------- | - | ----------------- |  | -------------------------- | ---------- |  | - | ------- | 
|                              |  | Notional
  Amount |            | Cost
  to Cede
  or Assume |   | Notional
  Amount |  | Cost
  to Cede
  or Assume |           
|                              |  |                   |            |                            |   |                   |  |                            |           
|Off-Balance Sheet Instruments |  |                   |            |                            |   |                   |  |                            |            |  |   |         | 
|Commitments to extend
credit  |  | $                 | 87,694,000 |                            | $ | 876,940           |  | $                          | 29,729,000 |  | $ | 297,290 | 

The
following methods and assumptions were used by the Company in estimating fair
value disclosures:

| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Cash and Cash Equivalents:Cash and cash
  equivalents are valued at their carrying amounts because of the short-term
  nature of these investments.
| |   |                                                                                                                                                    
| | · | Investment Securities:Investment securities
  are valued at the quoted market prices, where available.                                             

74

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Interest-bearing Deposits with Other Financial Institutions:The
  carrying amounts of interest-bearing deposits maturing within ninety days
  approximate their fair values. Fair values of other interest-bearing deposits
  are estimated using discounted cash flow analyses based on current rates for
  similar types of deposits.                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Restricted Stock:The carrying values of
  restricted equity securities approximate fair values due to redemption
  provisions of the stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Loans:For variable rate loans that reprice
  frequently and with no significant change in credit risk, fair values are
  based on carrying amounts. The fair values for other loans (for example,
  fixed rate commercial real estate loans, variable rate loans with initial
  fixed rate periods, and variable rate loans at their contractual cap or floor
  rates) are estimated using discounted cash flow analysis, based on interest
  rates currently being offered for loans with similar terms to borrowers of
  similar credit quality. Loan fair value estimates include judgments regarding
  future expected loss experience and risk characteristics. The carrying amount
  of accrued interest receivable approximates its fair value.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Bank Owned Life Insurance: The fair value of
  bank owned life insurance is based on the estimated realizable market value
  of the underlying investments and insurance reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Deposits:The fair values disclosed for
  transaction accounts; for example, interest-bearing checking deposits are, by
  definition, equal to the amount payable on demand at the reporting date (that
  is, their carrying amounts). The fair values for certificates of deposit are
  estimated using a discounted cash flow calculation that applies interest
  rates currently being offered on certificates to a schedule of aggregated
  contractual maturities on such time deposits. The carrying amount of accrued
  interest payable approximates fair value.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Borrowings:The fair values of the Companys
  long-term borrowings are estimated using discounted cash flow analyses based
  on the Companys current incremental borrowing rates for similar types of
  borrowing arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Off-balance Sheet Instruments: Fair values
  of loan commitments and financial guarantees are based upon fees currently
  charged to enter similar agreements, taking into account the remaining terms
  of the agreement and the counterparties credit standing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

75

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EPIC BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007 AND 2006

Note 12: Income Taxes

The current
and deferred components of the income tax provision for each of the three years
ended December 31 are as follows:

|                           |  |      |           |      |   |           |  |   |           |  
|-------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                           |  | 2007 |           | 2006 |   | 2005      | 
|                           |  |      |           |      |   |           | 
|Provision for income taxes |  |      |           |      |   |           |  |   |           |  
|Federal                    |  |      |           |      |   |           |  |   |           |  
|Current                    |  | $    | 2,147,842 |      | $ | 1,926,892 |  | $ | 2,457,286 |  
|Deferred                   |  |      | (164,247  | )    |   | 170,000   |  |   | (198,000  | )
|                           |  |      |           |      |   |           |  |   |           |  
|                           |  |      | 1,983,595 |      |   | 2,096,892 |  |   | 2,259,286 |  
|                           |  |      |           |      |   |           |  |   |           |  
|State                      |  |      |           |      |   |           |  |   |           |  
|Current                    |  |      | 362,005   |      |   | 302,683   |  |   | 394,014   |  
|Deferred                   |  |      | (58,753   | )    |   | 3,000     |  |   | (14,000   | )
|                           |  |      |           |      |   |           |  |   |           |  
|                           |  |      | 303,252   |      |   | 305,683   |  |   | 380,014   |  
|                           |  |      |           |      |   |           |  |   |           |  
|Total                      |  | $    | 2,286,847 |      | $ | 2,402,575 |  | $ | 2,639,300 |  
|                           |  |      |           |      |   |           |  |   |           |  

The effective
tax rate of the Company for 2007, 2006, and 2005 differs from the current
Federal statutory income tax rate as follows:

|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |  |   |           |  |  |      | 
|-------------------------------------------------------- |  | ------ | --------- | ------- |  | ------ | - | ------- | --------- | ------ |  | ------- |  | - | --------- |  |  | ---- | 
|                                                         |  | 2007   |           | 2006    |  | 2005   |  
|                                                         |  |        |           |         |  |        |  
|                                                         |  | Amount |           | Percent |  | Amount |   | Percent |           | Amount |  | Percent | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         | 
|Federal income tax at statutory rate                     |  | $      | 2,209,000 |         |  | 34.0   |   | $       | 2,153,000 |        |  | 34.0    |  | $ | 2,290,000 |  |  | 34.0 | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |  |   |           |  |  |      | 
|State franchise taxes, net of Federal income tax
benefit |  |        | 226,000   |         |  | 3.6    |   |         | 227,000   |        |  | 3.6     |  |   | 255,000   |  |  | 3.8  | 
|Other, net                                               |  |        | (148,153  | )       |  | (2.3   | ) |         | 22,575    |        |  | 0.3     |  |   | 94,300    |  |  | 1.4  | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |  |   |           |  |  |      | 
|                                                         |  | $      | 2,286,847 |         |  | 35.3   |   | $       | 2,402,575 |        |  | 37.9    |  | $ | 2,639,300 |  |  | 39.2 | 
|                                                         |  |        |           |         |  |        |   |         |           |        |  |         |  |   |           |  |  |      | 

76

---



EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

The following table shows
the tax effect of the Companys cumulative temporary differences as of December
31:

|                                |  |                  |       |      |   |       | 
|------------------------------- |  | ---------------- | ----- | ---- | - | ----- | 
|                                |  | 2007             |       | 2006 |  
|                                |  |                  |       |      |  
|                                |  | (In
  Thousands) |      
|Deferred
  Tax Assets           |  |                  |       |      |   |       | 
|Reserve for loan losses         |  | $                | 2,022 |      | $ | 1,923 | 
|Accruals                        |  |                  | 600   |      |   | 537   | 
|Investment securities valuation |  |                  |      |      |   | 82    | 
|Other                           |  |                  | 253   |      |   | 263   | 
|                                |  |                  |       |      |   |       | 
|Total Deferred Tax Assets       |  |                  | 2,875 |      |   | 2,805 | 
|                                |  |                  |       |      |   |       | 
|                                |  |                  |       |      |   |       | 
|Deferred
  Tax Liabilities      |  |                  |       |      |   |       | 
|Fixed assets                    |  |                  | 422   |      |   | 297   | 
|Deferred loan costs             |  |                  | 383   |      |   | 248   | 
|Loan fees                       |  |                  | 372   |      |   | 686   | 
|FHLB Stock Dividends            |  |                  | 386   |      |   | 440   | 
|Investment securities valuation |  |                  | 138   |      |   |      | 
|Prepaid Expenses                |  |                  | 242   |      |   | 207   | 
|Other                           |  |                  | 2     |      |   |      | 
|                                |  |                  |       |      |   |       | 
|Total Deferred Tax Liabilities  |  |                  | 1,945 |      |   | 1,878 | 
|                                |  |                  |       |      |   |       | 
|Net
  Deferred Tax Assets       |  | $                | 930   |      | $ | 927   | 
|                                |  |                  |       |      |   |       | 

Based upon the level of
history taxable income and projections for future taxable income over the
periods during which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of the deferred tax asset.

The Company is subject to
federal income tax and income tax of the state of California. The federal
income tax returns for the years ended December 31, 2007, 2006 and 2005 are
open to audit by the federal authorities and the California state tax returns
for the years ended December 31, 2007, 2006, 2005 and 2004 are open to audit by state
authorities.

The Company adopted the provisions of FASB
Interpretation (FIN) No. 48, Accounting for Uncertainity in Income Taxes, on
January 1, 2007. No adjustments were identified for unrecognized tax benefits
that required an adjustment to the January 1, 2007 beginning tax reserve. The
Company had no tax reserve for uncertain tax positions at December 31, 2007.
The Company does not anticipate providing a reserve for uncertain tax positions
in the next twelve months. The Company has elected to record interest and
penalities related to unrecognized tax benefits in tax expense. During the
years ended December 31, 2007, 2006 and 2005, neither the Bank nor the Company
had an accrual for interest and penalties associated with uncertain tax
positions.

77

---



EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

Note 13: Regulatory Capital Requirements

Banks are subject to various regulatory capital
requirements administered by Federal banking agencies, specifically, the
Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on a Banks financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, a Bank must meet
specific capital requirements that involve quantitative measures of a Banks
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. A Banks capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.

Quantitative measures established by regulation to
ensure capital adequacy requires the Bank maintain certain minimum amounts and
ratios of total and Tier I capital to risk-weighted assets (as defined), and of
Tier 1 capital to average assets (as defined). As the Company is not subject to
Federal Reserve Board (FRB) supervision, management believes the capital
requirements are not applicable, on a consolidated basis, to the Company.
Management believes, as of December 31, 2007, the Bank meets all capital
adequacy requirements to which it is subject.

As of the most recent notification, the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective acton. To be categorized as well capitalized, the Bank must
maintain minimum capital ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Banks category.

The following table sets forth the Banks actual
regulatory capital amounts and ratios (dollars amounts in thousands):

|                                         |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|---------------------------------------- |  | ---------------------- | ------ | ------------------------------- | ---- | ---------------------------------------------------------------------- |  | ----- | ------ | ------ | --- | ----- |  | - | ------ |  | ---- | - | 
|                                         |  | Actual Capital         |        | For Capital
  Adequacy Purposes |      | To Be Well
  Capitalized Under
  Prompt Corrective
  Action Provisions | 
|                                         |  |                        |        |                                 |      |                                                                        | 
|                                         |  | Amount                 |        | Ratio                           |      | Amount                                                                 |  | Ratio |        | Amount |     | Ratio | 
|                                         |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       | 
|                                         |  | (Dollars in Thousands) |       
|As of December
  31, 2007:               |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|                                         |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|Total capital to
  risk-weighted assets  |  | $                      | 49,971 |                                 | 10.2 | %                                                                      |  | $     | 39,386 |        | 8.0 | %     |  | $ | 49,233 |  | 10.0 | % | 
|Tier 1 capital
  to risk-weighted assets |  |                        | 45,056 |                                 | 9.2  | %                                                                      |  |       | 19,697 |        | 4.0 | %     |  |   | 29,545 |  | 6.0  | % | 
|Tier 1 capital
  to average assets       |  |                        | 45,056 |                                 | 8.3  | %                                                                      |  |       | 21,636 |        | 4.0 | %     |  |   | 27,044 |  | 5.0  | % | 
|                                         |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|As of December
  31, 2006:               |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|                                         |  |                        |        |                                 |      |                                                                        |  |       |        |        |     |       |  |   |        |  |      |   | 
|Total capital to
  risk-weighted assets  |  | $                      | 47,676 |                                 | 10.8 | %                                                                      |  | $     | 35,316 |        | 8.0 | %     |  | $ | 44,350 |  | 10.0 | % | 
|Tier 1 capital
  to risk-weighted assets |  |                        | 43,004 |                                 | 9.7  | %                                                                      |  |       | 17,734 |        | 4.0 | %     |  |   | 26,600 |  | 6.0  | % | 
|Tier 1 capital
  to average assets       |  |                        | 43,004 |                                 | 8.6  | %                                                                      |  |       | 19,955 |        | 4.0 | %     |  |   | 24,944 |  | 5.0  | % | 

California State Banking Law restricts the payment of
dividends. Generally, payment of dividends by the Bank is also limited under
FDIC regulations. The amount that can be paid in any calendar year without
prior approval of the Department of Financial Institutions cannot exceed the
lesser of net profits (as defined) for the last three fiscal years less the
amount of any distributions made during that three year period, or retained
earnings. Under these restrictions, the Bank was able to declare dividends for
the years ended December 31, 2007 and 2006. As of December 31,
2007 and 2006 the Bank had declared and paid cash dividends to the Company of
$3,745,000 and $3,933,034, respectively.

78

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EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

Note 14: Commitments and Contingencies

The Bank has entered into thirteen operating leases
with nonaffiliates for office and branch space which expire through the year
2017. Monthly payments under these thirteen leases total $75,739 with some
leases having scheduled annual adjustments and other leases having annual
adjustments based on the Consumer Price Index.

Future minimum rent payments under the non-cancelable
operating leases and long-term debt obligations are as follows:

|                             |  |   |           | 
|---------------------------- |  | - | --------- | 
|Year
  Ending
  December 31, |  |   |           | 
|                             |  |   |           | 
|2008                         |  | $ | 908,865   | 
|2009                         |  |   | 807,495   | 
|2010                         |  |   | 834,551   | 
|2011                         |  |   | 866,283   | 
|2012                         |  |   | 742,703   | 
|Thereafter                   |  |   | 1,727,953 | 
|                             |  |   |           | 
|                             |  | $ | 5,887,850 | 
|                             |  |   |           | 

The above information is given for existing lease
commitments and is not a forecast of future rental expense. Rental expenses
included in occupancy expense for the years ended December 31, 2007, 2006
and 2005 were $902,219, $875,569 and $789,806, respectively.

The Bank entered into sublease arrangements for
portions of the leased space. Rental payments received for the years ended
December 31, 2007, 2006 and 2005 were $89,754, $43,608 and $56,405,
respectively.

The long term debt obligations of $13,403,000 included
in the thereafter amount above may be retired prior to the contractual maturity
as discussed in Note 7 of the consolidated financial statements.

The Company is not subject to any legal proceedings
and claims which have arisen in the ordinary course of business.

Note 15: Concentration of Credit Risk

The majority of the Banks loan activity is with
customers located in California, primarily in the county of Marin, San
Francisco and Alameda. Although the Bank has a diversified loan portfolio, a
large portion of its loans are for commercial property, and 89.8% of the Banks
loans are secured by real estate.

The Banks loan portfolio presents significant
geographic concentration as follows: San Francisco County 26%, Alameda County
15%, Marin County 13%, Sonoma County 9%, Contra Costa County 8%, San Mateo
County 7%, Santa Clara County 5% and other 17% of loan portfolio.

79

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EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

Note 16: Stock Options

The Company maintains an Employee Stock Option and
Stock Appreciation Plan (the Plan) in which options to purchase shares of the
Companys common stock, or rights to be paid based on the appreciation of the
options in lieu of exercising the options, are granted at the Board of
Directors discretion to certain employees. The Plan was originally established
in 1997 and was replaced by a new Plan in 2006. The 2006 Plan terminates in
2016 and provides for a maximum of 28,890 shares (561,668 after stock splits,
stock dividend and a revision to the original plan) of the Companys common
stock. Options are issued at the fair market value of the stock at the date of
grant. Options expire ten years from the grant date. Options generally vest 20%
on each anniversary of the grant for five years or may be subject to vesting
over a specific period of time, as determined by the Board of Directors.
Options have a contractual term of ten years unless a shorter period is
determined by the Board of Directors.

The Company also maintains a Non-Employee Directors
Stock Option Plan (the Directors Plan). The Directors Plan was established
in 2003 and terminates in 2013. The Directors Plan provides for the grant of
options for up to 71,690 shares of Company common stock, subject to adjustment
upon certain events, such as stock splits. However, at no time shall the total
number of shares issuable upon exercise of all outstanding options under the
Directors Plan or any other stock option plan of the Company and the total
number of shares provided for a stock bonus or similar plan of the Company
exceed thirty percent (30%) of its then outstanding shares of common stock.
Options are issued at the fair market value of the stock at the date of grant.
The options may vest immediately or may be subject to vesting over a specific
period of time, as determined by the Board of Directors. Each option will
expire 10 years after the date of grant, or if sooner, upon a specified period
after termination of service as a Director.

A summary of activity for the Companys options as of
December 31, 2007, 2006, and 2005 is presented below. Amounts have been
restated to reflect the 7% stock dividend declared in January 2007.

|                                           |  |                      |          |                                     |   |                                          |  |                                                     |     |  |      |  | 
|------------------------------------------ |  | -------------------- | -------- | ----------------------------------- | - | ---------------------------------------- |  | --------------------------------------------------- | --- |  | ---- |  | 
|                                           |  | 2007                 |         
|                                           |  |                      |         
|                                           |  | Number
  of
  Shares |          | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average
  Remaining
  Contractual Term
  (in years) |    
|                                           |  |                      |          |                                     |   |                                          |  |                                                     |    
|                                          
|Options outstanding,
  beginning of period |  |                      | 510,734  |                                     | $ | 11.36                                    |  |                                                     |    |  |     |  | 
|Granted                                    |  |                      | 80,000   |                                     | $ | 13.44                                    |  |                                                     |    |  |     |  | 
|Cancelled/forfeited                        |  |                      | (126,429 | )                                   | $ | 12.66                                    |  |                                                     |    |  |     |  | 
|Exercised                                  |  |                      | (53,966  | )                                   | $ | 4.57                                     |  | $                                                   | 351 |  |     |  | 
|                                           |  |                      |          |                                     |   |                                          |  |                                                     |     |  |      |  | 
|                                           |  |                      |          |                                     |   |                                          |  |                                                     |     |  |      |  | 
|Options outstanding,
  end of year         |  |                      | 410,339  |                                     | $ | 12.26                                    |  | $                                                   | 488 |  | 7.22 |  | 
|                                           |  |                      |          |                                     |   |                                          |  |                                                     |     |  |      |  | 
|Exercisable (vested),
  end of period      |  |                      | 211,392  |                                     | $ | 11.52                                    |  | $                                                   | 95  |  | 6.43 |  | 
|                                           |  |                      |          |                                     |   |                                          |  |                                                     |     |  |      |  | 

80

---



EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|------------------------------------------ |  | -------------------- | ------- | ----------------------------------- | - | ---------------------------------------- |  | --------------------------------------------------- |  |  | ---- |  | 
|                                           |  | 2006                 |        
|                                           |  |                      |        
|                                           |  | Number
  of
  Shares |         | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average
  Remaining
  Contractual Term
  (in years) | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     | 
|                                          
|Options outstanding,
  beginning of period |  |                      | 541,321 |                                     | $ | 11.19                                    |  |                                                    |  |  |     |  | 
|Granted                                    |  |                      | 39,590  |                                     | $ | 13.45                                    |  |                                                    |  |  |     |  | 
|Cancelled/forfeited                        |  |                      | (46,564 | )                                   | $ | 13.10                                    |  |                                                    |  |  |     |  | 
|Exercised                                  |  |                      | (23,613 | )                                   | $ | 7.50                                     |  |                                                    |  |  |     |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|                                          
|Options outstanding,
  end of year         |  |                      | 510,734 |                                     | $ | 11.36                                    |  | 1,117                                               |  |  | 7.23 |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|Exercisable (vested),
  end of period      |  |                      | 259,873 |                                     | $ | 9.99                                     |  | 925                                                 |  |  | 6.36 |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 

|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|------------------------------------------ |  | -------------------- | ------- | ----------------------------------- | - | ---------------------------------------- |  | --------------------------------------------------- |  |  | ---- |  | 
|                                           |  | 2005                 |        
|                                           |  |                      |        
|                                           |  | Number
  of
  Shares |         | Weighted
  average
  Exercise Price |   | Total
  Intrinsic Value
  (in thousands) |  | Average
  Remaining
  Contractual Term
  (in years) | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     | 
|                                          
|Options outstanding,
  beginning of period |  |                      | 422,206 |                                     | $ | 10.05                                    |  |                                                    |  |  |     |  | 
|Granted                                    |  |                      | 161,570 |                                     | $ | 13.56                                    |  |                                                    |  |  |     |  | 
|Cancelled/forfeited                        |  |                      | (26,983 | )                                   | $ | 11.76                                    |  |                                                    |  |  |     |  | 
|Exercised                                  |  |                      | (15,472 | )                                   | $ | 3.65                                     |  |                                                    |  |  |     |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|Options outstanding,
  end of year         |  |                      | 541,321 |                                     | $ | 11.19                                    |  | 2,530                                               |  |  | 8.09 |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|Exercisable (vested),
  end of period      |  |                      | 190,644 |                                     | $ | 8.60                                     |  | 1,384                                               |  |  | 6.67 |  | 
|                                           |  |                      |         |                                     |   |                                          |  |                                                     |  |  |      |  | 
|                                           |  |                      |         |                                     |   |                                          | 

As of December 31, 2007 and 2006 there was $1,067,006
and $1,022,625, respectively of total unrecognized compensation cost related to
non-vested share-based compensation arrangements and the weighted average
period over which the cost is expected to be recognized is 2.92 years and 3.16
years, respectively.

81

---



EPIC
BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

Note 17: Share-Based Compensation

Effective January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R),
using the modified prospective transition method and, therefore, have not
restated results for prior periods. Under this transition method, share-based
compensation expense for the first quarter of 2006 included compensation
expense for all share-based compensation awards granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). Share-based compensation expense for
all share-based compensation awards granted after January 1, 2006 is based on
the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R. The Company recognizes these compensation costs on a straight-line
basis over the requisite service period of the award. Prior to the January 1,
2006 adoption of SFAS No. 123R, the Company recognized share-based compensation
expense in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB No. 107) regarding the SECs interpretation of
SFAS No. 123R and the valuation of share-based payments for public companies.
The Company has applied the provisions of SAB No. 107 in its adoption of SFAS
No. 123R.

SFAS No. 123R requires that an estimate of future
forfeitures be made and that compensation cost be recognized only for shares
that are expected to vest. The Company estimates forfeitures and only
recognizes expense for those shares expected to vest.

Certain of the Companys share-based award grants
contain terms that provide for a graded vesting schedule whereby portions of
the award vest in increments over the requisite service period. As provided for
under SFAS No. 123R, the Company has elected to recognize compensation expense
for awards with graded vesting schedules on a straight-line basis over the
requisite service period for the entire award. Additionally, SFAS No. 123R
requires companies to recognize compensation expense based on the estimated
number of stock options and awards for which service is expected to be
rendered.

SFAS No. 123R requires that cash flows resulting from
the realization of tax deductions in excess of the compensation cost recognized
(excess tax benefits) are to be classified as financing cash flows. Before the
adoption of SFAS No. 123R, the Company presented all tax benefits realized from
the exercise of stock options as operating cash flows in the Consolidated
Statement of Cash Flows. For the year ended December 31, 2007 and 2006,
$248,138 and $177,128, respectively is included as the proceeds from exercise
of stock options and $264,531 and $381,993, respectively is included as the
compensation expense and shown as financing cash inflows and operating cash
inflows, respectively, in the Consolidated Statement of Cash Flows.

The Company determines fair value at grant date using
the Black-Scholes pricing model that takes into account the stock price at the
grant date, exercise price, expected life of the option, volatility of the
underlying stock, expected dividend yield and risk-free interest rate over the
expected life of the option.

The weighted average assumptions used in the pricing
model for options granted during 2007, 2006 and 2005 are noted in the following
table. The expected term of options granted is derived from historical data on employee
exercise and post-vesting employment termination behavior. The risk free rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant. Expected volatility is
based on the historical volatility of the Companys stock.

82

---



EPIC BANCORP AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

|                            |  |      |       |      |  |      |       |   |  |  |       |   | 
|--------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | - | 
|                            |  | 2007 |       | 2006 |  | 2005 |      
|                            |  |     
|Risk-free
  interest rate   |  |      | 4.66  | %    |  |      | 4.89  | % |  |  | 4.10  | % | 
|Expected
  dividend yield   |  |      | 1.40  | %    |  |      | 0.82  | % |  |  | 0.82  | % | 
|Expected
  life in years    |  |      | 7     |      |  |      | 7     |   |  |  | 7     |   | 
|Expected
  price volatility |  |      | 25.61 | %    |  |      | 27.18 | % |  |  | 27.25 | % | 

The weighted
average grant date fair value of options granted for 2007, 2006 and 2005 was
$4.53, $4.41 and $4.61, respectively.

The
Black-Scholes option valuation model requires the input of highly subjective
assumptions, including the expected life of the stock based award and stock
price volatility. The assumptions listed above represent managements best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, the Companys recorded share-based compensation expense could have been
materially different from that reflected in these consolidated financial statements.
In addition, the Company is required to estimate the expected forfeitures rate
and only recognize expense for those shares expected to vest. If the Companys
actual forfeiture rate is materially different from the estimate, the
share-based compensation expense could be materially different.

Note 18: Shareholders Equity

In January
2007, the Board of Directors declared a 7% stock dividend payable on February
14, 2007 to shareholders of record on January 31, 2007. Cash was paid in lieu
of issuing fractional shares. Earnings per share amounts and information with
respect to stock options have been restated for all years presented to reflect
the stock dividends.

In 2007, the
Company paid cash dividends of $0.045 in April and July 2007 and $0.05 in
October 2007 per common share. In 2006, the company paid cash dividends of
$0.0374 per common share for each of the four quarters in 2006. The cash
dividends were recorded as a reduction to retained earnings.

Under SFAS no.
123R which was implemented in January 2006, the fair value of stock options on
the grant date is recorded as an expense on the income statement with a
corresponding increase in common stock. See Note 15 and 16 for further
information on accounting for stock options and share-based payments. In
addition, the Company recorded tax benefits on exercised stock options of
$59,078. The amount is accounted for as an addition to common stock with a
corresponding decrease in accrued tax liability.

In September
2007, the Company received approval from the Board of Directors to buy back up
to 5%, or approximately 200,649 shares of the Companys common stock
outstanding as of July 28, 2007, as reported on the Companys Form 10-Q filed
with the SEC on August 10, 2007. The repurchase program allows the Company to
purchase common shares for a period of approximately twelve months from the
approval date in the open market. The Company executes these transactions
pursuant to the SEC rule 10b-18. Repurchase transactions are subject to market
conditions as well as applicable legal and other considerations. All shares
repurchased were made in open market transactions and were part of the publicly
announced repurchase program. In 2007, the Company repurchased 196,216 shares
at prices ranging from $11.65 to $13.00 for a total cost of $2,468,846.

83

---



EPIC BANCORP AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

Note 19: Earnings Per Share (EPS)

Earnings per
share of common stock is calculated on both a basic and diluted basis based on
the weighted average number of common shares outstanding. Basic earnings per
share excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted from the issuance of
common stock that then shared in earnings.

The following
table reconciles the numerator and denominator of the Basic and Diluted
earnings per share computations:

|                                                               |  |      |           |      |   |           |  |   |           | 
|-------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                               |  | 2007 |           | 2006 |   | 2005      | 
|                                                               |  |      |           |      |   |           | 
|Net Income as Reported                                         |  | $    | 4,209,114 |      | $ | 3,928,449 |  | $ | 4,096,169 | 
|Weighted average shares:                                       |  |      |           |      |   |           |  |   |           | 
|Basic weighted average
  number of common shares outstanding   |  |      | 3,950,541 |      |   | 3,968,130 |  |   | 3,930,565 | 
|Dilutive effect of stock
  options                             |  |      | 1,177     |      |   | 4,299     |  |   | 131,522   | 
|                                                               |  |      |           |      |   |           |  |   |           | 
|Diluted weighted average
  number of common shares outstanding |  |      | 3,951,718 |      |   | 3,972,429 |  |   | 4,062,087 | 
|                                                               |  |      |           |      |   |           |  |   |           | 
|                                                               |  |      |           |      |   |           |  |   |           | 
|Net income per common
  share:                                 |  |      |           |      |   |           |  |   |           | 
|Basic                                                          |  | $    | 1.07      |      | $ | 0.99      |  | $ | 1.04      | 
|Diluted                                                        |  | $    | 1.07      |      | $ | 0.99      |  | $ | 1.01      | 

Note 20: Transactions with Related Parties

In the
ordinary course of business, the Bank has granted loans to, and accepted
deposits from, certain directors, officers, principal shareholders and the
companies with which they are associated. All such loans and deposits were made
under terms which are consistent with the Banks normal lending and deposit
policies.

An analysis of
the activity with respect to related party loans during 2007 and 2006 are as
follows.

|                                             |  |      |           |      |   |         | 
|-------------------------------------------- |  | ---- | --------- | ---- | - | ------- | 
|                                             |  | 2007 |           | 2006 |  
|                                             |  |      |          
|                                             |  |      |           |      |   |         | 
|Outstanding Balance,
  beginning of the year |  | $    | 520,000   |      | $ | 520,000 | 
|Credit granted, including
  renewals         |  |      | 1,500,000 |      |   |        | 
|Repayments                                   |  |      |          |      |   |        | 
|                                             |  |      |           |      |   |         | 
|Outstanding Balance, end
  of year           |  | $    | 2,020,000 |      | $ | 520,000 | 
|                                             |  |      |           |      |   |         | 

84

---



EPIC BANCORP AND SUBSIDIARIES 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
DECEMBER 31, 2007 AND 2006

The Bank
accepts deposits from shareholders, directors and employees in the normal
course of business, and the terms are comparable to those with non-affiliated
parties. At December 31, 2007 and 2006, the Bank held deposits from
related parties of $1,102,079 and $1,488,036, respectively.

Note 21: Financial Instruments with Off-Balance Sheet Risk

The Bank makes
commitments to extend credit in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit in the form of loans or through standby letters of
credit. Standby letters of credit written are confidential commitments issued
by the Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. The Bank anticipates no losses
as a result of such transactions.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements.

The Bank is
exposed to credit losses in the event of non performance by the borrower, in
the contract amount of the commitment. The Bank uses the same credit policies
in making commitments as it does for on-balance sheet instruments and evaluates
each customers creditworthiness on a case by case basis. The amount of
collateral obtained if deemed necessary by the Bank is based on managements
credit evaluation of the borrower. Collateral held varies but primarily
consists of residential and commercial property.

The Company
has no outstanding standby Letters of Credit, approximately $26,475,000 in
commitments to fund commercial real estate, construction, and land development
loans, $23,806,000 in commitments to fund revolving, open ended lines secured
by 1-4 family residential properties, and $37,413,000 in other unused
commitments as of December 31, 2007. The Company has no outstanding standby
Letters of Credit, approximately $8,565,000 in commitments to fund commercial
real estate, construction, and land development loans, $15,911,000 in
commitments to fund revolving, open ended lines secured by 1-4 family
residential properties, and $5,253,000 in other unused commitments as of
December 31, 2006.

At
December 31, 2007 and 2006, the Bank had no contingent liabilities for
letters of credit accommodations to its customers.

Note 22: Subsequent Events

On January 22, 2008, the Board
of Directors of the Company declared a $0.05 per share cash dividend, payable
on February 29, 2008, to shareholders of record as of February 15, 2008.

85

---



EPIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006

Note 23: Condensed Financial Information of Epic Bancorp
(Parent Company)

|                                                     |  |      |            |      |   |            |   |   |            |  
|---------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                     |  | 2007 |            | 2006 |   | 2005       |  
|                                                     |  |      |            |      |   |            |  
|Balance Sheets                                       |  |      |            |      |   |            |   |   |            |  
|Assets                                               |  |      |            |      |   |            |   |   |            |  
|Cash and cash equivalents                            |  | $    | 111,166    |      | $ | 123,420    |   | $ | 224,931    |  
|Investment in subsidiary                             |  |      | 45,781,157 |      |   | 43,443,282 |   |   | 36,392,045 |  
|Investment in nonconsolidated
subsidiary             |  |      | 408,961    |      |   | 403,552    |   |   | 310,000    |  
|Prepaids and other assets                            |  |      | 144,280    |      |   | 536,759    |   |   | 442,783    |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Total Assets                                         |  | $    | 46,445,564 |      | $ | 44,507,013 |   | $ | 37,369,759 |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Liabilities                                          |  |      |            |      |   |            |   |   |            |  
|Junior subordinated debentures                       |  |      | 13,403,000 |      |   | 13,403,000 |   |   | 10,310,000 |  
|Accrued interest payable and other
  liabilities     |  |      | 110,027    |      |   | 223,153    |   |   | 214,681    |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Total Liabilities                                    |  |      | 13,513,027 |      |   | 13,626,153 |   |   | 10,524,681 |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Stockholders Equity                                 |  |      |            |      |   |            |   |   |            |  
|Common stock                                         |  |      | 8,840,540  |      |   | 10,766,809 |   |   | 10,207,688 |  
|Retained earnings                                    |  |      | 23,884,813 |      |   | 20,236,571 |   |   | 16,899,835 |  
|Accumulated other comprehensive (loss)               |  |      | 207,184    |      |   | (122,520   | ) |   | (262,445   | )
|                                                     |  |      |            |      |   |            |   |   |            |  
|Total Stockholders Equity                           |  |      | 32,932,537 |      |   | 30,880,860 |   |   | 26,845,078 |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Total Liabilities and Stockholders
Equity           |  | $    | 46,445,564 |      | $ | 44,507,013 |   | $ | 37,369,759 |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Statements of Income                                 |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Equity in undistributed income of
  subsidiaries     |  | $    | 5,471,496  |      | $ | 5,118,465  |   | $ | 5,100,704  |  
|Other income                                         |  |      | 41,130     |      |   | 31,057     |   |   | 22,126     |  
|Interest expense on junior subordinated
  debentures |  |      | (1,123,231 | )    |   | (1,040,962 | ) |   | (743,214   | )
|Other expenses                                       |  |      | (1,095,434 | )    |   | (1,078,037 | ) |   | (983,447   | )
|                                                     |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Income Before Income Taxes                           |  |      | 3,293,961  |      |   | 3,030,523  |   |   | 3,396,169  |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Income Tax Benefit                                   |  |      | 915,153    |      |   | 897,926    |   |   | 700,000    |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|                                                     |  |      |            |      |   |            |   |   |            |  
|Net Income                                           |  | $    | 4,209,114  |      | $ | 3,928,449  |   | $ | 4,096,169  |  
|                                                     |  |      |            |      |   |            |   |   |            |  

86

---



EPIC BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006

|                                                                                           |  |      |            |      |   |            |   |   |            |  
|------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                                                           |  | 2007 |            | 2006 |   | 2005       |  
|                                                                                           |  |      |            |      |   |            |  
|Statements
  of Cash Flows                                                                 |  |      |            |      |   |            |   |   |            |  
|Cash Flows from Operating Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Net income                                                                                 |  | $    | 4,209,114  |      | $ | 3,928,449  |   | $ | 4,096,169  |  
|Adjustments to reconcile net income to net cash provided/(used) by
  operating activities: |  |      |            |      |   |            |   |   |            |  
|Equity in undistributed income of Subsidiaries                                             |  |      | (5,471,496 | )    |   | (5,118,465 | ) |   | (5,100,704 | )
|Share-based compensation                                                                   |  |      | 114,545    |      |   | 90,146     |   |   |           |  
|Net change in assets and liabilities                                                       |  |      | 504,934    |      |   | (179,056   | ) |   | (86,402    | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash used by operating activities                                                      |  |      | (642,903   | )    |   | (1,278,926 | ) |   | (1,090,937 | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash Flows from Investing Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Capital contributions to Subsidiaries                                                      |  |      | (345,990   | )    |   | (3,086,000 | ) |   | (794,000   | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash used by investing activities                                                      |  |      | (345,990   | )    |   | (3,086,000 | ) |   | (794,000   | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash Flows from Financing Activities                                                       |  |      |            |      |   |            |   |   |            |  
|Repurchase of Stock                                                                        |  |      | (2,455,627 | )    |   |           |   |   |           |  
|Issuance of junior subordinated debentures                                                 |  |      |           |      |   | 3,093,000  |   |   |           |  
|Dividends received from Bank                                                               |  |      | 3,745,000  |      |   | 1,585,000  |   |   | 2,348,034  |  
|Cash dividends paid to shareholders                                                        |  |      | (560,872   | )    |   | (591,713   | ) |   | (441,050   | )
|Stock options exercised                                                                    |  |      | 248,138    |      |   | 177,128    |   |   | 48,449     |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net cash provided by financing activities                                                  |  |      | 976,639    |      |   | 4,263,415  |   |   | 1,955,433  |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Net (Decrease)/Increase in Cash and Cash Equivalents                                       |  |      | (12,254    | )    |   | (101,511   | ) |   | 70,496     |  
|Cash and Cash Equivalents, Beginning of Year                                               |  |      | 123,420    |      |   | 224,931    |   |   | 154,435    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Cash and Cash Equivalents, End of Year                                                     |  | $    | 111,166    |      | $ | 123,420    |   | $ | 224,931    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Supplemental Cash Flow Information                                                         |  |      |            |      |   |            |   |   |            |  
|Cash paid during the year for:                                                             |  |      |            |      |   |            |   |   |            |  
|Interest                                                                                   |  | $    | 1,049,121  |      | $ | 1,022,612  |   | $ | 743,214    |  
|                                                                                           |  |      |            |      |   |            |   |   |            |  
|Non-Cash Investing Activities                                                              |  |      |            |      |   |            |   |   |            |  
|Net change in accumulated other comprehensive income/(loss)                                |  | $    | 329,704    |      | $ | 139,925    |   | $ | (33,168    | )
|                                                                                           |  |      |            |      |   |            |   |   |            |  

87

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ITEM 9  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and
Procedures

The Companys
management carried out an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 2007, pursuant to Exchange Act Rule 13a-15. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as of December 31,
2007 are effective in timely alerting them to material information relating to
the Company (including its consolidated subsidiaries) required to be included
in the Companys periodic filings under the Exchange Act.

The Companys
management, including the CEO and CFO, does not expect that the Companys
Disclosure Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control systems are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

(b) Changes in
Disclosure Controls and Procedures

For the year
ended December 31, 2007, there have not been any significant changes in
the Companys internal controls or in other factors that could significantly
affect disclosure or financial reporting controls subsequent to the date of
their evaluation. The Company is not aware of any significant deficiencies or
material weaknesses; therefore, no corrective actions were taken.

ITEM 9A (T) 
CONTROLS AND PROCEDURES

See
Managements Report on Internal Control Over Financial Reporting at Page 62
of this Annual Report.

ITEM 9B  OTHER INFORMATION

There were no
events in the fourth quarter which were required on Form 8-K and were not so
reported.

PART III

ITEM 10  DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE

The
information required in response to this item is incorporated by reference from
the information contained in the sections captioned Nominees for Director,
Executive Officers Who Are Not Directors and Executive Compensation 
Compliance with Section 16(a) of the Securities Exchange Act of 1934, in the
Registrants Proxy Statement for the 2008 Annual Meeting of Shareholders (the
Proxy Statement) which will be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934.

88

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ITEM 11  EXECUTIVE COMPENSATION

The
information in response to this item is incorporated by reference from the
information contained in the section captioned Executive Compensation in the
Registrants Proxy Statement for the 2008 Annual Meeting which will be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934.

ITEM 12  SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The
information required in response to this item is incorporated by reference from
the information contained in the section captioned Beneficial Ownership of the
Common Stock in the Registrants Proxy Statement for the 2008 Annual Meeting
of Shareholders which will be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934.

ITEM 13  CERTAIN RELATIONSHIPS, RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE

The
information required in response to this item is incorporated by reference from
the information contained in the section captioned Certain Transactions in the
Registrants Proxy Statement for the 2008 Annual Meeting which will be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934.

ITEM 14  PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The
information required in response to this item is incorporated by reference from
the information contained in the section captioned Ratification of the
Selection of Independent Auditors in the Registrants Proxy Statement for the
2008 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A of the Securities Exchange Act of 1934.

PART IV

ITEM 15  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

(a) Exhibits

See Index to
Exhibits of this Annual Report on Form 10-K.

INDEX TO EXHIBITS

|              |                                                                                      
|------------- | -------------------------------------------------------------------------------------
|ExhibitNumber | Description of
Exhibit                                                               
|              |                                                                                      
|              |                                                                                      
|3.1           | Articles of Incorporation
  of Bancorp (1)                                           
|              |                                                                                      
|3.2           | Bylaws of
  the Bancorp (9)                                                          
|              |                                                                                      
|3.3           | Amendment
  and Restated Bylaws of the Bancorp (7)                                   
|              |                                                                                      
|4.1           | Amended and
  Restated Trust Agreement (8)                                           
|              |                                                                                      
|4.2           | Trust
  Preferred Securities Guarantee Agreement (1)                                 
|              |                                                                                      
|4.3           | Floating
  Rate Junior Subordinated Deferrable Interest Debenture of Epic Bancorp (1)
|              |                                                                                      
|4.4           | Form of
  Certificate Evidencing Capital Securities of San Rafael Trust II (1)       

89

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|      |                                                                                                                                                                      
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5   | Form of
  Common Security Certificate of San Rafael Trust II (2)                                                                                                     
|      |                                                                                                                                                                      
|4.6   | Amended and
  Restated Trust Agreement (6)                                                                                                                           
|      |                                                                                                                                                                      
|4.7   | Trust
  Preferred Securities Guarantee Agreement (6)                                                                                                                 
|      |                                                                                                                                                                      
|4.8   | Floating
  Rate Junior Subordinated Deferrable Interest Debenture of Epic Bancorp (6)                                                                                
|      |                                                                                                                                                                      
|4.9   | Form of
  Certificate Evidencing Capital Securities of San Rafael Trust II (6)                                                                                       
|      |                                                                                                                                                                      
|4.10  | Form of
  Common Security Certificate of San Rafael Trust II (6)                                                                                                     
|      |                                                                                                                                                                      
|4.11  | Amended and
  Restated Trust Agreement dated 7-25-07 (9)                                                                                                             
|      |                                                                                                                                                                      
|4.12  | Trust
  Preferred Securities Guarantee Agreement dated 7-25-07 (9)                                                                                                   
|      |                                                                                                                                                                      
|4.13  | Floating
  Rate Junior Subordinated Deferrable Interest Debenture of Epic Bancorp dated
  7-25-07 (9)                                                                
|      |                                                                                                                                                                      
|4.14  | Form of
  Certificate Evidencing Capital Securities of San Rafael Trust III dated
  7-25-07 (9)                                                                      
|      |                                                                                                                                                                      
|4.15  | Form of
  Common Security Certificate of San Rafael Trust III dated 7-25-07 (9)                                                                                      
|      |                                                                                                                                                                      
|10.1  | Epic Bancorp
  2006 Employee Stock Option and Stock Appreciation Rights Plan (3) *                                                                                   
|      |                                                                                                                                                                      
|10.2  | Salary
  Continuation Plan for Mark Garwood (1)*                                                                                                                     
|      |                                                                                                                                                                      
|10.3  | Tamalpais
  Bank Defined Contribution Plan; Tamalpais Bank Defined Contribution Trust;
  EGTRRA Amendment for 401(k) Plans; Defined Contribution Plan Amendment (1) *
|      |                                                                                                                                                                      
|10.4  | Epic Bancorp
  2003 Non-Employee Directors Stock Option Plan and Agreement (2)*                                                                                      
|      |                                                                                                                                                                      
|10.5  | Agreement
  signed on July 19, 2005 between TWA and Kit M. Cole (4)                                                                                                  
|      |                                                                                                                                                                      
|10.7  | Tiburon
  lease agreement between Tamalpais Bank and Main Street Properties (3)                                                                                      
|      |                                                                                                                                                                      
|10.8  | Las Gallinas
  lease agreement between Tamalpais Bank and Citibank (4)                                                                                               
|      |                                                                                                                                                                      
|10.9  | Epic Bancorp
  2006 Employee Stock Option and Stock Appreciation Plan (5)                                                                                            
|      |                                                                                                                                                                      
|10.10 | Bank-Owned
  Life Insurance (BOLI) Program (8)                                                                                                                       
|      |                                                                                                                                                                      
|10.11 | 2007
  Executive Bonuses *                                                                                                                                           
|      |                                                                                                                                                                      
|11    | Statement re
  computation of per share earning. Included in footnote 18 to the Registrants
  audited financial statements included in this Annual Report           
|      |                                                                                                                                                                      
|14    | Code of
  Ethics                                                                                                                                                     
|      |                                                                                                                                                                      
|21    | Subsidiaries
  of the Bancorp: Tamalpais Bank; San Rafael Capital Trust I; San Rafael
  Capital Trust II; San Rafael Capital Trust III; Tamalpais Wealth Advisors    

90

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|     |                                                                                                            
|---- | -----------------------------------------------------------------------------------------------------------
|23   | Consent of
  Independent Registered Public Accounting Firm                                                 
|     |                                                                                                            
|24   | Power of
  Attorney                                                                                        
|     |                                                                                                            
|31.1 | Certification
  of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002.
|     |                                                                                                            
|31.2 | Certification
  of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
  Act of 2002.
|     |                                                                                                            
|32.1 | Certificate of Principal Executive Officer Pursuant to 18 U.S.C.
  Section 1350                            
|     |                                                                                                            
|32.2 | Certificate of Principal Financial Officer Pursuant to 18 U.S.C.
  Section 1350                            

|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Employment
  Agreement or Compensation Plan.                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                  
|(1) | Attached as
  Exhibits 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 10.2, 10.3, and 10.4, respectively, to
  Registration Statement No. 333-105991 filed by Epic Bancorp with the
  Securities and Exchange Commission under the Securities Act of 1933, and
  incorporated herein by reference.
|    |                                                                                                                                                                                                                                                                                  
|(2) | Attached as
  Exhibits 99.1 and 99.2, respectively, to Registration Statement No. 333-132197
  on Form S-8 filed by Epic Bancorp with the Securities and Exchange
  Commission, and incorporated herein by reference.                                                            
|    |                                                                                                                                                                                                                                                                                  
|(3) | Attached as
  Exhibit 10.1 to Registration Statement No. 333-135143 filed by Epic Bancorp
  with the SEC at Incorporation by reference.                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                  
|(4) | Attached as
  Exhibits 10.1 and 10.2 to the Quarterly Report on Form 10-Q for the quarter
  ended June 30, 2005 filed by Epic Bancorp with the Securities and Exchange
  Commission                                                                                              
|    |                                                                                                                                                                                                                                                                                  
|(5) | Attached as
  Exhibit 10.1 to Registration Statement No. 333-135143 filed by Epic Bancorp
  with the SEC at Incorporation by reference.                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                  
|(6) | Attached as
  Exhibits 4.1, 4.2, 4.3, 4.4 and 4.5, respectively, to the Quarterly Report on
  Form 10-Q for Quarter ended June 30, 2006 filed by Epic Bancorp with
  Securities and Exchange Commission.                                                                         
|    |                                                                                                                                                                                                                                                                                  
|(7) | Attached as
  Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended June
  30, 2007 filed by Epic Bancorp with the Securities and Exchange Commission.                                                                                                          
|    |                                                                                                                                                                                                                                                                                  
|(8) | Attached as
  Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March
  31, 2007 filed by Epic Bancorp with the Securities and Exchange Commission.                                                                                                        
|    |                                                                                                                                                                                                                                                                                  
|(9) | Attached as
  Exhibits 3.2, 4.1, 4.2, 4.3, 4.4 and 4.5, respectively, to the
  Quarterly Report on Form 10-Q for Quarter ended June 30, 2007 filed by Epic
  Bancorp with Securities and Exchange Commission.                                                                    

91

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SIGNATURES

In accordance
with the requirements of Section 13 of the Securities Exchange Act of
1934, Epic Bancorp has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                              |  |                              
|----------------------------- |  | -----------------------------
|By: /s/ MARK
  GARWOOD        |  | By: /s/
  MICHAEL MOULTON    
|                              |  |                              
|Chief Executive Officer       |  | Chief Financial Officer      
|(Principal Executive Officer) |  | (Principal Financial Officer)
|March 25,
  2008              |  | March 25,
  2008             
|                              |  |                              

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

|                        |  |                                                                     |  |                  | 
|----------------------- |  | ------------------------------------------------------------------- |  | ---------------- | 
|Signature               |  | Title                                                               |  | Date             | 
|                        |  |                                                                     |  |                  | 
|                       
|/s/ CAROLYN
  HORAN     |  | Director and
  Chairman of the Board                                |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                  | 
|Carolyn
  Horan         |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|/s/ RICHARD E.
  SMITH  |  | Director                                                            |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                  | 
|Richard E.
  Smith      |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|/s/ W. JEFFREY
  TAPPAN |  | Director                                                            |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                  | 
|W. Jeffery
  Tappan     |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|/s/ ALLAN BORTEL        |  | Director                                                            |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                  | 
|Allan Bortel            |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|/s/ PAUL
  SCHAEFFER    |  | Director                                                            |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                  | 
|Paul
  Schaeffer        |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|                        |  |                                                                     |  |                  | 
|/s/ MARK GARWOOD        |  | Director and
  Chief ExecutiveOfficer (Principal Executive Officer) |  | March 25,
  2008 | 
|                        |  |                                                                     |  |                 
|Mark Garwood            |  |                                                                     |  |                  | 

92

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