UNITED STATES SECURITIES AND EXCHANGE COMMISSION



|Washington, D.C. 20549FORM 10-K
|-------------------------------



| | (Mark one)
| | ----------

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006
|- | --------------------------------------------------------------------------------------------------------------------------------

| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from 
__________ to __________
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Commission File Number 000-52165
|--------------------------------



|SAN JOAQUIN BANCORP(Exact name of registrant as specified in its charter)
|-------------------------------------------------------------------------

California
(State or other jurisdiction of incorporation or organization)
     20-5002515
(I.R.S. Employer Identification No.)1000 Truxtun Ave, Bakersfield, California
     93301(Address of principal executive offices)
     (Zip Code)




|(661) 281-0360(Registrants telephone number, including area code)Common Stock (no par value)(Securities registered pursuant to section 12(g) of the Act)
|---------------------------------------------------------------------------------------------------------------------------------------------------------

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Noþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No  ̈

Indicate by check mark if disclosure of delinquent filers pursuant 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.  ̈

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   ̈                                                                              |        | Accelerated filer þ
|                                                                                                       
|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | Yes   ̈ | No þ               

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2006, as reported on the OTC Bulletin Board, was approximately $83,572,882. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of Common Stock was 3,524,022 as of February 28, 2007.



|DOCUMENTS INCORPORATED BY REFERENCE
|-----------------------------------

Portions of the definitive Proxy Statement relating to the registrants Annual Meeting of Shareholders, to be held May 23, 2007, are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part III to the extent described therein.

---

|SAN JOAQUIN BANCORP                        
|-------------------------------------------
|FORM 10-K                                  
|FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
|INDEX                                      
|                                           
|PART I                                     
|ITEM 1.                                    
|ITEM 1A.                                   
|ITEM 1B.                                   
|ITEM 2.                                    
|ITEM 3.                                    
|ITEM 4.                                    
|                                           
|PART II                                    
|ITEM 5.                                    
|                                           
|ITEM 6.                                    
|ITEM 7.                                    
|                                           
|ITEM 7A.                                   
|ITEM 8.                                    
|ITEM 9.                                    
|                                           
|ITEM 9A.                                   
|ITEM 9B.                                   
|                                           
|PART III                                   
|ITEM 10.                                   
|ITEM 11.                                   
|ITEM 12.                                   
|                                           
|ITEM 13.                                   
|                                           
|ITEM 14.                                   
|                                           
|PART IV                                    
|ITEM 15                                    

This report contains forward-looking statements about the Company for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation
Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or
conditional verbs such as "will," "would," "should," "could," or "may."

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors -- many of which are beyond our control -- could cause actual conditions,
events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors include, among others, certain credit,
market, operational and liquidity risks associated with our business and operations, changes in business and economic conditions in California and nationally, rising interest rates, potential acts of terrorism (which are beyond our control),
volatility of rate sensitive deposits and assets, value of real estate collateral securing many of our loans, accounting estimates and judgments, compliance costs associated with the companys internal control structure and procedures for
financial reporting. These risk factors are not exhaustive and additional factors that could have an adverse effect on our business and financial performance are set forth under Risk Factors in Item 1A and elsewhere in our annual report
on Form 10-K.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the
date forward-looking statements are made.

1

---



|PART I
|------



|ITEM 1. BUSINESS
|----------------



|General
|-------

San Joaquin Bancorp (the "Bancorp") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Its legal headquarters and principal administrative
offices are located at 1000 Truxtun Avenue, Bakersfield, California. San Joaquin Bancorp provides a full range of banking services through its subsidiary bank, San Joaquin Bank. San Joaquin Bank (the "Bank") is insured by the Federal Deposit
Insurance Corporation ("FDIC") and is a member of the Federal Reserve System. The Bank commenced operations as a California state-chartered bank in December 1980 and is the oldest independent community bank headquartered in Bakersfield, Kern County,
California. At December 31, 2006, San Joaquin Bancorp and its subsidiaries (together the "Company") had total consolidated assets of $748,930,000, total consolidated deposits of $642,654,000, total consolidated net loans of $527,999,000,
and shareholders equity of $45,866,000.

The Bank has four Banking offices within Kern County, California. The Main Office is located at 1301  17thStreet, Bakersfield, California. The Rosedale Branch, located at 3800 Riverlakes Drive, Bakersfield, California, is owned by the Company, as are the
Stockdale Branch located at 4600 California Avenue and the Administrative Center located at 1000 Truxtun Avenue, both in Bakersfield, California. The Main Office and the Delano Branch at 1613 Inyo Street, Delano, are both leased
facilities.

In 1987, the Bank formed a subsidiary, Kern Island Company (KIC), to acquire, develop, sell or operate commercial or residential real property located in the
Companys geographic market area. In 1993, the Bank formed a limited partnership, Farmersville Village Grove Associates (a California limited partnership) (FVGA), to acquire and operate low-income housing projects under the auspices
of the Rural Economic and Community Development Department (formerly Farmers Home Administration), United States Department of Agriculture (RECD). KIC is the 5% general partner and the Bank is the 95% limited partner.

The investment in FVGA is shown on the Companys consolidated financial statements as Investment in real estate. This investment consists of a 48-unit seniors
apartment project, located in Farmersville, Tulare County, California. This project is financed by the RECD. The Company acquired the project by a grant deed executed in lieu of foreclosure pursuant to a judgment entered December 3, 1991, in Kern
County Superior Court. The deed was executed in settlement of a $400,000 loan owed to the Company. Concurrent with the acquisition, the Company assumed an $880,000 loan payable to the RECD. The project is operated by FVGA. The FVGA apartment
project generates a positive cash flow; therefore, additional investment in the project by the Company is not required. Because of the subsidized rent program sponsored by RECD under which this apartment project is operated, the owner of the project
received a federal tax credit in the amount of $600,000, which was amortized over a period of 10 years. Both KIC and FVGA exist solely to own and operate the Farmersville apartment project. Management does not anticipate that the Company will be
required to infuse any additional cash into the operations of KIC and FVGA, and has determined that such operations have a negligible impact on the company.

Through its network of banking offices, the Company emphasizes professional, personal banking service directed primarily to small and medium-sized businesses and professionals.
Although the Companys primary focus is toward the small and medium-sized business and professional market, the Company also provides a full range of banking services that are available to individuals, public entities, and non-profit
organizations.

The Company offers a wide range of deposit accounts. These include personal and business checking and savings accounts, interest-bearing negotiable order of withdrawal (Super
NOW) accounts, money market accounts, time deposits and individual retirement accounts.

The Company provides a full array of lending services, including commercial, consumer installment, and real estate loans. Commercial loans are loans to local community businesses and
may be unsecured or secured by assets of the business and/or its principals. Consumer installment loans include loans for automobiles, home improvements, debt consolidation and other personal needs. Real estate loans include short-term commercial
loans secured by real estate and construction loans.

2

---

The Company originates loans that are guaranteed under the Small Business Investment Act. Although the Company currently retains SBA loans in its portfolio, it has sold SBA loans in
the secondary market in the past.

The Company also offers a wide range of specialized services designed to attract and service the needs of commercial customers and account holders. These services include Automated
Clearing House ("ACH") origination services, Internet banking for businesses and individual customers, safe deposit, MasterCard and Visa merchant deposit services, messenger pick-up service, cash management sweep accounts, MasterCard
MasterMoney ATM/Check cards, and Visa and MasterCard credit cards.

At December 31, 2006, the Company employed 145 persons of whom 22 were officers, 85 were full-time employees and 38 were part-time employees. The Company believes that its employee
relations are satisfactory.

The Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as well as
beneficial ownership reports on Forms 3, 4 and 5. Such documents are also available through the Securities and Exchange Commission (the SEC) website at http://www.sec.gov. After opening this page, click Search for Company
Filings, then click Companies & Other Filers and enter the name San Joaquin Bancorp in the Company Name box and, lastly, click the box labeled Find Companies. Requests for the Form 10-K annual report,
beneficial ownership reports, as well as the Companys director, officer and employee Code of Conduct and Ethics, can also be submitted to:



|San Joaquin BancorpCorporate Secretary1000 Truxtun AvenueBakersfield, CA 93301Competition
|-----------------------------------------------------------------------------------------

The banking and financial services industry in California generally, and in the Company's market area specifically, is highly competitive. The increasingly competitive environment is
primarily the result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Company competes for loans, deposits, and customers with other
commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than San Joaquin Bancorp.

Economic Conditions, Government Policies, Legislation, and Regulation

The Company's profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by the
Company on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans extended to its customers and securities held in its investment portfolio,
comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of San Joaquin Bancorp, such as inflation, recession and unemployment. The impact that future changes in domestic and
foreign economic conditions might have on the Company cannot be predicted.

The business of the Company is also influenced by the fiscal, monetary, and regulatory policies of the federal government, particularly those promulgated and implemented by the
Federal Reserve. The Federal Reserve implements national monetary policies through the actions of the Federal Open Market Committee (FOMC). The objectives of the FOMC include curbing inflation and combating recession through its
open-market operations in U.S. Government securities, by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds rate applicable to funds purchased and sold
between financial institutions on an overnight basis, and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of Company loans, investments, and deposits and also
affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on the Company of any future changes in monetary and fiscal policies cannot be predicted.

3

---

From time to time, legislation, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and
financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. This legislation may change banking statutes and the operating environment of the Company in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial
institutions. The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the
Company.



|Supervision and Regulation
|--------------------------

Banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund; not for the
benefit of stockholders of the Bank or Bancorp. The following is a summary of certain statutes and regulations affecting the Bancorp and the Bank.  It is not intended to be an exhaustive description of the statutes and regulations applicable to the
Bancorps or the Banks business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions.

Moreover, major new legislation and other regulatory changes affecting the Bancorp, the Bank, banking, and the financial services industry in general have occurred in the last several
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.

Certain Restrictions on Activities and Operations of the Bancorp

San Joaquin Bancorp is registered as a bank holding company (a BHC) under the Bank Holding Company Act of 1956, as amended (the BHCA), and as such is subject
to regulation by the Board of Governors of the Federal Reserve System (FRB). The Bancorp and nonbanking subsidiaries are subject to the supervision, examination, and reporting requirements of the BHCA and the regulations of the FRB. The
Bancorp is also a BHC within the meaning of Section 3700 of the California Financial Code. As such, the Bancorp and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial
Institutions (the DFI).

The FRB has the authority to issue orders to BHCs to cease and desist from unsafe or unsound banking practices and violations of conditions imposed by, or violations of agreements
with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA orders or regulations thereunder, to order termination of nonbanking activities of BHCs, and to order termination of
ownership and control of a nonbanking subsidiary by a BHC.



|Limitations on BHC Activities
|-----------------------------

The BHCA prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank,
or increasing such ownership or control of any bank, or merging or consolidating with any BHC without prior approval of the FRB. In general, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 authorizes BHCs to acquire banks
located in any state, subject to certain state-imposed age and deposit concentration limits, and also authorizes interstate mergers and to a lesser extent, interstate branching.

The Gramm-Leach-Bliley Act (GLBA) established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other
financial service providers by expanding the BHCA framework to permit BHCs that elect to be treated as financial holding companies (FHCs) to engage in a range of financial activities broader than would be permissible for
traditional BHCs, such as the Bancorp, that have not elected to be treated as FHCs. 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. In sum, the GLBA permits a BHC that qualifies and elects to be treated as a FHC to engage in a significantly broader range

4

---

of financial activities than BHCs that have not elected FHC status. The Bancorp does not currently intend to elect to become a FHC.

Unless a BHC becomes a FHC under the GLBA, the BHCA prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that
is not a bank or a BHC. In addition, it prohibits engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks.  However, it may engage in and may own shares
of companies engaged in certain activities the FRB determines to be so closely related to banking or managing and controlling banks so as to be a proper incident thereto. In making such determinations, the FRB is required to weigh the expected
benefit to the public. This determination incorporates greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of
interests or unsafe or unsound banking practices.

In order to elect to become a FHC and thus engage in a broader range of financial activities, a BHC must meet certain tests and file an election form with the FRB. To qualify, all of
a BHCs subsidiary banks must be well capitalized (as discussed below under "Capital Requirements and Prompt Corrective Action") and well managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHCs
banks must have been rated satisfactory or better in its most recent federal Community Reinvestment Act (CRA) evaluation.

A BHC that elects to be treated as an FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an
agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and
well-managed institutions.



|Capital Requirements
|--------------------

The FRB has risk-based capital adequacy guidelines intended to provide a measure of capital adequacy 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. government securities, to 100% for assets with
relatively higher credit risk, such as certain loans.

The FRB takes into consideration concentrations of credit risk and risks from nontraditional activities, as well as an institutions ability to manage those risks, when
determining the adequacy of an institutions capital. This evaluation is made as a part of the institutions regular safety and soundness examination. The federal banking agencies also consider 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) in evaluation of a banks capital adequacy.

The FRB may increase such minimum requirements for all banks and bank holding companies or for specified banks or bank holding companies.  Increases in the minimum required ratios
could adversely affect the Bank and Bancorp, including their ability to pay dividends. U.S. bank regulatory authorities have proposed changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital
guidelines to which the Bancorp and the Bank are subject. These changes are discussed in Recent Regulatory Developments, below.



|Limitations on Acquisitions of Common Stock
|-------------------------------------------

The federal Change in Bank Control Act prohibits a person or group of persons from acquiring control of a BHC unless the FRB has been given at least 60 days to review and
does not object to the proposal. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a BHC, such as the Bancorp, with a class of securities registered under Section 12 of the
Exchange Act, would, under the circumstances set forth in the presumption, constitute the acquisition of control of a BHC. California law also imposes certain limitations on the ability of persons and entities to acquire control of banking
institutions and their parent companies.

In addition, any company would be required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a BHC) or more, or otherwise
obtaining control or a controlling influence over a BHC.

5

---



|Cash Dividends
|--------------

FRB policy provides that a bank or a BHC generally should not maintain its existing rate of cash dividends on common stock unless the organizations net income available to
common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organizations capital needs, asset quality and overall financial condition. FRB
policy further provides that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that
may undermine the BHCs ability to serve as a source of strength.

Section 500 of the California General Corporations Law restricts the ability of a California corporation to declare and pay dividends. As a California corporation, the Bancorp is
restricted in its ability to declare and pay dividends. The Bancorp may make a distribution to its shareholders if one of the following standards is met: (i) the retained earnings of the corporation immediately prior to the distribution equals or
exceeds the amount of the proposed distribution; or (ii) immediately after giving effect to the dividend, the assets of the corporation is at least equal to 11⁄4 times its liabilities and the current assets of the corporation is at least equal
to its current liabilities, but if the average pre-tax net earnings of the corporation before interest expense for the two years preceding the distribution was less than the average interest expense of the corporation for those years, the current
assets of the corporation must at least equal 11⁄4 times its current liabilities.



|Support of Subsidiary Institutions
|----------------------------------

Under FRB policy, the Bancorp is expected to act as a source of financial and managerial strength for, and commit its resources to, supporting the Bank during periods of financial
stress or adversity. This support may be required at times when the Bancorp may not be inclined to provide it. In addition, any capital loans by a BHC to any of its bank subsidiaries are subordinate to the payment of deposits and to certain other
indebtedness. In the event of the bankruptcy of a BHC, any commitment by the BHC to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.



|Restrictions on Activities of the Bank
|--------------------------------------

The Bank is a California-chartered bank and a member of the Federal Reserve System. The Bank is subject to primary supervision, periodic examination and regulation by the DFI and the
FRB. If, as a result of an examination of the Bank, the FRB 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 the FRB. 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. The DFI has many of the same remedial powers.

The GLB Act changed the powers of national banks and their subsidiaries, which affects the powers of state-chartered banks that are members of the Federal Reserve System, such as the
Bank. The GLB Act permits a national bank to underwrite, deal in, and purchase state and local revenue bonds. It also allows a subsidiary of a national bank to engage in financial activities that the bank can not, except for general insurance
underwriting and real estate development and investment. In order for a subsidiary to engage in new financial activities, the national bank and its depository institution affiliates must be well-capitalized; have at least satisfactory
general, managerial, and CRA examination ratings; and meet other qualification requirements relating to total assets, subordinated debt, capital, risk management, and affiliate transactions. Subsidiaries of state banks can exercise the same powers
as national bank subsidiaries if they satisfy the same qualifying rules that apply to national banks. For state banks, such as the Bank, that are members of the Federal Reserve System, prior approval of the FRB is required before they can create a
subsidiary to capitalize on the additional financial activities empowered by the GLB Act.

6

---



|FDIC Insurance Premiums
|-----------------------

The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC for Deposit Insurance Fund-member institutions. In 2006, the Federal Deposit
Insurance Reform Act of 2005 was signed into law (FDIRA). Pursuant to the FDIRA, the Bank Insurance Fund and Savings Association Insurance Fund were merged to create the Deposit Insurance Fund. On January 1, 2007, final rules under the
FDIRA became effective which set a base assessment schedule for 2007 for Deposit Insurance Fund premiums. The final rules provide that the FDIC will apply assessment credits to offset 100% of a banks entire premium charge in 2007 and up to 90%
of a banks premium charge in 2008, 2009 and 2010 until the credit is exhausted. The Bank expects its assessment credits to be exhausted in 2007.



|Capital Requirements and Prompt Corrective Action
|-------------------------------------------------

As discussed above, the FRB has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks, which, like the Bank, are members of
the Federal Reserve System. Moreover, the FRB has promulgated regulations to implement the system of prompt corrective action established by the FDIA. Under the regulations, a bank is given one of the following ratings based upon its regulatory
capital: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Immediately upon becoming undercapitalized, an
institution becomes subject to prompt corrective action provisions of the FDIA, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the FRB monitor the condition of the institution and its
efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institutions assets and (v) requiring prior approval of certain expansion proposals.

In addition, an institution generally must file a written capital restoration plan which meets specified requirements with the appropriate Federal Reserve Bank within 45 days of the
date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. An institution, which is required to submit a capital restoration plan, must
concurrently submit a performance guaranty by each company that controls the institution. A critically undercapitalized institution generally is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that
forbearance from such action would better protect the deposit insurance fund. See Note 19 to the consolidated financial statements for further information.

The FRB may increase such minimum requirements for all banks or for specified banks. Increases in the minimum required ratios could adversely affect the Bank, including its ability to
pay dividends.

As of December 31, 2006, the Bank was well capitalized for the above purposes. The FDIC may revise capital requirements applicable to banking organizations beyond current levels. U.S.
bank regulatory authorities have proposed changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines to which the Bancorp and the Bank are subject.  These changes are discussed in
Recent Regulatory Developments, below.



|Brokered Deposits
|-----------------

Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit depending on the
institutions capital category. These restrictions have not had a material impact on the operations of the Bank because the Bank historically has not relied upon brokered deposits as a source of funding.

7

---



|Transactions with Affiliates
|----------------------------

Under Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder, there are various legal restrictions on the extent to which a BHC, such as the Bancorp,
and its nonbank subsidiaries may borrow, obtain credit from or otherwise engage in covered transactions with its FDIC insured depository institution subsidiaries. Such borrowings and other covered transactions by an insured depository
institution subsidiary (and its subsidiaries) with its nondepository institution affiliates are limited to the following amounts:

- In the case of one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed ten percent (10%) of the capital stock and surplus of the insured depository institution; and
- In the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed twenty percent (20%) of the capital stock and surplus of the insured depository institution.

Covered transactions are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued
by an affiliate, a purchase of assets from an affiliate unless exempted by the FRB, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, or the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a BHC and its subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.



|Community Investment and Consumer Protection Laws
|-------------------------------------------------

In connection with its retail banking activities, the Bank is subject to a variety of federal laws designed to protect depositors and borrowers and to promote lending to various
sectors of the economy and population. Included among these are:

- the CRA;
- the Electronic Funds Transfer Act;
- the Equal Credit Opportunity Act;
- the Expedited Funds Availability Act;
- the Fair Credit Reporting Act;
- the Fair Debt Collection Practices Act;
- the Home Mortgage Disclosure Act;
- the Home Ownership and Equity Protection Act;
- the Real Estate Settlement Procedures Act;
- the Truth in Savings Act; and
- the Truth in Lending Act.

The Bank is subject to rules and regulations implementing such laws which were promulgated by, among other regulators, the FRB, the FDIC, the U.S. Department of Housing and Urban
Development and the Federal Trade Commission.

The CRA requires the FRB to evaluate the Banks performance in helping to meet the credit needs of their entire communities, including low-and-moderate-income neighborhoods,
consistent with their safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it
limit an institutions discretion to develop the type of products and services that it believes are best suited to its particular community, consistent with the purposes of the CRA.

Recent amendments to CRA regulations by the FRB have created a new classification of intermediate small bank, which includes banks that have $250 million or more but
less than $1 billion in assets.  San Joaquin Bank currently qualifies as an intermediate small bank for CRA purposes.  The CRA performance of intermediate small banks is measured using a lending test and a community development test.
An intermediate small bank may elect to be treated as a large bank for CRA purposes, if it maintains the necessary data.

8

---

The FRBs CRA regulations for large banks are based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate
the institutions record of making loans in its service areas; (ii) an investment test, to evaluate the institutions record of investing in community development projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (iii) a service test, to evaluate the institutions delivery of services through its branches, ATMs, and other offices. As of the date of its most recent CRA evaluation in September of 2005, the Bank was rated in
the highest category for CRA compliance, outstanding.



|Customer Information Security
|-----------------------------

The FRB and other bank regulatory agencies have adopted final guidelines for establishing 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.



|Privacy
|-------

The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third
parties. In general, the statute requires the Bank to explain to consumers its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, the Bank is prohibited from disclosing
such information except as provided in its policies and procedures.



|The USA PATRIOT Act
|-------------------

The USA PATRIOT Act of 2001 (the PATRIOT Act), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has
significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, requires financial
institutions to implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance; suspicious activities and currency transaction reporting; and due diligence on
customers.



|Government Policies and Legislation
|-----------------------------------

The policies of regulatory authorities, including the FRB, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the
future. An important function of the Federal Reserve System is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on member bank borrowings, and changes
in reserve requirements against member bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the
United States government. Such policies have had, and will continue to have, a significant effect on the operating results of financial institutions.

The United States Congress has periodically considered and adopted legislation that has resulted in further deregulation of both banks and other financial institutions, including
mutual funds, securities brokerage firms and investment banking firms. No assurance can be given as to whether any additional legislation will be adopted or as to the effect such legislation would have on the business of the Bank or Bancorp. In
addition to the relaxation or elimination of geographic restrictions on banks and bank holding companies, a number of regulatory and legislative initiatives have the potential for eliminating many of the product line barriers presently separating
the services offered by commercial banks from those offered by non-banking institutions.

9

---



|Recent Regulatory Developments
|------------------------------

The Basel Committee on Banking Supervisions Basel II regulatory capital guidelines, published in June 2004 and amended in November 2005, are designed to promote
improved risk measurement and management processes and better align minimum capital requirements with risk. The Basel II guidelines would, however, be mandatory only for core banks, i.e., banks with consolidated total assets of $250
billion or more. They would, therefore, not foreseeably be applicable to the Bank, which continues to operate under U.S. risk-based capital guidelines consistent with Basel I guidelines published in 1988.

U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision the (Basel Committee), continue
to consider changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines to which the Bancorp and the Bank are subject. In 2005, the federal banking agencies issued an advance notice of
proposed rulemaking (ANPR) concerning potential changes in the risk-based capital rules (Basel 1-A) that are designed to apply to, and potentially reduce the risk capital requirements of BHCs, such as the Bancorp, that are
not among the 20 or so largest U.S. BHCs.  In December 2006, the federal bank regulators, including the FRB, issued a revised Interagency Notice of Proposed Rulemaking concerning Basel 1-A (the NPR), which would allow banks and BHCs that
are not among the 20 or so largest U.S. BHCs to either adopt Basel 1-A or remain subject to the existing risk-based capital rules. The NPR would also, among other changes, amend the ANPR to add new risk weights, expand the use of external credit
ratings for certain exposures and expand the range of eligible collateral and guarantors used to mitigate credit risk. The effective date, if adopted, of the Basel 1-A rules remains uncertain. Accordingly, the Bancorp is not yet able to determine
the effect of such rules on its risk capital requirements.

On December 12, 2006, the federal banking agencies jointly issued final guidance for banks and thrifts with high and increasing concentrations of commercial real estate
(CRE), construction, and development loans.  These guidelines generally require banks with concentrations in commercial real estate loans to adopt sound risk management programs and may, in certain cases, require banks to retain
additional capital commensurate with the risk presented by their respective loan portfolios.  The Bank believes that it has adopted a sound risk management program that is commensurate with its commercial real estate lending activities.



|Sarbanes-Oxley Act
|------------------

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). The stated goals of Sarbanes-Oxley are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

Sarbanes-Oxley generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports under the Exchange Act. Sarbanes-Oxley includes very
specific additional disclosure requirements and new corporate governance rules. These new requirements prompted the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandated
further studies of certain issues. Sarbanes-Oxley represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of directors and its committees.

Sarbanes-Oxleys principal provisions, many of which have been interpreted through regulations, provide for and include, among other things: (i) the creation of an independent
accounting oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that
the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and
senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public
companies and how they interact with the Bancorps independent auditors; (vi) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii)
requirements that companies disclose whether at least one member of the audit committee is a financial expert (as such term is defined by the SEC) and if not discussed, why the audit committee does not have a financial expert; (viii)
expanded disclosure

10

---

requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (ix) a
prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulatory requirements; (x) disclosure of a code of ethics and filing a
Form 8-K for a change or waiver of such code; (xi) requirements that management assess the effectiveness of internal control over financial reporting and the Bancorps independent registered public accounting firm attest to the assessment; and
(xii) a range of enhanced penalties for fraud and other violations.

The Bancorp has implemented procedures to comply with the various requirements provided in Sarbanes-Oxley and the rules promulgated by the SEC thereunder.



| | ITEM 1A. RISK FACTORS
| | ---------------------

There are risk factors that may affect the Companys business and impact the results of operations, some of which are beyond the control of the Company.

The Company may face risks and uncertainties in addition to those described below. Managements Discussion & Analysis of Financial Condition and Results of Operations, at
Item 7 in this Report, sets forth other risks and uncertainties regarding our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial, but later become material, may
also impair the Companys financial condition or results of operations.

If any of the following risks actually occur, the Companys financial condition and results of operations could be materially affected. This may cause the value of the
Companys securities to decline significantly, and investors could lose all or part of their investment in the Companys common stock.



|Interest Rate Risks
|-------------------

Any change in interest rates may significantly adversely affect our earnings

Our earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the rates received on loans and securities and the rates paid on
deposits and other borrowings. The relationship between the rates received on earning assets and the rates paid on interest-bearing liabilities is known as interest rate spread.  In general, the wider the spread, the more San Joaquin Bancorp earns.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, of the Federal Reserve Board. Changes in monetary
policy, including changes in interest rates, could influence not only the interest we receive on loans and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain
deposits. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our earnings could be adversely affected. Our earnings could also be adversely affected
if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.



|Credit Risks
|------------

A degradation our loan portfolio quality or an increase in loan losses may significantly adversely affect our earnings

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents managements estimate of probable
losses that have been incurred within the existing portfolio of loans. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects managements continuing
evaluation of credit risks, loan loss experience, current loan portfolio quality, present economic and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance
for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Any increases in the allowance for loan losses will
result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations.

11

---



|Geographic and Economic Risks
|-----------------------------

The Company's operations are geographically concentrated and a change in economic conditions may significantly adversely affect our earnings

Our operations are concentrated in Kern County, California.  As a result of this geographic concentration, the local economic conditions have a significant impact on the demand for
our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation,
recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, drought and other adverse weather conditions, changes in securities markets or other factors could impact local economic conditions
and, in turn, have a material adverse effect on our financial condition and results of operations.

A large portion of our assets consist of loans secured by real estate in California. Conditions in the California real estate market historically have influenced the level of
non-performing assets. A real estate recession in the San Joaquin Valley in California and/or Kern County could adversely affect our results of operations. In addition, California has experienced, on occasion, significant natural disasters,
including earthquakes, fires and flooding. The occurrence of one or more of such catastrophes could impair the value of the collateral for our real estate secured loans and adversely affect us. In recent years, real estate prices in our market area
have risen significantly. If real estate prices were to fall in our market area, the security for many of our real estate secured loans could be reduced and we could incur significant losses if borrowers of real estate secured loans default, and the
value of our collateral is insufficient to cover our losses.



|Competitive Risks
|-----------------

The Company faces strong competition which may significantly adversely affect our earnings

The banking and financial services business in our market area is highly competitive. Such competitors primarily include national, regional, and community banks within the markets in
which we operate. We also face competition from savings and loans, credit unions and other financial services companies. Our ability to compete successfully depends on a number of factors, including, among other things: Personalized service,
relationships between our customers and key managers, rates we offer on our deposit and loan products and product differentiation. Failure to perform in any of these areas could significantly weaken the Companys competitive position and in
turn, adversely affect our financial condition.



|Regulatory Risks
|----------------

Adverse effects of laws and regulations may significantly adversely affect our operations or earnings

As a one-bank holding company, a substantial portion of the Companys cash flow typically comes from dividends paid by its bank subsidiary. Various statutory provisions restrict
the amount of dividends the Companys subsidiaries can pay to the Company without regulatory approval. In addition, if any of the Companys subsidiaries were to liquidate, that subsidiarys creditors will be entitled to receive
distributions from the assets of that subsidiary to satisfy their claims against it before the Company, as a holder of an equity interest in the subsidiary, will be entitled to receive any of the assets of the subsidiary.

The Company is subject to significant federal and state regulation and supervision, which is primarily for the benefit and protection of the Banks customers and not for the
benefit of investors. In the past, the Banks business has been materially affected by these regulations. This trend is likely to continue in the future. Laws, regulations or policies, including accounting standards and interpretations
currently affecting the Company and the Companys subsidiaries, may change at any time. Regulatory authorities may also change their interpretation of these statutes and regulations. Therefore, the Companys business may be adversely
affected by any future changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, including legislative and regulatory reactions to the terrorist attack on September 11, 2001 and future acts of
terrorism, and major U.S. corporate bankruptcies and reports of accounting irregularities at U.S. public companies.

Additionally, the Banks business is affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected
by the policies of the FRB, which regulates the supply of money

12

---

and credit in the United States of America. Under long- standing policy of the FRB, a BHC is expected to act as a source of financial strength for its subsidiary banks. As a result of
that policy, the Company may be required to commit financial and other resources to its subsidiary bank in circumstances where the Company might not otherwise do so. Among the instruments of monetary policy available to the FRB are (a) conducting
open market operations in U.S. government securities, (b) changing the discount rates of borrowings by depository institutions, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods
are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the
Companys business, results of operations and financial condition.



|Internal Control Risks
|----------------------

The Companys controls and procedures may fail or be circumvented which may significantly adversely affect our operations or earnings.

Management regularly evaluates and maintains the Companys internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and
procedures. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. A control
procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. The design of any control procedure 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, controls become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. 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. Any failure or circumvention
of the Companys controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Companys financial condition and results of operations.



|Systems Risks
|-------------

The Companys information systems may experience an interruption or breach in security.

We rely heavily on technology and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions
in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our systems, there can be no
assurance that any such failures, interruptions or security breaches will not occur. The occurrence of any failures, interruptions or security breaches could damage our reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.



|Shareholder Risks
|-----------------

Your ability to sell your shares of common stock at the times and in the amounts you desire may be limited.

Although our common stock is listed for trading on the Over-the-Counter Bulletin Board, the trading volume in our common stock is thin and average daily volumes are much lower than
those of other larger financial services companies. We are not listed on the Nasdaq or any other securities exchange.  While there are several investment securities brokers/dealers who make a market in our common stock, there is no active trading
market for our common stock and thus you may not be able to sell the shares of common stock that you own at the times and in the amounts you would otherwise like to.

Our directors and executive officers beneficially own a significant portion of our outstanding common stock.

Our directors and executive officers beneficially own a significant portion of our outstanding common stock. As a result, such shareholders would most likely control the outcome of
corporate actions requiring shareholder approval, including the election of directors and the approval of significant corporate transactions, such as a merger or sale of all or

13

---

substantially all of our assets. We can provide no assurance that the investment objectives of such shareholders will be the same as our other shareholders.



|ITEM 1B. UNRESOLVED STAFF COMMENTS
|----------------------------------



|None.
|-----



|ITEM 2. PROPERTIES
|------------------

The following properties are owned by the Company and are unencumbered. In the opinion of Management, all such properties are adequately covered by insurance.

|                      |  | Use of            |  | Square Feet of |  | Land and       |  |                      
|--------------------- |  | ----------------- |  | -------------- |  | -------------- |  | ---------------------
|Name and Location     |  | Facilities        |  | Interior Space |  | Building Costs |  | Date of Acquisition  
|                      |  |                   |  |                |  |                |  |                      
|                     
|Administration        |  | Principle         |  | 10,000         |  | $879,000       |  | 06/01/1996           
|1000 Truxtun Ave.     |  | Executive Offices |  |                |  |                |  |                      
|Bakersfield, CA 93301 |  |                   |  |                |  |                |  |                      
|                      |  |                   |  |                |  |                |  |                      
|                     
|Rosedale              |  | Branch Office     |  | 12,600         |  | $3,562,000     |  | 02/01/2002 (land)    
|3800 Riverlakes Dr.   |  |                   |  |                |  |                |  | 08/01/2004 (building)
|Bakersfield, CA 93312 |  |                   |  |                |  |                |  |                      
|                      |  |                   |  |                |  |                |  |                      
|                     
|Stockdale             |  | Branch Office     |  | 5,914          |  | $3,317,000     |  | 2/27/2004            
|4600 California Ave.  |  |                   |  |                |  |                |  |                      
|Bakersfield, CA 93309 |  |                   |  |                |  |                |  |                      
|                      |  |                   |  |                |  |                |  |                      

The following facilities are leased by the Company as of December 31, 2006. In the opinion of Management, all such properties are adequately covered by insurance.

|                      |  | Use of        |  | Square Feet of |  | Land and                |  | Lease          
|--------------------- |  | ------------- |  | -------------- |  | ----------------------- |  | ---------------
|Name and Location     |  | Facilities    |  | Interior Space |  | Building Costs          |  | Expiration Date
|                      |  |               |  |                |  |                         |  |                
|                     
|Main Office           |  | Branch Office |  | 6,311          |  | $ 6,829.74 per month(1) |  | 2/28/2016      
|1301-17thSt.          |  |               |  |                |  |                         |  |                
|Bakersfield, CA 93301 |  |               |  |                |  |                         |  |                
|                      |  |               |  |                |  |                         |  |                
|                     
|Delano Office         |  | Branch Office |  | 1,690          |  | $2,112.50 per month     |  | 9/30/2008(2)   
|1613 Inyo St.         |  |               |  |                |  |                         |  |                
|Delano, CA            |  |               |  |                |  |                         |  |                
|                      |  |               |  |                |  |                         |  |                

|1. | This rent amount is subject to a periodic cost of living adjustment based upon the producer price index as published by the U.S. Bureau of Labor Statistics. The next adjustment is due
on February 1, 2013.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | The Company may terminate the lease prior to the lease expiration date upon 60 days notice and payment of two months rent upon such cancellation date.                                                      
|  



|Future Plans For Expansion
|--------------------------

On December 21, 2006, the Company entered into an agreement with a third party to purchase land located at the northeast corner of Panama Lane and Stine Road, in the City of
Bakersfield, County of Kern, State of California, that is approximately 57,000 square feet in size. The actual size of the Land shall be determined prior to the Close of Escrow by a survey (the Survey) prepared by a licensed engineer
retained by Seller at its own expense. The purchase price of the property is thirty dollars ($30.00) per square foot of the land, as determined by the Survey (an estimated One Million Seven Hundred Ten Thousand Dollars ($1,710,000)). The
Company plans to build and open a branch on the property. Completion of the project is expected in 2008.

14

---



|ITEM 3. LEGAL PROCEEDINGS
|-------------------------

There are no material pending legal proceedings to which the Company is a party or of which their property is subject, other than routine, ordinary, litigation incidental to the
business of the Company. None of the ordinary routine litigation in which the Company is involved is expected to have material adverse impact upon the financial position or results of operations of the Company.

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



|None.
|-----

15

---



|PART II
|-------

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The capital stock of San Joaquin Bancorp is currently traded on the OTC Bulletin Board under the symbol SJQU. The Company has not filed an application for listing of its Common Stock on any national stock exchange or market, nor does the Companys Management have a current intention to file such an application.

The following table summarizes the high and low bid information for the Companys common stock for each full quarterly period within the two most recent fiscal years as quoted on the OTC Bulletin Board. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

|                             | High    | Low    
|---------------------------- | ------- | -------
|                             |         |        
|Year Ended December 31, 2006 |         |        
|Fourth Quarter               | $ 43.00 | $ 37.10
|Third Quarter                | $ 41.00 | $ 34.50
|Second Quarter               | $ 38.00 | $ 34.50
|First Quarter                | $ 37.00 | $ 33.50
|                            
|Year Ended December 31, 2005 |         |        
|Fourth Quarter               | $ 35.00 | $ 30.80
|Third Quarter                | $ 31.65 | $ 26.55
|Second Quarter               | $ 28.90 | $ 26.25
|First Quarter                | $ 29.00 | $ 26.10

As of February 28, 2007, there were 1,070 holders of record of the Companys common stock (including holders who may be nominees for an undetermined number of beneficial owners). This figure may not include some beneficial owners who hold shares in nominee name.

San Joaquin Bancorp has paid a cash dividend in each of the last eight years. The following sets forth the cash dividend history of the Company for the past three years:

- A $0.22 per share cash dividend was declared for shareholders of record as of February 25, 2005.
- A $0.24 per share cash dividend was declared for shareholders of record as of February 27, 2006.
- A $0.27 per share cash dividend was declared for shareholders of record as of February 28, 2007.

The Company expects that comparable cash dividends will be paid in future years.

Under California law, the Company may declare a cash dividend out of the Companys net profits up to the lesser of the Companys retained earnings or the Companys net income for the last three (3) fiscal years (less any distributions made to shareholders during such period), or, with the prior written approval of the Commissioner, in an amount not exceeding the greatest of (i) the retained earnings of the Company; (ii) the net income of the Company for its last fiscal year; or (iii) the net income of the Company for its current fiscal year. The payment of any cash dividends by the Company will depend not only upon the Companys earnings during a specified period, but also on the Company meeting certain regulatory capital requirements. See Item 1  Restrictions on Dividends and Other Distributions herein.

16

---

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2006 about the Companys common stock that may be issued upon the exercise of options under the Companys 1989 Stock Option Plan or 1999 Stock Incentive Plan that were approved by our shareholders or that may be issued upon the exercise of options granted outside of these equity compensation plans.

|                              |  |                            |  |                           |  | Number of Securities     
|----------------------------- |  | -------------------------- |  | ------------------------- |  | -------------------------
|                              |  |                            |  |                           |  | Remaining Available for  
|                              |  |                            |  |                           |  | Future Issuance under    
|                              |  | Number of Securities to be |  | Weighted-average Exercise |  | Equity Compensation Plans
|                              |  | Issued upon Exercise of    |  | Price of Outstanding      |  | (Excluding Securities    
|                              |  | Outstanding Options,       |  | Options, Warrants and     |  | Reflected in Column (a)) 
|Plan Category                 |  | Warrants and Rights (#)(a) |  | Rights ($)(b)             |  | (#)(c)                   
|                              |  |                            |  |                           |  |                          
|                             
|Equity compensation plans     |  |                            |  |                           |  |                          
|Approved by shareholders      |  | 439,165(1)                 |  | $17.63                    |  | 226,485(2)               
|Equity compensation plans not |  |                            |  |                           |  |                          
|Approved by shareholders      |  | -                          |  | -                         |  | -                        
|                              |  |                            |  |                           |  |                          
|Total                         |  | 439,165                    |  | $17.63                    |  | 226,485                  

|1) | Represents options granted under the 1989 Stock Option Plan to purchase 83,150 shares of the Companys common stock and options granted under the 1999 Stock Incentive Plan to purchase 356,015 shares of the Companys common stock.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) | Represents 226,485 shares reserved for issuance under the 1999 Stock Incentive Plan.                                                                                                                                                 
|  

17

---



|Stock Performance
|-----------------

The following graph compares San Joaquin Bancorp's cumulative 5-year total shareholder return on common stock with the cumulative total returns of the Russell 2000 index and the
NASDAQ Bank index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from December 31, 2001 to December 31, 2006.



|COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among San Joaquin Bancorp, The Russell 2000 IndexAnd The NASDAQ Bank Index
|-----------------------------------------------------------------------------------------------------------------------





| | * $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.Fiscal year ending December 31.
| | -----------------------------------------------------------------------------------------------------------------

|                    |  | 12/01  |  | 12/02  |  | 12/03  |  | 12/04  |  | 12/05  |  | 12/06 
|------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                    |  |        |  |        |  |        |  |        |  |        |  |       
|                   
|San Joaquin Bancorp |  | 100.00 |  | 122.34 |  | 183.46 |  | 275.27 |  | 335.33 |  | 380.37
|Russell 2000 Index  |  | 100.00 |  | 79.52  |  | 117.09 |  | 138.55 |  | 144.86 |  | 171.47
|NASDAQ Bank Index   |  | 100.00 |  | 59.14  |  | 89.11  |  | 103.85 |  | 130.57 |  | 166.05

The stock price performance included in this graph is not necessarily indicative of future stock price performance.



|Issuer Purchases of Equity Securities
|-------------------------------------

The Company did not purchase any shares of its common stock during fiscal year 2006.



|Unregistered Sales of Equity Securities
|---------------------------------------



|None.
|-----

18

---



|ITEM 6. SELECTED FINANCIAL DATA
|-------------------------------

The following table presents selected historical financial information, including share and per share information. The selected financial and other data as of and for the five years
ended December 31, 2006 is derived in part from the audited Financial Statements of the Company presented elsewhere in this annual report on Form 10-K. The selected historical financial data set forth below should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements of the Company, including the related notes included elsewhere herein.

|                                                      |  |           |  |           |  | At December 31, |  |           |  |          
|----------------------------------------------------- |  | --------- |  | --------- |  | --------------- |  | --------- |  | ---------
|(data in thousands, except per share data)            |  | 2006      |  | 2005      |  | 2004            |  | 2003      |  | 2002     
|                                                      |  |           |  |           |  |                 |  |           |  |          
|Total Assets                                          |  | $ 748,930 |  | $ 627,098 |  | $ 496,746       |  | $ 415,501 |  | $ 337,388
|Cash & Due from banks                                 |  | 31,869    |  | 24,355    |  | 24,082          |  | 20,980    |  | 19,608   
|Federal Funds Sold                                    |  | 4,250     |  | 1,700     |  | -               |  | 31,000    |  | 9,300    
|Securities available-for-sale                         |  | 7,072     |  | 2,428     |  | 2,494           |  | -         |  | -        
|Securities held-to-maturity                           |  | 140,822   |  | 167,636   |  | 122,912         |  | 80,563    |  | 56,959   
|Total Loans, gross                                    |  | 537,761   |  | 408,950   |  | 326,879         |  | 268,620   |  | 237,507  
|Allowance for loan losses                             |  | 8,409     |  | 7,003     |  | 5,487           |  | 4,819     |  | 4,276    
|Deferred loan fees                                    |  | 1,353     |  | 1,550     |  | 1,023           |  | 845       |  | 529      
|Investment in real estate                             |  | 643       |  | 710       |  | 686             |  | 745       |  | 805      
|Total deposits                                        |  | 642,654   |  | 575,533   |  | 442,976         |  | 376,261   |  | 304,410  
|Federal funds purchased and securities sold           |  |           |  |           |  |                 |  |           |  |          
|under agreements to repurchase                        |  | -         |  | -         |  | 8,663           |  | 6,380     |  | 4,919    
|FHLB Advances                                         |  | 32,200    |  | -         |  | -               |  | -         |  | -        
|Long-term debt and other borrowings                   |  | 17,098    |  | 6,797     |  | 6,805           |  | 813       |  | 820      
|Total shareholders' equity                            |  | 45,866    |  | 39,192    |  | 33,110          |  | 28,209    |  | 24,420   
|                                                     
|Selected Statement of Operations Data:                |  | 2006      |  | 2005      |  | 2004            |  | 2003      |  | 2002     
|                                                      |  |           |  |           |  |                 |  |           |  |          
|Interest income                                       |  | $ 46,528  |  | 32,269    |  | 22,055          |  | 18,112    |  | 17,592   
|Interest expense                                      |  | 17,828    |  | 9,046     |  | 3,615           |  | 2,983     |  | 4,091    
|Net interest income before                            |  |           |  |           |  |                 |  |           |  |          
|provision for loan losses                             |  | 28,700    |  | 23,223    |  | 18,440          |  | 15,129    |  | 13,501   
|Provision for loan losses                             |  | 1,730     |  | 1,200     |  | 1,200           |  | 1,470     |  | 1,670    
|Net interest income after                             |  |           |  |           |  |                 |  |           |  |          
|provision for loan losses                             |  | 26,970    |  | 22,023    |  | 17,240          |  | 13,659    |  | 11,831   
|Noninterest income                                    |  | 3,075     |  | 2,711     |  | 3,070           |  | 2,927     |  | 2,866    
|Noninterest expense                                   |  | 15,205    |  | 13,368    |  | 11,427          |  | 10,261    |  | 8,737    
|Income before taxes                                   |  | 14,840    |  | 11,366    |  | 8,883           |  | 6,325     |  | 5,960    
|Income tax expense                                    |  | 6,366     |  | 4,742     |  | 3,475           |  | 2,138     |  | 2,365    
|Net income                                            |  | 8,474     |  | $ 6,624   |  | $ 5,408         |  | $ 4,187   |  | $ 3,595  
|                                                     
|Share Data:                                           |  | 2006      |  | 2005      |  | 2004            |  | 2003      |  | 2002     
|                                                      |  |           |  |           |  |                 |  |           |  |          
|Net income per share (basic)                          |  | $ 2.44    |  | $ 1.94    |  | $ 1.60          |  | $ 1.25    |  | $ 1.10   
|Net income per share (diluted)                        |  | $ 2.29    |  | $ 1.81    |  | $ 1.50          |  | $ 1.18    |  | $ 1.06   
|Book Value per share(1)                               |  | $ 13.16   |  | $ 11.41   |  | $ 9.75          |  | $ 8.42    |  | $ 7.41   
|Cash dividend per share                               |  | $ 0.24    |  | $ 0.22    |  | $ 0.20          |  | $ 0.20    |  | $ 0.18   
|Weighted average common shares outstanding            |  | 3,475,801 |  | 3,421,380 |  | 3,387,864       |  | 3,339,850 |  | 3,280,283
|Period end shares outstanding                         |  | 3,486,222 |  | 3,435,896 |  | 3,396,134       |  | 3,352,151 |  | 3,294,291
|                                                     
|1) Shareholders' equity divided by shares outstanding |  |           |  |           |  |                 |  |          

19

---

|                                             |  |          |  |         |  | At December 31, |  |         |  |       
|-------------------------------------------- |  | -------- |  | ------- |  | --------------- |  | ------- |  | ------
|                                             |  |          |  |         |  |                 |  |         |  |       
|Key Operating Ratios:                        |  | 2006     |  | 2005    |  | 2004            |  | 2003    |  | 2002  
|                                             |  |          |  |         |  |                 |  |         |  |       
|Performance ratios:                          |  |          |  |         |  |                 |  |         |  |       
|Return on Average Equity(1)                  |  | 19.48%   |  | 18.43%  |  | 17.69%          |  | 15.92%  |  | 15.62%
|Return on Average Assets(2)                  |  | 1.26%    |  | 1.18%   |  | 1.17%           |  | 1.11%   |  | 1.12% 
|Net interest spread(3)                       |  | 3.47%    |  | 3.70%   |  | 4.06%           |  | 4.09%   |  | 4.16% 
|Net interest margin(4)                       |  | 4.60%    |  | 4.51%   |  | 4.43%           |  | 4.41%   |  | 4.62% 
|Efficiency ratio(5)                          |  | 47.85%   |  | 51.55%  |  | 53.12%          |  | 56.83%  |  | 53.38%
|Net loans(6)to total deposits                |  | 82.16%   |  | 69.57%  |  | 72.32%          |  | 69.89%  |  | 76.40%
|Dividend payout ratio(7)                     |  | 9.84%    |  | 11.34%  |  | 12.50%          |  | 16.00%  |  | 16.67%
|Average shareholders' equity to              |  |          |  |         |  |                 |  |         |  |       
|average total assets                         |  | 6.45%    |  | 6.41%   |  | 6.64%           |  | 6.98%   |  | 7.21% 
|                                            
|Asset Quality Ratios:                        |  |          |  |         |  |                 |  |         |  |       
|Nonperforming and restructured loans         |  |          |  |         |  |                 |  |         |  |       
|to total loans(8)                            |  | 0.03%    |  | 0.18%   |  | 0.63%           |  | 0.65%   |  | 1.84% 
|Nonperforming and restructured assets        |  |          |  |         |  |                 |  |         |  |       
|to total loans and OREO(9)                   |  | 0.15%    |  | 0.35%   |  | 0.84%           |  | 0.93%   |  | 2.18% 
|Net charge-offs to average total loans       |  | 0.07%    |  | 0.17%   |  | 0.17%           |  | 0.22%   |  | 0.22% 
|Allowance for loan losses to total loans     |  | 1.57%    |  | 1.72%   |  | 1.68%           |  | 1.79%   |  | 1.80% 
|Allowance for loan losses to                 |  |          |  |         |  |                 |  |         |  |       
|nonperforming and restructured loans         |  | 5496.08% |  | 963.27% |  | 267.53%         |  | 276.48% |  | 97.74%
|                                            
|Capital Ratios:                              |  |          |  |         |  |                 |  |         |  |       
|Tier 1 capital to adjusted total assets      |  | 8.24%    |  | 6.44%   |  | 6.66%           |  | 6.89%   |  | 7.28% 
|Tier 1 capital to total risk weighted assets |  | 9.16%    |  | 8.03%   |  | 8.68%           |  | 8.81%   |  | 8.91% 
|Total capital to total risk weighted assets  |  | 11.37%   |  | 10.51%  |  | 11.50%          |  | 10.06%  |  | 10.14%

|1) | Net income divided by average shareholders' equity.                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) | Net income divided by average assets.                                                                                                                               
|  
|3) | Dollar weighted average interest income yield less dollar weighted average interest expense rate.                                                                   
|  
|4) | Net interest income divided by average interest-earning assets.                                                                                                     
|  
|5) | Noninterest expense as a percentage of the sum of net interest income before provision for loan losses and noninterest income excluding securities gains and losses.
|  
|6) | Total gross loans less the allowance for loan losses, deferred fees and related costs.                                                                              
|  
|7) | Dividends declared per share as a percentage of net income per share.                                                                                               
|  
|8) | Nonperforming loans consist of nonaccrual loans, loans past due 90 days or more.                                                                                    
|  
|9) | Nonperforming assets consist of nonperforming and restructured loans and other real estate owned (OREO).                                                            
|  

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion addresses 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 thereto appearing elsewhere in this report.

This report contains forward-looking statements about the Company for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation
Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking
statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or
conditional verbs such as "will," "would," "should," "could," or "may."

20

---

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors -- many of which are beyond our control -- could cause actual conditions,
events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors include, among others, certain credit,
market, operational and liquidity risks associated with our business and operations, changes in business and economic conditions in California and nationally, rising interest rates, potential acts of terrorism (which are beyond our control),
volatility of rate sensitive deposits and assets, value of real estate collateral securing many of our loans, accounting estimates and judgments, compliance costs associated with the companys internal control structure and procedures for
financial reporting. These risk factors are not exhaustive and additional factors that could have an adverse effect on our business and financial performance are set forth under Risk Factors in Item 1A and elsewhere in our annual report
on Form 10-K.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the
date forward-looking statements are made.



|Critical Accounting Policies
|----------------------------

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The
financial information and disclosures contained within those statements are significantly impacted by Managements estimates, assumptions, and judgments. These estimates, assumptions, and judgments are based upon historical experience and
various other factors available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater
reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. In addition, GAAP itself may change from one previously acceptable
method to another method.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented
in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.



|Reorganization
|--------------

On May 9, 2006, San Joaquin Bancorp, San Joaquin Bank, and San Joaquin Reorganization Corp. (the "Reorganization Corp."), a California corporation and wholly- owned subsidiary of the
Bancorp, entered into an Agreement and Plan of Reorganization and Agreement of Merger (together, the "Agreements") pursuant to which the Reorganization Corp. would be merged with and into the Bank, with the Bank being the surviving corporation (the
"Reorganization"). Upon consummation of the Reorganization, the Bank would become a wholly-owned subsidiary of the Bancorp and the shareholders of the Bank would receive one share of Bancorp common stock in exchange for each share of Bank common
stock held by such shareholder.

At the Banks Annual Meeting of Shareholders on June 20, 2006, the Reorganization was approved by the affirmative vote of a majority of the outstanding shares of the Banks
common stock. In addition, the Bank and Bancorp received all required approvals to the consummation of the Reorganization from all applicable regulatory authorities.

The Agreements were filed with the Secretary of State of the State of California and the Reorganization became effective as of the close of business on July 31, 2006. As a result of
the Reorganization, the Bank became a wholly-owned subsidiary of the Bancorp and the one-for-one share exchange described above was completed. In addition, upon consummation of the Reorganization, the Bancorp assumed all outstanding stock options of
the Bank exercisable into shares of Bank common stock. Such stock options continue be subject to the same terms and conditions of such stock options immediately prior to the consummation of the Reorganization, except that such options are now
exercisable for Bancorp common stock.

Prior to the Reorganization, the Bank's common stock was registered under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Bank was subject to the
information requirements of the Exchange Act and filed annual and quarterly reports, proxy statements and other information with the FDIC. As a result of the Reorganization, the Bancorp became the successor to the Bank as provided in Rule 12g-3(a)
under the Exchange Act and the Bancorp's common stock became registered under Section 12(g) of the Exchange Act.

21

---

The directors and executive officers of the Bancorp following the Reorganization are the same directors and officers of the Bank, except that Bruce Maclin is Chairman of the Board and
Chief Executive Officer, Bart Hill is the President of the Bancorp, and John Ivy is an executive officer of the Bank but not of the Bancorp. The directors and officers of the Bank following the Reorganization are the same directors and officers of
the Bank as prior to the Merger. The Bank will continue to do business under the name of San Joaquin Bank.



|Overview
|--------

At December 31, 2006, we had total consolidated assets of $748,930,000 (an increase of 19.4% compared to the $627,098,000 in assets at the end of 2005), total consolidated
deposits of $642,654,000 (an increase of 11.7% over the 2005 level of $575,533,000), total consolidated net loans of $527,999,000 (an increase 31.9% compared to the $400,397,000 in net loans at year end 2005), and consolidated
shareholders equity of $45,866,000 (an increase of 17.0% compared to $39,192,000 at the end of 2005).

We reported record annual net income of $8,474,000 for the year ended December 31, 2006. Net income increased $1,850,000, or 27.9%, over the $6,624,000 reported in 2005,
which was an increase of $1,216,000, or 22.5%, from the $5,408,000 reported in 2004. Diluted earnings per share for the year ended December 31, 2006 increased 26.5% to $2.29 compared to the $1.81 for 2005, which was an increase of
20.7% from $1.50 in 2004. The annualized return on average equity (ROAE) was 19.48%, 18.43%, and 17.69% for the years ended December 31, 2006, 2005, and 2004, respectively. For the same periods, the annualized return on average assets was 1.26%,
1.18%, and 1.17%, respectively. We have experienced steady growth in loan volumes while, at the same time, we have continued to maintain control over our overhead and other fixed expenses, which has resulted in our strong earnings
performance.

We ended 2006 with a Tier 1 capital ratio of 8.24%, a Tier 1 capital to risk weighted asset ratio of 9.16%, and a total capital to risk weighted asset ratio of 11.37% . At the end of
2005, these ratios were 6.44%, 8.03% and 10.51%, respectively. We met all the criteria under current regulatory guidelines for a well capitalized Company as of December 31, 2006.

During 2006, the need for noncore funding, such as Federal Home Loan Bank ("FHLB") advances, brokered deposits, and time certificates of deposit in the form of public funds, increased
as loan growth outpaced deposit growth. This increased need for funding alternatives at higher interest rates resulted in a greater increase in interest expense year-over-year than would have resulted otherwise from core funding such as demand, NOW,
money market, savings, and time certificates of deposit under $100,000.

22

---

The following table provides a summary of the major elements of income and expense for the three years ended December 31:

|                                              |  |          |  | Twelve Months Ended December 31 |  |         |  |               
|--------------------------------------------- |  | -------- |  | ------------------------------- |  | ------- |  | --------------
|                                              |  |          |  |                                 |  |         |  |               
|                                              |  |          |  | Year-Over-Year                  |  |         |  | Year-Over-Year
|(dollars in thousands, except per share data) |  | 2006     |  | Change                          |  | 2005    |  | Change        
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|INTEREST INCOME                               |  |          |  |                                 |  |         |  |               
|Loans (including fees)                        |  | $ 39,615 |  | $ 13,403                        |  | 51.1%   |  | $ 26,212      
|Investment securities                         |  | 6,456    |  | 1,119                           |  | 21.0%   |  | 5,337         
|Fed funds & other interest-bearing balances   |  | 457      |  | (263)                           |  | -36.5%  |  | 720           
|                                              |  |          |  |                                 |  |         |  |               
|Total Interest Income                         |  | 46,528   |  | 14,259                          |  | 44.2%   |  | 32,269        
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|INTEREST EXPENSE                              |  |          |  |                                 |  |         |  |               
|Deposits                                      |  | 16,190   |  | 7,559                           |  | 87.6%   |  | 8,631         
|Short-term borrowings                         |  | 905      |  | 868                             |  | 2345.9% |  | 37            
|Long-term borrowings                          |  | 733      |  | 355                             |  | 93.9%   |  | 378           
|                                              |  |          |  |                                 |  |         |  |               
|Total Interest Expense                        |  | 17,828   |  | 8,782                           |  | 97.1%   |  | 9,046         
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|Net Interest Income                           |  | 28,700   |  | 5,477                           |  | 23.6%   |  | 23,223        
|Provision for loan losses                     |  | 1,730    |  | 530                             |  | 44.2%   |  | 1,200         
|                                              |  |          |  |                                 |  |         |  |               
|Net Interest Income After Loan Loss Provision |  | 26,970   |  | 4,947                           |  | 22.5%   |  | 22,023        
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|NONINTEREST INCOME                            |  |          |  |                                 |  |         |  |               
|Service charges & fees on deposits            |  | 787      |  | (100)                           |  | -11.3%  |  | 887           
|Other customer service fees                   |  | 1,322    |  | 171                             |  | 14.9%   |  | 1,151         
|Other                                         |  | 966      |  | 293                             |  | 43.5%   |  | 673           
|                                              |  |          |  |                                 |  |         |  |               
|Total Noninterest Income                      |  | 3,075    |  | 364                             |  | 13.4%   |  | 2,711         
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|NONINTEREST EXPENSE                           |  |          |  |                                 |  |         |  |               
|Salaries and employee benefits                |  | 9,494    |  | 1,587                           |  | 20.1%   |  | 7,907         
|Occupancy                                     |  | 942      |  | 47                              |  | 5.3%    |  | 895           
|Furniture & equipment                         |  | 1,029    |  | 4                               |  | 0.4%    |  | 1,025         
|Promotional                                   |  | 568      |  | (99)                            |  | -14.8%  |  | 667           
|Professional                                  |  | 1,227    |  | 293                             |  | 31.4%   |  | 934           
|Other                                         |  | 1,945    |  | 5                               |  | 0.3%    |  | 1,940         
|                                              |  |          |  |                                 |  |         |  |               
|Total Noninterest Expense                     |  | 15,205   |  | 1,837                           |  | 13.7%   |  | 13,368        
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|Income Before Taxes                           |  | 14,840   |  | 3,474                           |  | 30.6%   |  | 11,366        
|Income Taxes                                  |  | 6,366    |  | 1,624                           |  | 34.2%   |  | 4,742         
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|NET INCOME                                    |  | $ 8,474  |  | 1,850                           |  | 27.9%   |  | $ 6,624       
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|                                             
|Basic Earnings per Share                      |  | $ 2.44   |  | 0.50                            |  | 25.8%   |  | $ 1.94        
|                                              |  |          |  |                                 |  |         |  |               
|                                             
|Diluted Earnings per Share                    |  | $ 2.29   |  | 0.48                            |  | 26.5%   |  | $ 1.81        
|                                              |  |          |  |                                 |  |         |  |               



|Net Interest Income
|-------------------

Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, is the principal component of our earnings.
The following tables provide a summary of earning assets and interest-bearing liabilities with their corresponding components of net interest income and the changes within the components for the periods indicated. The second and third tables set
forth changes in interest income and interest expense segregated for major categories of interest-earning assets and interest-bearing liabilities into amounts

23

---

attributable to changes in volume (volume) and changes in rates (rate). Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume
and rate components.

|Distribution of Assets, Liabilities & Shareholders' Equity, Rates & Interest Margin |  |           |  |          |  |                                 |  |          
|----------------------------------------------------------------------------------- |  | --------- |  | -------- |  | ------------------------------- |  | ---------
|                                                                                   
|                                                                                    |  |           |  |          |  | Twelve Months Ended December 31 |  |          
|                                                                                    |  |           |  |          |  |                                 |  |          
|(dollars in thousands)                                                              |  |           |  | 2006     |  |                                 |  |          
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                    |  | Avg       |  |          |  | Avg                             |  | Avg      
|                                                                                    |  | Balance   |  | Interest |  | Yield                           |  | Balance  
|                                                                                    |  |           |  |          |  |                                 |  |          
|ASSETS                                                                              |  |           |  |          |  |                                 |  |          
|Earning assets:                                                                     |  |           |  |          |  |                                 |  |          
|Loans, net of unearned(1)                                                           |  | $ 461,346 |  | $ 39,615 |  | 8.59%                           |  | $ 334,158
|Taxable investments                                                                 |  | 148,570   |  | 6,301    |  | 4.24%                           |  | 156,451  
|Tax-exempt investments(2)                                                           |  | 4,091     |  | 155      |  | 3.79%                           |  | 1,183    
|Fed funds sold and other                                                            |  |           |  |          |  |                                 |  |          
|interest-bearing balances                                                           |  | 9,796     |  | 457      |  | 4.67%                           |  | 23,258   
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|Total Earning Assets                                                                |  | 623,803   |  | 46,528   |  | 7.46%                           |  | 515,050  
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|Cash & due from Banks                                                               |  | 26,457    |  |          |  |                                 |  | 26,347   
|Other assets                                                                        |  | 23,761    |  |          |  |                                 |  | 19,545   
|                                                                                    |  |           |  |          |  |                                 |  |          
|Total Assets                                                                        |  | $ 674,021 |  |          |  |                                 |  | $ 560,942
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|LIABILITIES                                                                         |  |           |  |          |  |                                 |  |          
|Interest-bearing liabilities:                                                       |  |           |  |          |  |                                 |  |          
|NOW & money market                                                                  |  | $ 289,385 |  | $ 11,428 |  | 3.95%                           |  | $ 213,249
|Savings                                                                             |  | 98,432    |  | 3,525    |  | 3.58%                           |  | 106,552  
|Time deposits                                                                       |  | 31,972    |  | 1,237    |  | 3.87%                           |  | 24,171   
|Other borrowings                                                                    |  | 27,531    |  | 1,638    |  | 5.95%                           |  | 8,893    
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|Total interest-bearing liabilities                                                  |  | 447,320   |  | 17,828   |  | 3.99%                           |  | 352,865  
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|Noninterest-Bearing Deposits                                                        |  | 176,879   |  |          |  |                                 |  | 166,573  
|Other Liabilities                                                                   |  | 6,319     |  |          |  |                                 |  | 5,570    
|                                                                                    |  |           |  |          |  |                                 |  |          
|                                                                                   
|Total Liabilities                                                                   |  | $ 630,518 |  |          |  |                                 |  | $ 525,008
|                                                                                   
|SHAREHOLDERS' EQUITY                                                                |  |           |  |          |  |                                 |  |          
|Shareholders' Equity                                                                |  | 43,503    |  |          |  |                                 |  | 35,934   
|                                                                                    |  |           |  |          |  |                                 |  |          
|Total Liabilities and                                                               |  |           |  |          |  |                                 |  |          
|Shareholders' Equity                                                                |  | $ 674,021 |  |          |  |                                 |  | $ 560,942
|                                                                                    |  |           |  |          |  |                                 |  |          
|Net Interest Income and                                                             |  |           |  |          |  |                                 |  |          
|Net Interest Margin(3)                                                              |  |           |  | $ 28,700 |  | 4.60%                           |  |          
|                                                                                    |  |           |  |          |  |                                 |  |          

|1) | Loan interest income includes fee income of $1,967,000, $1,907,000, and $1,536,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Includes
nonperforming and restructured loans of $153,000, $727,000, and $2,051,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) | The amount of tax-exempt securities that we hold is minimal and the amount derived from these securities is not significant, therefore there have been no adjustments made to reflect
interest earned on these securities on a tax-equivalent basis.                                                            
|  
|3) | Net interest margin is computed by dividing net interest income by the total average earning assets.                                                                                                                                                                                                            
|  

24

---

|Summary of Changes in Interest Income and Expense  |  |                                 |  |                |  |           
|-------------------------------------------------- |  | ------------------------------- |  | -------------- |  | ----------
|                                                   |  |                                 |  |                |  |           
|                                                  
|                                                   |  | Twelve Months Ended December 31
|                                                   |  |                                 |  | 2006 over 2005 |  |           
|                                                   |  |                                 |  |                |  |           
|(dollars in thousands)                             |  | Volume                          |  | Rate           |  | Net Change
|                                                   |  |                                 |  |                |  |           
|Interest-Earning Assets:                           |  |                                 |  |                |  |           
|Loans, net of unearned income(1)                   |  | 10,733                          |  | 2,670          |  | 13,403    
|Taxable investment securities                      |  | (277)                           |  | 1,310          |  | 1,033     
|Tax-exempt investment securities(2)                |  | 118                             |  | (32)           |  | 86        
|Fed funds sold and other interest-bearing balances |  | (529)                           |  | 266            |  | (263)     
|                                                   |  |                                 |  |                |  |           
|                                                  
|Total                                              |  | 10,045                          |  | 4,214          |  | 14,259    
|                                                   |  |                                 |  |                |  |           
|Interest-Bearing Liabilities:                      |  |                                 |  |                |  |           
|                                                  
|NOW and money market accounts                      |  | 2,373                           |  | 3,584          |  | 5,957     
|Savings deposits                                   |  | (211)                           |  | 1,134          |  | 923       
|Time deposits                                      |  | 219                             |  | 460            |  | 679       
|Other borrowings                                   |  | 1,081                           |  | 142            |  | 1,223     
|                                                   |  |                                 |  |                |  |           
|                                                  
|Total                                              |  | 3,462                           |  | 5,320          |  | 8,782     
|                                                   |  |                                 |  |                |  |           
|Interest Differential                              |  | 6,583                           |  | (1,106)        |  | 5,477     
|                                                   |  |                                 |  |                |  |           
|                                                  
|                                                  
|                                                   |  | Twelve Months Ended December 31
|                                                   |  |                                 |  | 2005 over 2004 |  |           
|                                                   |  |                                 |  |                |  |           
|(dollars in thousands)                             |  | Volume                          |  | Rate           |  | Net Change
|                                                   |  |                                 |  |                |  |           
|Interest-Earning Assets:                           |  |                                 |  |                |  |           
|                                                  
|Loans, net of unearned income(1)                   |  | 3,598                           |  | 3,142          |  | 6,740     
|Taxable investment securities                      |  | 1,207                           |  | 1,768          |  | 2,975     
|Tax-exempt investment securities(2)                |  | 8                               |  | 22             |  | 30        
|Fed funds sold and other interest-bearing balances |  | 56                              |  | 413            |  | 469       
|                                                   |  |                                 |  |                |  |           
|                                                  
|Total                                              |  | 4,869                           |  | 5,345          |  | 10,214    
|                                                   |  |                                 |  |                |  |           
|Interest-Bearing Liabilities:                      |  |                                 |  |                |  |           
|                                                  
|NOW and money market accounts                      |  | 500                             |  | 3,449          |  | 3,949     
|Savings deposits                                   |  | 359                             |  | 866            |  | 1,225     
|Time deposits                                      |  | (2)                             |  | 183            |  | 181       
|Other borrowings                                   |  | (81)                            |  | 157            |  | 76        
|                                                   |  |                                 |  |                |  |           
|                                                  
|Total                                              |  | 776                             |  | 4,655          |  | 5,431     
|                                                   |  |                                 |  |                |  |           
|Interest Differential                              |  | 4,093                           |  | 690            |  | 4,783     
|                                                   |  |                                 |  |                |  |           

|1) | Loan interest income includes fee income of $1,967,000, $1,907,000, and $1,536,000 for the years ended December 31, 2006, 2005, and 2004, respectively.                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) | The amount of tax-exempt securities that we hold is minimal and the amount derived from these securities is not significant, therefore there have been no adjustments made to reflect
interest earned on these securities on a tax-equivalent basis.
|  

Net interest income, before provision for loan loss, for the year ended December 31, 2006 was $28,700,000, an increase of $5,477,000 (23.6%) compared to $23,223,000 for
the year ended December 31, 2005, which increased $4,783,000 (25.9%) over $18,440,000 for the year ended December 31, 2004.

25

---



|2006 Compared to 2005
|---------------------

Total interest income for the year ended December 31, 2006 was $46,528,000 compared to $32,269,000 for the same period of 2005, an increase of $14,259,000, or 44.2% .
Changes in interest income are the result of changes in the average balances and changes in average yields on earning assets. During 2006, total average earning assets were $623,803,000 compared to $515,050,000 in 2005, an increase of
$108,753,000, or 21.1% . During the same period, the average rate paid on earning assets increased from 6.27% to 7.46%, or 119 basis points. Of the increase in interest income, $10,045,000 was due to changes in the volume of earning assets
and $4,214,000 was due to changes in the average rate earned on earning assets. Components of earning assets that contributed the majority of the increase in interest income include loans and taxable investment securities which were partially
offset by declines in Federal Funds sold and other interest-bearing balances. Year-over-year, we experienced changes in average balances and average yields on these balances as follows:

Average loans increased $127,188,000, or 38.1%, from $334,158,000 at December 31, 2005 to $461,346,000 at December 31, 2006, increasing interest income by $10,733,000
for the year ended December 31, 2006. During that same year-over-year period, the average yield on loans increased by 75 basis points, resulting in an increase in interest income on loans of $2,670,000. The combined effect was an increase of
$13,403,000 in interest income earned on average loans during 2006 compared to 2005.

Average taxable investment securities decreased from $156,451,000 at December 31, 2005 to $148,570,000 at December 31, 2006, a decrease of $7,881,000, or 5.0% . This
decrease in taxable investment securities volume caused interest income to decrease by $277,000 during 2006 compared to 2005. The rates of return earned on taxable investment securities increased by 87 basis points during this year-over-year
period, increasing interest income on taxable investment securities by $1,310,000 during the year ended December 31, 2006 compared to the year ended December 31, 2005. These two factors resulted in a net increase in interest earned on taxable
investment securities of $1,033,000 in 2006 versus the same period of 2005.

Average federal funds sold and other interest bearing balances decreased by $13,462,000, or 57.9% to $9,796,000 at December 31, 2006 compared to the same period in 2005. This
volume decrease resulted in a decrease in interest income of $529,000 on the sale of federal funds during 2006 compared to 2005, while the increase of 157 basis points in the average yield on federal funds sold caused an increase in interest
income of $266,000 during this time period. The net result was a decrease of $263,000 in interest income on federal funds sold during 2006 compared to 2005.

Interest expense for the year ended December 31, 2006 was $17,828,000 compared to $9,046,000 for the same period of 2005, an increase of $8,782,000, or 97.1% . Changes in
interest expense are the result of changes in the average balances and changes in average rates paid on interest-bearing liabilities. During the 2006, total average interest-bearing liabilities were $447,320,000 compared to $352,865,000
during 2005, an increase of $94,455,000, or 26.8% . During the same period, the average rate paid on interest-bearing liabilities increased from 2.56% to 3.99%, or 143 basis points. Of the increase in interest expense, $3,462,000 was due to
changes in the volume of interest-bearing liabilities and $5,320,000 was due to changes in the average rate paid on interest-bearing liabilities. Major components of interest-bearing liabilities include NOW and money market accounts, savings
deposits, time deposits, and other borrowings. Year-over-year, we experienced changes in average balances and average yields on these balances as follows:

Average NOW and money market deposits increased from $213,249,000 for the year ended December 31, 2005 to $289,385,000 in 2006, an increase of $76,136,000, or 35.7% . This
increased volume of interest-bearing deposits resulted in an increase in interest expense of $2,373,000 during 2006 compared to 2005, while the 138 basis point increase in average rates during the same period caused interest expense to increase
by $3,584,000. The net result was an increase in interest expense on NOW and money market accounts of $5,957,000 during the year ended December 31, 2006 compared to 2005.

Average savings deposits decreased during 2006 to $98,432,000, compared to $106,552,000 in 2005, a decrease of $8,120,000, or 7.6% . Because of this decrease in volume,
interest expense decreased $211,000. During the same period, interest rates increased by 114 basis points, resulting in an increase of interest expense of $1,134,000 in 2006 compared to 2005. The net result was an increase of $923,000 in
interest expense on average savings deposits during 2006 versus 2005.

26

---

Average time deposits during the year ended December 31, 2006 increased to $31,972,000 compared to $24,171,000 during the year ended December 31, 2005, an increase of
$7,801,000 (32.3%) . This increase in average time deposits caused interest expense to increase by $219,000 in 2006 compared to 2005, while the 156 basis point increase in interest rates on time deposits caused interest expense to increase
by $460,000 during this same time period. These two factors resulted in an increase in interest expense on time deposits of $679,000 in 2006 compared to 2005.

Average other borrowings, consisting primarily of subordinated notes and FHLB advances, increased during the year ended December 31, 2006 to $27,531,000 compared to $8,893,000
during the year ended December 31, 2005, an increase of $18,638,000, or 209.6% . This increase in volume caused interest expense to increase by $1,081,000 during 2006 compared to 2005. The increase in volume was primarily due to increases in
FHLB advances. Due to significant demand for new loans, the Company began relying on FHLB advances to fund a portion of the increase in loan volume. Interest rates paid on other borrowings increased by 128 basis points and caused interest expense to
increase by $142,000 during this same year-over-year time period. The net result was an increase of $1,223,000 in interest expense on other borrowings during 2006 compared to 2005.



|2005 Compared to 2004
|---------------------

Total interest income for the year ended December 31, 2005 was $32,269,000 compared to $22,055,000 for the same period of 2004, an increase of $10,214,000, or 46.3% .
During 2005, total average earning assets were $515,050,000 compared to $415,988,000 in 2004, an increase of $99,062,000, or 23.8% . During the same period, the average rate paid on earning assets increased from 5.30% to 6.27%, or 97
basis points. Of the increase in interest income, $4,869,000 was due to changes in the volume of earning assets and $5,345,000 was due to changes in the average rate earned on earning assets. Components of earning assets that contributed the
majority of the increase in interest income include loans, investment securities, and Federal Funds sold and other interest-bearing balances. Year-over-year, we experienced changes in average balances and average yields on these balances as
follows:

Average loans increased $48,822,000, or 17.1%, from $285,336,000 at December 31, 2004 to $334,158,000 at December 31, 2005, increasing interest income by $3,598,000
for the year ended December 31, 2005. During that same year-over-year period, the average yield on loans increased by 102 basis points, resulting in an increase in interest income on loans of $3,142,000. The combined effect was an increase of
$6,740,000 in interest income earned on average loans during 2005 compared to 2004.

Average taxable investment securities increased from $110,109,000 at December 31, 2004 to $156,451,000 at December 31, 2005, an increase of $46,342,000, or 42.1% . This
increase in taxable investment securities volume caused interest income to increase by $1,207,000 during the year of 2005 compared to the year of 2004. The rates of return earned on taxable investment securities increased by 129 basis points
during this year-over-year period, increasing interest income on taxable investment securities by $1,768,000 during the year ended December 31, 2005 compared to the year ended December 31, 2004. These two factors resulted in an increase in
interest earned on taxable investment securities of $2,975,000 in 2005 versus the same period of 2004.

Average federal funds sold and other interest bearing balances increased by $3,720,000, or 19.0%, to $23,258,000 at December 31, 2005 compared to the same period in 2004. This
volume increase resulted in an increase in interest income of $56,000 on the sale of federal funds during 2005 compared to 2004, while the increase of 182 basis points in the average yield on federal funds sold caused an increase in interest
income of $413,000 during this time period. The net result was an increase of $469,000 in interest income on federal funds sold during 2005 compared to 2004.

Interest expense for the year ended December 31, 2005 was $9,046,000 compared to $3,615,000 for the same period of 2004, an increase of $5,431,000, or 150.2% . During the
2005, total average interest-bearing liabilities were $352,865,000 compared to $290,858,000 during 2004, an increase of $62,007,000, or 21.3% . During the same period, the average rate paid on interest-bearing liabilities increased from
1.24% to 2.56%, or 132 basis points. Of the increase in interest expense, $776,000 was due to changes in the volume of interest-bearing liabilities and $4,655,000 was due to changes in the average rate paid on interest-bearing liabilities.
Major components of interest-bearing liabilities include NOW and money market accounts, savings deposits, time deposits, and other borrowings. Year-over-year, we experienced changes in average balances and average yields on these balances as
follows:

Average NOW and money market deposits increased from $168,403,000 for the year ended December 31, 2004 to $213,249,000 in 2005, an increase of $44,846,000, or 26.6% . This
increased volume of interest-bearing deposits resulted

27

---

in an increase in interest expense of $500,000 during 2005 compared to 2004, while the 167 basis point increase in average rates during the same period caused interest expense to
increase by $3,449,000. The result was an increase in interest expense on NOW and money market accounts of $3,949,000 during the year ended December 31, 2005 compared to 2004.

Average savings deposits increased during 2005 to $106,552,000, compared to $86,972,000 in 2004, an increase of $19,580,000, or 22.5% . Because of this increase in volume,
interest expense increased $359,000. During the same period, interest rates increased by 86 basis points, resulting in an increase of interest expense of $866,000 in 2005 compared to 2004. The net result was an increase of $1,225,000 in
interest expense on average savings deposits during 2005 versus 2004.

Time deposits during the year ended December 31, 2005 decreased to $24,171,000 compared to $24,268,000 during the year ended December 31, 2004, a reduction of $97,000, or
0.4% . This decline in average time deposits caused interest expense to drop by $2,000 in 2005 compared to 2004, while the 76 basis point increase in interest rates on time deposits caused interest expense to increase by $183,000 during this
same time period. These two factors resulted in an increase in interest expense on time deposits of $181,000 in 2005 compared to 2004.

Average other borrowings, consisting primarily of securities sold under agreements to repurchase and a subordinated note, decreased during the year ended December 31, 2005 to
$8,893,000 compared to $11,215,000 during the year ended December 31, 2004, a decrease of $2,322,000, or 20.7% . This decrease in volume caused interest expense to decrease by $81,000 during 2005 compared to 2004, while a 165 basis
point increase in interest rates paid on other borrowings caused interest expense to increase by $157,000 during this same year-over-year time period. The net result was an increase of $76,000 in interest expense on other borrowings during
2005 compared to 2004.



|Net Interest Margin
|-------------------

The net interest margin for the year ended December 31, 2006 was 4.60% compared to 4.51% for the year ended December 31, 2005, and 4.43% for the year ended December 31, 2004. The net
interest margin in 2006 reflects the effect of the 25 basis point increases in the federal funds rate that occurred in the months of January, March, May, and June, respectively. The net interest margin in 2005 reflects the effect of the 25 basis
point increases in the federal funds rate that occurred in the months of February, March, May, June, August, September, November and December 2005, respectively. The net interest margin for 2004 reflects the effect of the 25 basis point increases in
interest rates that occurred in each of the months of June, August, September, November and December 2004.



| | Provision for Loan Losses
| | -------------------------

We made a $1,730,000 addition to the allowance for loan losses in the year ended December 31, 2006 compared to a $1,200,000 addition in the year ended December 31, 2005, which
was an increase of 18.37% compared to the addition of $1,200,000 to the allowance for loan losses in the years ended December 31, 2005 and 2004. The provision for loan losses is based upon in-depth analysis, in which Management considers many
factors, including, the rate of loan growth, changes in the level of past due, nonperforming and classified assets, changing portfolio mix, overall credit loss experience, recommendations of regulatory authorities, and prevailing local and national
economic conditions to establish the required level of the allowance for loan losses. Based upon information known to Management at the date of this report, Management believes that these additions to the total allowance for loan losses allow the
Company to maintain an adequate reserve to absorb losses inherent in the loan portfolio as of December 31, 2006. For further information on the allowance for loan losses, see "Allowance for Loan Losses."

28

---

|Noninterest Income                         |  |         |  |         |  |        
|------------------------------------------ |  | ------- |  | ------- |  | -------
|                                          
|Components of noninterest income           |  |         |  |         |  |        
|                                          
|(dollars in thousands)                     |  | 2006    |  | 2005    |  | 2004   
|                                           |  |         |  |         |  |        
|Service charges on deposit accounts        |  | $ 787   |  | $ 887   |  | $ 984  
|Other service charges and fees             |  | 1,322   |  | 1,151   |  | 1,014  
|Net gain on sale of premises and equipment |  | 17      |  | 11      |  | 43     
|Other                                      |  | 949     |  | 662     |  | 1,029  
|                                           |  |         |  |         |  |        
|Total Noninterest Income                   |  | $ 3,075 |  | $ 2,711 |  | $ 3,070
|                                           |  |         |  |         |  |        

For the year ended December 31, 2006, noninterest income totaled $3,075,000, an increase of $364,000, or 13.4%, compared to $2,711,000 for the year ended December 31,
2005, which decreased $359,000, or 11.7%, from $3,070,000 for the year ended December 31, 2004. Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. These components of noninterest
income changed as follows:

Service charges on deposit accounts decreased $100,000 during 2006 compared to 2005. During 2005, service charges decreased $97,000 compared to 2004. The decrease in service
charges and fees was the result of customers maintaining higher balances in their accounts thereby offsetting service charges and fees that would have been charged against those accounts.

Other service charges and fees increased $171,000, or 14.9% to $1,322,000 during 2006 compared to $1,151,000 in 2005. During 2005, other service charges and fees increased
$137,000, or 13.5%, compared to $1,014,000 in 2004.

Other noninterest and miscellaneous income increased by $287,000 during 2006 compared to 2005, which was down $367,000 compared to 2004. In 2004, the Company was reimbursed by
the Superfund Redevelopment Program for costs incurred in association with the clean up of soil contamination of a parcel of real property that was held as collateral by the Company, which resulted in higher other noninterest income in 2004, as
compared to 2005. As of December 31, 2006, the Company had no significant exposure to environmental cleanup costs related to this property.

|Noninterest Expense               |  |          |  |          |  |         
|--------------------------------- |  | -------- |  | -------- |  | --------
|                                 
|Components of noninterest expense |  |          |  |          |  |         
|                                 
|(dollars in thousands)            |  | 2006     |  | 2005     |  | 2004    
|                                  |  |          |  |          |  |         
|Salaries and employee benefits    |  | $ 9,494  |  | $ 7,907  |  | $ 6,888 
|Occupancy                         |  | 942      |  | 895      |  | 508     
|Furniture and equipment           |  | 1,029    |  | 1,025    |  | 762     
|Promotion                         |  | 568      |  | 667      |  | 473     
|Travel, meals and lodging         |  | 210      |  | 165      |  | 192     
|Professional services             |  | 1,227    |  | 934      |  | 719     
|Office supplies and expenses      |  | 572      |  | 665      |  | 528     
|Regulatory assessments            |  | 139      |  | 113      |  | 90      
|Insurance                         |  | 254      |  | 317      |  | 329     
|Director related expenses         |  | 236      |  | 189      |  | 253     
|Other                             |  | 534      |  | 491      |  | 685     
|                                  |  |          |  |          |  |         
|                                 
|Total                             |  | $ 15,205 |  | $ 13,368 |  | $ 11,427
|                                  |  |          |  |          |  |         

Noninterest expense was $15,205,000 in 2006, an increase of $1,837,000, or 13.7% from $13,368,000 in 2005, which increased $1,941,000, or 17.0%, from $11,427,000
in 2004. Salary and employee benefits increased $1,587,000, or 20.1%, in 2006. In 2005, salary and employee benefits increased $1,019,000, or 14.8% . The increases in salaries and employee benefits were due to normal salary increases,
increases in officer incentive compensation, and salary continuation plan expense as compared to the prior year. Occupancy and fixed asset expense increased by $51,000 during 2006 compared to 2005, which increased $650,000 compared to 2004.
The variance in 2006 over 2005 was due to

29

---

normal fluctuations in janitorial expense, utilities expenses and other occupancy-related expenses. The variance in 2005 over 2004 was the result of as additional occupancy expenses
for the Bank's Rosedale branch, which opened in the third quarter of 2004. Professional expenses, which include audit and legal fees, increased by $293,000, or 31.4%, in 2006 compared to 2005, which increased $194,000, or 41.0%, compared to
2004. The increase in professional services in 2006 was primarily the result of increases in legal fees as a result of the reorganization of the bank into a bank holding company structure and issuing trust preferred securities. All other expenses
for the year ended December 31, 2006 totaled $2,513,000, a decrease of $94,000 compared to $2,607,000 in 2005, which was an increase of $57,000 compared to 2004. The decrease in 2006 was attributable to Management's maintenance of
expense controls, along with planned reductions in advertising, promotional, and bank insurance expenses. The increases in other noninterest expense in 2005 was primarily due to increases in promotional expenses. The efficiency ratio for the year
ended December 31, 2006 was 47.85% compared to 51.55% for the year ended December 31, 2005 and 53.12% for the year ended December 31, 2004. The efficiency ratio is the Company's overhead divided by net interest income plus noninterest income and is
a measure of operating efficiency. The decrease in the efficiency ratio indicates that the Company's overall operating efficiency continued to improved in 2006 compared to the prior two years.



|Provision for Income Taxes
|--------------------------

During the year ended December 31, 2006, we recorded income tax expense of $6,366,000 compared to $4,742,000 during 2005, and $3,475,000 during 2004. The increases in the
provision for income tax was primarily due to increased profitability in the each of the respective periods as compared to the same periods in the prior year. The effective tax rate for the year ended December 31, 2006 was 42.9% compared to 41.7% in
2005 and 39.1% in 2004. Income tax expense for the year ended December 31, 2006 includes a refund of 2005 taxes of $266,000. See Note 13 to the consolidated financial statements for further information.

30

---



|Securities
|----------

The Company maintains an investment portfolio consisting of U.S. Treasury, U.S. Government agencies and corporations, mortgage-backed securities, and other securities. Investment
securities are held in safekeeping by an independent custodian, except for certain government agency securities which are held by the bank.. The objective of our investment portfolio is to maintain a prudent yield and provide collateral to pledge
for deposits of public funds and other borrowing facilities. For more information on investment securities, see notes 1 and 2 to the consolidated financial statements. The following table shows the distribution of the Companys investment
portfolio:

Distribution of Securities in the Companys Investment portfolio

|(dollars in thousands)                           |  |           |  | At December 31 |  |          
|------------------------------------------------ |  | --------- |  | -------------- |  | ---------
|                                                 |  |           |  |                |  |          
|Held to Maturity                                 |  | 2006      |  | 2005           |  | 2004     
|                                                 |  |           |  |                |  |          
|                                                
|U.S. Treasury securities                         |  | $ 16,983  |  | $ 29,016       |  | $ 51,576 
|Securities of U.S. government                    |  |           |  |                |  |          
|agencies and corporations                        |  | 72,755    |  | 74,587         |  | 42,560   
|Obligations of states and political subdivisions |  | -         |  | 1,876          |  | 999      
|Other securities                                 |  | 51,084    |  | 64,033         |  | 28,776   
|                                                 |  |           |  |                |  |          
|Total                                            |  | $ 140,822 |  | $ 169,512      |  | $ 123,911
|                                                 |  |           |  |                |  |          
|Fair Value                                       |  | $ 138,315 |  | $ 164,959      |  | $ 122,360
|                                                 |  |           |  |                |  |          
|                                                
|(dollars in thousands)                           |  |           |  | At December 31 |  |          
|                                                 |  |           |  |                |  |          
|Available for Sale                               |  | 2006      |  | 2005           |  | 2004     
|                                                 |  |           |  |                |  |          
|                                                
|U.S. Treasury securities                         |  | $ -       |  | $ -            |  | $ -      
|Securities of U.S. government                    |  |           |  |                |  |          
|agencies and corporations                        |  | -         |  | -              |  | -        
|Obligations of states and political subdivisions |  | 4,646     |  | -              |  | -        
|Other securities                                 |  | 2,500     |  | 2,500          |  | 2,500    
|                                                 |  |           |  |                |  |          
|Total                                            |  | $ 7,146   |  | $ 2,500        |  | $ 2,500  
|                                                 |  |           |  |                |  |          
|Fair Value                                       |  | $ 7,072   |  | $ 2,428        |  | $ 2,494  
|                                                 |  |           |  |                |  |          

31

---

|Maturity Distribution and Average Yield on Securities |  |            |  |            |  |            |  |            |  |        
|----------------------------------------------------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | -------
|                                                     
|                                                      |  |            |  |            |  | After One  |  | After Five |  |        
|(dollars in thousands)                                |  | Within One |  | but Within |  | but Within |  | After Ten  |  |        
|Held-to-Maturity                                      |  | Year       |  | Five Years |  | Ten Years  |  | Years      |  | Other  
|                                                      |  |            |  |            |  |            |  |            |  |        
|                                                     
|U.S. Treasury securities                              |  | $ 12,986   |  | $ 3,997    |  | $ -        |  | $ -        |  | $ -    
|Weighted average yield                                |  |            |  | 3.46%      |  | 5.05%      |  |            |  |        
|                                                     
|Securities of U.S. government                         |  |            |  |            |  |            |  |            |  |        
|agencies and corporations                             |  |            |  | 9,989      |  | 55,281     |  | 7,485      |  | -      
|Weighted average yield                                |  |            |  | 4.31%      |  | 4.16%      |  | 5.19%      |  |        
|                                                     
|Obligations of states and political subdivisions      |  |            |  | -          |  | -          |  | -          |  | -      
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                     
|Mortgage-backed securities                            |  |            |  | -          |  | 10         |  | 5,730      |  | 45,344 
|Weighted average yield                                |  |            |  |            |  | 8.50%      |  | 4.06%      |  | 4.35%  
|                                                     
|Other securities                                      |  |            |  | -          |  | -          |  | -          |  | -      
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                      |  |            |  |            |  |            |  |            |  |        
|Total                                                 |  | $ 22,975   |  | $ 59,288   |  | $ 13,215   |  | $ 45,344   |  | $ -    
|                                                      |  |            |  |            |  |            |  |            |  |        
|Weighted average yield                                |  |            |  | 3.83%      |  | 4.22%      |  | 4.70%      |  | 4.35%  
|                                                      |  |            |  |            |  |            |  |            |  |        
|                                                     
|                                                     
|                                                      |  |            |  |            |  | After One  |  | After Five |  |        
|(dollars in thousands)                                |  | Within One |  | but Within |  | but Within |  | After Ten  |  |        
|Available-for-Sale                                    |  | Year       |  | Five Years |  | Ten Years  |  | Years      |  | Other  
|                                                      |  |            |  |            |  |            |  |            |  |        
|                                                     
|U.S. Treasury securities                              |  | $ -        |  | $ -        |  | $ -        |  | $ -        |  | $ -    
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                     
|Securities of U.S. government                         |  |            |  |            |  |            |  |            |  |        
|agencies and corporations                             |  |            |  | -          |  | -          |  | -          |  | -      
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                     
|Obligations of states and political subdivisions      |  |            |  | 631        |  | 1,007      |  | 416        |  | 2,595  
|Weighted average yield(1)                             |  |            |  | 5.85%      |  | 4.71%      |  | 4.93%      |  | 5.83%  
|                                                     
|Mortgage-backed securities                            |  |            |  | -          |  | -          |  | -          |  | -      
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                     
|Other securities                                      |  |            |  | -          |  | -          |  | -          |  | -      
|Weighted average yield                                |  |            |  |            |  |            |  |            |  |        
|                                                      |  |            |  |            |  |            |  |            |  |        
|Total                                                 |  | $ 631      |  | $ 1,007    |  | $ 416      |  | $ 2,595    |  | $ 2,423
|                                                      |  |            |  |            |  |            |  |            |  |        
|Weighted average yield                                |  |            |  | 5.85%      |  | 4.71%      |  | 4.93%      |  | 5.83%  
|                                                      |  |            |  |            |  |            |  |            |  |        

1. Yields on tax-exempt obligations have been computed on a tax equivalent basis using the current statutory federal tax rate.

At December 31, 2006, held-to-maturity securities had a fair value of $138,315,000 with an amortized cost basis of $140,822,000. On an amortized cost basis, held-to-maturity investments decreased $26,814,000 from the December 31, 2005 balance of $167,636,000, which had increased $44,724,000 from the December 31, 2004 balance of $122,912,000. The change in held-to-maturity investments was primarily due to scheduled maturities of investment securities. The

32

---

unrealized pretax loss on held-to-maturity securities at December 31, 2006 was $2,507,000, as compared to a loss of $2,677,000 at December 31, 2005, a decrease of
$170,000. The unrealized holding losses on held-to-maturity securities was caused by a decline in fair value due to changes in market interest rates, not in estimated cash flows. As a general rule, the market price of fixed rate investment
securities will decline as interest rates rise. Inasmuch as these investment securities are classified as held-to-maturity, we expect to hold all such securities until they reach their respective maturity dates and, therefore, we do not anticipate
recognizing any losses on these securities.

Tax-exempt securities had an amortized cost basis of $4,646,000 at December 31, 2006 compared to $1,876,000 at December 31, 2005, an increase of $2,770,000, or 147.7% .
Additional purchases of tax-exempt securities were purchased in 2006, because of their favorable tax treatment which results in a higher yield on a taxable equivalent basis. At December 31, 2006, these securities had a fair value of $4,649,000
which included a unrealized gain of $3,000. All tax-exempt securities are classified as available-for sale

In March 2006, certain securities which had been classified as held-to-maturity were transferred to available-for-sale. At the time of transfer, these securities had a carrying value
of $2,834,000 and a net unrealized loss of $21,000. The unrealized loss was charged to other comprehensive income in shareholders' equity on the balance sheet. The transfer of the securities to the available-for sale category was based upon
a change in the Company's intent with respect to holding the securities to maturity. The Company had $7,072,000 in securities classified as available-for-sale at December 31, 2006. Available-for-sale securities are held at fair value which
included an unrealized loss of $74,000 at December 31, 2006.

The Company had no trading securities at December 31, 2006, 2005 and 2004.

At December 31, 2006, there were no securities from a single issuer with an aggregate value in excess of ten percent of shareholders' equity. See Note 2 to the consolidated financial
statements for further information.



|Loans
|-----

The following table summarizes the composition of the Companys loan portfolio at December 31 for the years indicated:

|Loan Portfolio Distribution              |  |           |  |           |  |           |  |           |  |          
|---------------------------------------- |  | --------- |  | --------- |  | --------- |  | --------- |  | ---------
|                                        
|(dollars in thousands)                   |  | 2006      |  | 2005      |  | 2004      |  | 2003      |  | 2002     
|                                         |  |           |  |           |  |           |  |           |  |          
|Commercial and industrial loans          |  | $ 63,753  |  | $ 55,895  |  | $ 61,593  |  | $ 67,855  |  | $ 63,247 
|Real estate loans                        |  |           |  |           |  |           |  |           |  |          
|Construction and land development        |  | 177,493   |  | 100,115   |  | 78,903    |  | 50,003    |  | 24,445   
|Secured by residential properties        |  | 19,950    |  | 13,468    |  | 11,194    |  | 7,198     |  | 9,181    
|Secured by farmland                      |  | 54,974    |  | 47,665    |  | 44,757    |  | 33,873    |  | 37,358   
|Secured by commercial properties         |  | 199,191   |  | 171,873   |  | 114,143   |  | 91,724    |  | 87,370   
|Installment loans                        |  | 1,535     |  | 1,719     |  | 2,018     |  | 3,479     |  | 3,406    
|Loans to finance agricultural production |  | 20,864    |  | 18,211    |  | 13,549    |  | 12,970    |  | 12,433   
|All other loans                          |  | 1         |  | 4         |  | 722       |  | 1,518     |  | 67       
|                                         |  | 537,761   |  | 408,950   |  | 326,879   |  | 268,620   |  | 237,507  
|Less: Allowance for possible loan losses |  | 8,409     |  | 7,003     |  | 5,487     |  | 4,819     |  | 4,276    
|Less: Deferred loan fees                 |  | 1,353     |  | 1,550     |  | 1,023     |  | 845       |  | 529      
|Net Loans                                |  | $ 527,999 |  | $ 400,397 |  | $ 320,369 |  | $ 262,956 |  | $ 232,702
|                                         |  |           |  |           |  |           |  |           |  |          

The ending balance for net loans at December 31, 2006 was $527,999,000, an increase of $127,602,000, or 31.9%, compared to $400,397,000 in 2005, which increased
$80,028,000, or 25.0% from the year-end 2004 balance of $320,369,000.

For 2006 compared to 2005, the most significant percentage changes in the Companys loan portfolio were as follows: commercial and industrial loans increased $7,858,000, or
14.1% from $55,895,000 in 2005 to $63,753,000 in 2006; construction and land development loans increased $77,378,000, or 77.3% from $100,115,000 in 2005 to $177,493,000 in 2006; real estate loans secured by residential properties
increased $6,482,000, or 48.1%, from $13,468,000 in 2005 to

33

---

$19,950,000 in 2006; loans secured by farmland increased $7,309,000, or 15.3%, from $47,665,000 in 2005 to $54,974,000 in 2006; real estate loans secured by commercial properties increased $27,318,000, or 15.9%, from $171,873,000 in 2005 to $199,191,000 in 2006; and, Loans to finance agricultural production increased $2,653,000, or 14.6%, from $18,211,000 in 2005 to $20,864,000 in 2006.

For 2005 compared to 2004, the most significant percentage changes in the Companys loan portfolio were as follows: commercial and industrial loans decreased $5,698,000, or 9.3%, from $61,593,000 in 2004 to $55,895,000 in 2005; construction loans increased $21,212,000, or 26.9%, from $78,903,000 in 2004 to $100,115,000 in 2005; real estate loans secured by residential properties increased $2,274,000, or 20.3%, from $11,194,000 in 2004 to $13,468,000 in 2005; loans secured by farmland increased $2,908,000, or 6.5%, from $44,757,000in 2004 to $47,665,000 in 2005; real estate loans secured by commercial properties increased $57,730,000, or 50.6%, from $114,143,000 in 2004 to $171,873,000 in 2005; and, loans to finance agricultural production increased $4,662,000, or 34.4%, from $13,549,000 in 2004 to $18,211,000 in 2005.

Real estate loans have continued to be a major factor in the ongoing growth of the loan portfolio and Company earnings. Current economic projections considered by management for Kern County and the greater Bakersfield area indicate that loan demand for Kern County and the greater Bakersfield area will remain fairly constant over the next few quarters. The Company had $ 451,608,000 in real estate loans at December 31, 2006 as compared to $333,121,000 at December 31, 2005. For more information on loans, see Note 3 to the consolidated financial statements.

The following table summarizes the maturity distribution and interest rate sensitivity of commercial, real estate construction loans, and agriculture loans at December 31, 2006:

|Loan Maturity Distribution               |  |            |  |             |  |           
|---------------------------------------- |  | ---------- |  | ----------- |  | ----------
|                                        
|                                         |  | Within One |  | One to Five |  | After Five
|(dollars in thousands)                   |  | Year       |  | Years       |  | Years     
|                                         |  |            |  |             |  |           
|Commercial loans                         |  | $39,888    |  | $18,664     |  | $5,201    
|Real estate construction loans           |  | 148,999    |  | 19,047      |  | 9,447     
|Loans to finance agricultural production |  | 15,388     |  | 3,972       |  | 1,504     
|                                         |  |            |  |             |  |           
|Total                                    |  | $ 164,387  |  | $ 23,019    |  | $ 10,951  
|                                         |  |            |  |             |  |           

Loans Due After One Year With Predetermined Interest Rates and With Floating or Adjustable Rates

|(dollars in thousands)                  |  |         
|--------------------------------------- |  | --------
|                                        |  |         
|Commercial and industrial loans         |  |         
|with fixed interest rates               |  | $ 9,346 
|with variable interest rates            |  | 14,519  
|Real estate construction loans          |  |         
|with fixed interest rates               |  | 7,113   
|with variable interest rates            |  | 21,381  
|Loans to finance agriculture production |  |         
|with fixed interest rates               |  | 303     
|with variable interest rates            |  | 5,173   
|                                        |  |         
|Total Fixed Rate Loans                  |  | $ 16,762
|                                        |  |         
|Total Variable Rate Loans               |  | $ 41,073
|                                        |  |         
|                                       
|Total                                   |  | $ 57,835
|                                        |  |         

See Note 3 to the consolidated financial statements for further information.

34

---



|Commitments and Letters of Credit
|---------------------------------

Loan commitments are agreements to lend to a customer provided that there is no violation of any condition established in the agreement. Commitments generally have fixed expiration
dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the
Companys normal credit policies and collateral requirements. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are subject to the
Companys normal credit policies and collateral requirements. Commercial lines of credit are lines of credit that are available to customers but have not been funded. The following table sets forth the Companys commitments and letters of
credit at the dates indicated:

|(dollars in thousands)       |  | 2006      |  | 2005      |  | 2004      |  | 2003      |  | 2002    
|---------------------------- |  | --------- |  | --------- |  | --------- |  | --------- |  | --------
|                             |  |           |  |           |  |           |  |           |  |         
|                            
|Commitments to extend credit |  | $ 291,717 |  | $ 224,027 |  | $ 160,185 |  | $ 146,654 |  | $ 91,920
|Standby letters of credit    |  | $ 10,537  |  | $ 8,676   |  | $ 7,129   |  | $ 4,922   |  | $ 4,889 



|Credit Quality
|--------------

We assess and manage credit risk on an ongoing basis through a formal credit review program and approval policies, internal monitoring and formal lending policies. We believe our
ability to identify and assess risk and return characteristics of our loan portfolio are critical for profitability and growth. We emphasize credit quality in the loan approval process, active credit administration and regular monitoring. With this
in mind, we have designed and implemented a comprehensive loan review and grading system that functions to monitor and assess the credit risk inherent in the loan portfolio.

Ultimately, the credit quality of our loans may be influenced by underlying trends in the national and local economic and business cycles. Our business is mostly concentrated in Kern
County, California. Our economy is diversified between agriculture, oil, light industry, and warehousing and distribution. As a result, we lend money to individuals and companies dependent upon these industries.

We have significant extensions of credit and commitments to extend credit which are secured by real estate, totaling approximately $548,148,000 at December 31, 2006. Although we
believe this real estate concentration has no more than the normal risk of collectibility, a substantial decline in the economy in general, or a decline in real estate values in our primary market area in particular, could have an adverse impact on
the collectibility of these loans. The ultimate recovery of these loans is generally dependent on the successful operation, sale or refinancing of the real estate. We monitor the effects of current and expected market conditions and other factors on
the collectibility of real estate loans. When, in our judgment, these loans are impaired, an appropriate provision for losses is recorded. The more significant assumptions we consider involve estimates of the following: lease, absorption and sale
rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in most instances, personal guarantees. Notwithstanding the foregoing, abnormally high rates of
impairment due to general or local economic conditions could adversely affect our future prospects and results of operations.

In extending credit and commitments to borrowers, we generally require collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow and
from proceeds from the sale of selected assets of the borrowers. Our requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with our 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. We secure our collateral by perfecting our interest in business assets, obtaining deeds of trust, or
outright possession among other means. Loan losses from lending transactions related to real estate and agriculture compare favorably with our loan losses on our loan portfolio as a whole.

We believe that our lending policies and underwriting standards will tend to mitigate losses in an economic downturn; however, there is no assurance that losses will not occur under
such circumstances. Our loan policies and underwriting standards include, but are not limited to, the following: 1) maintaining a thorough understanding of our service area and limiting investments outside of this area, 2) maintaining an
understanding of borrowers knowledge and capacity in their fields of expertise, 3) basing real estate construction loan approval not only on salability of the project, but also on the borrowers capacity to support the project financially
in the event it does not sell within the original projected time

35

---

period, and 4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis of our construction
lending activities. In addition, we strive to diversify the risk inherent in the construction portfolio by avoiding concentrations to individual borrowers and on any one project.

Nonaccrual, Past Due, Restructured Loans and Other Real Estate Owned (OREO)

We generally place loans on nonaccrual status when they become 90 days past due as to principal or interest, unless the loan is well secured and in the process of collection. When a
loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be
returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement and remaining principal is considered collectible or when the loan is both well secured and in the process of
collection. Loans or portions thereof are charged off when, in Managements opinion, collection appears unlikely. The following table sets forth nonaccrual loans, loans past due 90 days or more and still accruing, restructured loans performing
in compliance with modified terms and OREO at December 31:

|(data in thousands, except percentages)               |  | 2006     |  | 2005    |  | 2004    |  | 2003    |  | 2002   
|----------------------------------------------------- |  | -------- |  | ------- |  | ------- |  | ------- |  | -------
|                                                      |  |          |  |         |  |         |  |         |  |        
|Past due 90 days or more and still accruing:          |  |          |  |         |  |         |  |         |  |        
|Commercial                                            |  | $ -      |  | $ -     |  | $ 2     |  | $ -     |  | $ -    
|Real estate                                           |  | -        |  | -       |  | -       |  | -       |  | 83     
|Consumer and other                                    |  | 3        |  | -       |  | -       |  | -       |  | 13     
|Nonaccrual:                                           |  |          |  |         |  |         |  |         |  |        
|Commercial                                            |  | -        |  | -       |  | -       |  | 169     |  | 1,040  
|Real estate                                           |  | 150      |  | 727     |  | 2,049   |  | 1,535   |  | 2,777  
|Consumer and other                                    |  | -        |  | -       |  | -       |  | -       |  | 22     
|Restructured (in compliance with modified             |  |          |  |         |  |         |  |         |  |        
|terms)                                                |  | -        |  | -       |  | -       |  | 39      |  | 440    
|                                                      |  |          |  |         |  |         |  |         |  |        
|Total nonperforming and restructured loans            |  | 153      |  | 727     |  | 2,051   |  | 1,743   |  | 4,375  
|Other real estate owned                               |  | 643      |  | 710     |  | 686     |  | 745     |  | 805    
|                                                      |  |          |  |         |  |         |  |         |  |        
|Total nonperforming and restructured assets           |  | $ 796    |  | $ 1,437 |  | $ 2,737 |  | $ 2,488 |  | $ 5,180
|                                                      |  |          |  |         |  |         |  |         |  |        
|Allowance for loan losses as a percentage of          |  |          |  |         |  |         |  |         |  |        
|nonperforming and restructured loans                  |  | 5496.08% |  | 963.27% |  | 267.53% |  | 276.48% |  | 97.74% 
|Nonperforming and restructured loans to total loans   |  | 0.03%    |  | 0.18%   |  | 0.63%   |  | 0.65%   |  | 1.85%  
|Allowance for loan losses to nonperforming and        |  |          |  |         |  |         |  |         |  |        
|restructured assets                                   |  | 1056.41% |  | 487.33% |  | 200.47% |  | 193.69% |  | 82.55% 
|Nonperforming and restructured assets to total assets |  | 0.11%    |  | 0.23%   |  | 0.55%   |  | 0.60%   |  | 1.54%  

Nonperforming loans and restructured loans at December 31, 2006 decreased $574,000 from the December 31, 2005 balance, which decreased $1,324,000 from the December 31, 2004
balance. The majority of the decrease in nonperforming and restructured loans in 2006 compared to 2005 was caused by a decrease in nonaccrual loans. This decrease was primarily the result of principal payments received in 2006 as well as charge offs
of $127,000. During 2006, the Company closely monitored and actively pursued the collection of all loans classified as nonperforming. At December 31, 2006, nonperforming and restructured loans were 0.03% of total loans compared to 0.18% at
December 31, 2005 and 0.63% at December 31, 2004. The ratio of nonperforming and restructured assets to total assets was 0.11% at December 31, 2006 compared to 0.23% at December 31, 2005 and 0.55% at December 31, 2004.

Under generally accepted accounting principles, a loan is considered impaired when, based on current information and events, it is probable that we may 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 effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is collateral-dependent. Under some circumstances, a loan which is deemed impaired may still perform in accordance with its contractual terms. Loans that are considered impaired
are generally not placed on nonaccrual status unless the loan becomes 90 days or more past due.

36

---

Generally, it is the Companys policy, that when a loan is nonaccrual, payments are applied against the principal balance of the loan until such time as full collection of the
principal balance is expected. The amount of gross interest income that would have been recorded for nonaccrual loans for the year ended December 31, 2006, if all such loans had been current in accordance with their original terms, was $379,000.
The amount of interest income that was recognized on nonaccrual loans from all cash payments, including those related to interest owed from prior years, made during the year ended December 31, 2006, totaled $0.



|Classified Loans
|----------------

We have established a system of evaluation of all loans in our loan portfolio. Based upon the evaluation performed, each loan is assigned a risk rating. This risk rating system
quantifies the risk we believe we have assumed when entering into a credit transaction. The system rates the strength of the borrower and the facility or transaction, which provides a tool for risk management and early problem loan recognition.

For each new credit approval, credit review, credit extension or renewal or modification of existing facilities, the approving officers assign risk ratings utilizing an eight point
rating scale. The rating assigned by the officers must then be justified in writing in the Credit Memorandum that accompanies each loan or credit facility. The risk ratings are a measure of credit risk based on the historical, current and
anticipated financial characteristics of the borrower in the current risk environment. We assign risk ratings on a scale of 1 to 8, with 1 being the highest quality rating and 8 being the lowest quality rating. Loans rated an 8 are charged
off.

The primary accountability for risk rating management resides with the account officer. The Credit Review Department is responsible for confirming the risk rating after reviewing all
the credit factors independently of the account officer. The rating assigned to a credit is the one determined to be appropriate by the Credit Review Department.

The loans we consider classified are those that have a credit risk rating of 6 through 8. These are the loans and other credit facilities that we consider to be of the
greatest risk to us and, therefore, they receive the highest level of attention by our account officers and senior credit management officers.

A loan that is classified may be either a performing or nonperforming loan. A performing loan is one wherein the borrower is making all payments as required by
the loan agreements and can include impaired loans. A nonperforming loan is one wherein the borrower is not paying as agreed and/or is not meeting specific other performance requirements that were agreed to in the loan documentation. We
include all non-accrual loans, restructured loans, and loans 90 days or more past due and still accruing within the classified loan category.

The following table summarizes the Companys classified loans for the periods indicated:

|                 |  | 2006    |  | 2005    |  | 2004   
|---------------- |  | ------- |  | ------- |  | -------
|                 |  |         |  |         |  |        
|                
|Classified Loans |  | $ 3,045 |  | $ 4,676 |  | $ 4,962
|OREO             |  | 643     |  | 710     |  | 686    
|                 |  |         |  |         |  |        
|Total            |  | $ 3,688 |  | $ 5,386 |  | $ 5,648
|                 |  |         |  |         |  |        

The loans and other credit facilities considered classified are also allocated a specific amount in the allowance for loan losses, as further explained in the Allowance for Loan
Losses section herein. As of December 31, 2006, other than for classified loans disclosed in the above table and impaired loans discussed elsewhere in this report, management was not aware of any other loans as to which management had serious
doubts as to the ability of the borrowers to comply with the present repayment terms.



|Impaired Loans
|--------------

At December 31, 2006 and 2005, the recorded investment in loans that were considered impaired under SFAS No. 114 was $0. At December 31, 2004, the recorded investment in loans
considered impaired was $1,754,000 of which $1,754,000 was included in nonaccrual loans and $0 was included in restructured loans and $0 in other loans identified as impaired. Impaired loans had valuation allowances totaling $0
as of December 31, 2006 and 2005, and $184,000 at

37

---

December 31, 2004. Other than classified loans disclosed in the preceding table, the company is not aware of any other potential problem loans which were accruing and current at
December 31, 2006, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. In this report, the terms impaired and classified will not necessarily be used to describe the same
loans. Impaired loans are those loans that meet the definition outlined in SFAS No. 114. Classified loans generally refer to those loans that have a credit risk rating of 6 through 8, as further discussed above.



|Allowance for Loan Losses
|-------------------------

The following table summarizes the Companys loan loss experience for the periods indicated:

|Loan Loss Allowance, Charge offs & Recoveries                  |  |           |  |                                 |  |           |  |           |  |          
|-------------------------------------------------------------- |  | --------- |  | ------------------------------- |  | --------- |  | --------- |  | ---------
|                                                              
|                                                               |  |           |  | Twelve Months Ended December 31 |  |          
|(dollars in thousands)                                         |  | 2006      |  | 2005                            |  | 2004      |  | 2003      |  | 2002     
|                                                               |  |           |  |                                 |  |           |  |           |  |          
|Beginning Balance                                              |  | $ 7,003   |  | $ 5,487                         |  | $ 4,819   |  | $ 4,276   |  | $ 3,507  
|Provision Charged To Expense                                   |  | 1,730     |  | 1,200                           |  | 1,200     |  | 1,470     |  | 1,670    
|Loans Charged Off:                                             |  |           |  |                                 |  |           |  |           |  |          
|Commercial Loans                                               |  | (260)     |  | (51)                            |  | (20)      |  | (538)     |  | (343)    
|Real Estate Loans                                              |  |           |  |                                 |  |           |  |           |  |          
|Construction                                                   |  | -         |  | -                               |  | -         |  | -         |  | -        
|Secured by Residential Properties                              |  | -         |  | -                               |  | -         |  | (7)       |  | -        
|Secured by Commercial Properties                               |  | (201)     |  | (800)                           |  | (798)     |  | -         |  | -        
|Installment Loans                                              |  | (53)      |  | (9)                             |  | (1)       |  | (28)      |  | (166)    
|Recoveries:                                                    |  |           |  |                                 |  |           |  |           |  |          
|Commercial Loans                                               |  | 62        |  | 81                              |  | 76        |  | 35        |  | 16       
|Real Estate Loans                                              |  |           |  |                                 |  |           |  |           |  |          
|Secured by Residential Properties                              |  | 14        |  | 5                               |  | -         |  | -         |  | -        
|Secured by Commercial Properties                               |  | 108       |  | 183                             |  | 250       |  | -         |  | -        
|Installment Loans                                              |  | 6         |  | 29                              |  | 9         |  | 12        |  | 19       
|                                                               |  |           |  |                                 |  |           |  |           |  |          
|Net Charge-offs                                                |  | (324)     |  | (562)                           |  | (484)     |  | (526)     |  | (474)    
|Reclassification from (to) reserve for off-balance sheet risks |  | -         |  | 878                             |  | (48)      |  | (401)     |  | (427)    
|                                                               |  |           |  |                                 |  |           |  |           |  |          
|Ending Balance                                                 |  | $ 8,409   |  | $ 7,003                         |  | $ 5,487   |  | $ 4,819   |  | $ 4,276  
|                                                               |  |           |  |                                 |  |           |  |           |  |          
|Ending Loan Portfolio                                          |  | $ 537,761 |  | $ 408,950                       |  | $ 326,879 |  | $ 268,620 |  | $ 237,507
|                                                               |  |           |  |                                 |  |           |  |           |  |          
|Allowance for loss as a percentage of ending loan portfolio    |  | 1.56%     |  | 1.71%                           |  | 1.68%     |  | 1.79%     |  | 1.80%    
|Net charge-offs to average loans                               |  | 0.07%     |  | 0.17%                           |  | 0.17%     |  | 0.22%     |  | 0.22%    
|                                                              
|Allocation for the Allowance for Loan Losses                   |  |           |  |                                 |  |           |  |           |  |          

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular assessments of the probable losses inherent in the loan
portfolio and to a lesser extent, unused commitments to provide financing. Determining the adequacy of the allowance is a matter of judgment, which reflects consideration of all significant factors that affect the collectibility of the portfolio as
of the evaluation date. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated reserve. The
unallocated allowance contains amounts that are based on our evaluation of existing conditions that are not directly measured in the determination of the formula and specific allowances.

The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments, in each case based on the internal risk grade of such loans and
commitments. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for other factors that, in our judgment, affect
the collectibility of the portfolio as of the evaluation date. At December 31, 2006, the formula allowance was $6,013,000 compared to $3,866,000 at December 31, 2005 and $2,966,000 at December 31, 2004. The increase in the formula
allowance in 2006 was primarily a result of

38

---

increases in the balances of loans outstanding and an increase in the current factor adjustment which considers, among other factors, policy, economic conditions, volume changes, loan
concentrations and external factors.

In addition to the formula allowance calculated by the application of the loss factors to the standard loan categories, specific allowances may also be calculated. Quarterly, all
significant classified loans are analyzed individually based on the source and adequacy of repayment and specific type of collateral, and an assessment is made of the adequacy of the formula reserve relative to the individual loan. A specific
allocation either higher or lower than the formula reserve will be calculated based on the higher/lower-than-normal probability of loss and the adequacy of the collateral. At December 31, 2006, the specific allowance was $1,059,000 on a
classified loan base of $3,045,000 compared to a specific allowance of $1,412,000 on a classified loan base of $4,676,000 at December 31, 2005.

At December 31, 2006 and December 31, 2005 there was $1,337,000 and $1,725,000, respectively, in the allowance for loan losses that was unallocated. In the opinion of
Management, and based upon an evaluation of potential losses inherent in the loan portfolio, it is necessary to establish unallocated allowance amounts above the amounts allocated using the formula and specific allowance methods, based upon our
evaluation of the following factors:

- The current national and local economic and business conditions, trends and developments, including the condition of various market segments within our lending area;
- Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
- Changes in the nature, mix, concentrations and volume of the loan portfolio;
- The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in our current portfolio.

There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the combined allowance for loan losses as determined by us at December 31,
2006 and set forth in the preceding paragraph.

The allowance for loan losses totaled $8,409,000 or 1.56% of total loans at December 31, 2006, compared to $7,003,000 or 1.71% of total loans at December 31, 2005. At these
dates, the allowance represented 5496.08% and 963.27% of nonperforming and restructured loans, respectively.

It is the Companys policy to maintain the allowance for loan losses at a level considered adequate for risks inherent in the loan portfolio. Based on information currently
available to Management, including economic factors, overall credit quality, historical delinquency and history of actual charge-offs, as of December 31, 2006, we believe that the allowance for loan losses is adequate. However, no prediction of the
ultimate level of additional provisions to our allowance or loans charged off in future years can be made with any certainty. See Note 3 to the consolidated financial statements for further information.



|Liquidity
|---------

Liquidity management refers to our ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients.
Both assets and liabilities contribute to our liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals
decrease liquidity. We assess the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs.

Our sources of liquidity consist of overnight funds sold to correspondent banks, and unpledged marketable investments. On December 31, 2006, consolidated liquid assets totaled
$62,488,000, or 8.3% of total assets, compared to $150,422,000, or 23.99% of total assets at December 31, 2005. The decrease in liquid assets is the result of additional pledging of securities in order to secure short-term credit lines with
the Federal Home Loan Bank. In addition to liquid assets, we maintain short-term lines of credit with correspondent banks. At December 31, 2006, the Company had unused federal fund lines of credit with correspondent banks. These credit lines total
$15,000,000 and have variable interest rates based on the individual lending Company's daily federal fund rates, and are due on demand. These are

39

---

uncommitted lines under which availability is subject to federal fund balances of the issuing banks. Additionally we have total borrowing capacity with the Federal Home Loan Bank in
the amount of $71,331,000. At December 31, 2006, the Company had advances on its lines of credit in the amount of $32,200,000. We serve primarily a business and professional customer base and, as such, our deposit base is susceptible to
economic fluctuations. Accordingly, we strive to maintain a balanced position of liquid assets to volatile and cyclical deposits.



|Capital Resources
|-----------------

The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company's capital position
represents the level of capital available to support continued operations and expansion.

The Company's primary capital resource is shareholders equity which was $45,866,000 at December 31, 2006 compared to $39,1929,000 at December 31, 2005. The change is the
result of the years earnings, the increase in other comprehensive income or loss, the payout of a cash dividend to shareholders in February 2006, and issuance of stock in connection with employee stock option plans. At December 31, 2006, the
Company's Tier 1 leverage ratio, Tier 1 risk-based capital ratio, and Total risk based capital ratio were 8.24%, 9.16%, and 11.37%, respectively. Company Management can employ various means to manage the Company's capital ratios including
controlling asset growth and dividend payouts and raising additional capital. Management believes it has the ability to maintain adequate capital to support operations and continued expansion.

In addition to shareholders' equity, the company also has issued certain capital securities that qualify as either Tier 1 or Tier 2 capital under applicable regulatory guidelines. The
capital securities consist of $10,000,000 in trust preferred securities and a $6,000,000 subordinated note. See Note 9 and Note 19 to the consolidated financial statements for further information.

|Contractual Obligations                                                 |  |          |  |         |  |        
|----------------------------------------------------------------------- |  | -------- |  | ------- |  | -------
|Long-term debt consists of the following at December 31:                |  |          |  |         |  |        
|(dollars in thousands)                                                  |  | 2006     |  | 2005    |  | 2004   
|                                                                        |  |          |  |         |  |        
|Mortgage note payable, 9% stated rate - matures 2030                    |  | $ 788    |  | $ 797   |  | $ 805  
|Subordinated note, 3 month LIBOR + 2.7% floating rate - due 2019        |  | 6,000    |  | 6,000   |  | 6,000  
|Junior subordinated note, 3 month LIBOR + 1.6% floating rate - due 2036 |  | 10,000   |  | -       |  | -      
|Junior subordinated note, 3 month LIBOR + 1.6% floating rate - due 2036 |  | 310      |  | -       |  | -      
|                                                                        |  |          |  |         |  |        
|Total Long-Term Debt                                                    |  | $ 17,098 |  | $ 6,797 |  | $ 6,805
|                                                                        |  |          |  |         |  |        

The mortgage note payable is secured by a 48-unit seniors apartment project and is payable in monthly installments of $2,300 including interest at a stated rate of 9%. The loan
matures in 2030. The note is classified as a Rural Rental Housing (RRH) loan issued pursuant to the Housing Act of 1949. Under the RRH program, the borrower pays interest at a rate lower than the stated rate.

The subordinated note is a capital security that qualifies as Tier 2 capital pursuant to capital adequacy guidelines promulgated by the federal regulatory agencies. Both junior
subordinated notes are related to the issuance of trust preferred securities which qualify as Tier 1 capital. The subordinated note and trust preferred securities are discussed in further detail under the caption "Capital Resources" above and in
Note 9 to the consolidated financial statements.

40

---

Estimated future maturities of long-term debt at December 31, 2006 are as follows:

|Years Ending |  |                        |  |         
|------------ |  | ---------------------- |  | --------
|December 31  |  | (dollars in thousands) |  |         
|2007         |  |                        |  | $ 10    
|2008         |  |                        |  | 11      
|2009         |  |                        |  | 12      
|2010         |  |                        |  | 13      
|2011         |  |                        |  | 14      
|Thereafter   |  |                        |  | 17,038  
|             |  |                        |  | $ 17,098
|             |  |                        |  |         

One of the Company's branch office locations is subject to a non-cancelable operating lease agreement expiring in 2016 with renewal option periods extending through 2026. These
contractual obligations are discussed in Item 2 above and in Note 4 to the consolidated financial statements.



|Financial Ratios
|----------------

The following table shows key financial ratios for the periods indicated:

|                                                     |  | 2006   |  | 2005   |  | 2004  
|---------------------------------------------------- |  | ------ |  | ------ |  | ------
|                                                     |  |        |  |        |  |       
|Return on Average Total Assets                       |  | 1.26%  |  | 1.18%  |  | 1.17% 
|Return on Average Shareholders' Equity               |  | 19.48% |  | 18.43% |  | 17.69%
|Average Shareholders' Equity to Average Total Assets |  | 6.45%  |  | 6.41%  |  | 6.64% 
|Net interest Margin                                  |  | 4.60%  |  | 4.51%  |  | 4.43% 
|Efficiency Ratio                                     |  | 47.85% |  | 51.55% |  | 53.12%
|Dividend Payout ratio                                |  | 9.84%  |  | 11.34% |  | 12.50%

41

---



|Deposit Categories
|------------------

The Company primarily attracts deposits from local businesses and professionals. Although San Joaquin Bancorps primary focus is toward the small and medium-sized business and professional market, the Company also provides a full range of banking services that are available to individuals, public entities, and non-profit organizations.

The following table summarizes the Companys average balances of deposits and the rates paid for the periods indicated:

|Deposit Distribution and Average Rates Paid |  |             |  |                |  |          |  |          |  |         
|------------------------------------------- |  | ----------- |  | -------------- |  | -------- |  | -------- |  | --------
|                                            |  |             |  | 2006           |  |          |  |         
|                                            |  |            
|                                            |  |             |  | Percent of     |  |          |  |          |  |         
|Interest Bearing Deposits:                  |  | Avg Balance |  | Total Deposits |  |          |  | Interest |  | Avg Rate
|                                            |  |             |  |                |  |          |  |          |  |         
|Now and Money Market                        |  | $ 289,385   |  | 48.50%         |  | $ 11,428 |  | 3.95%   
|Savings                                     |  | 98,432      |  | 16.50%         |  |          |  | 3,525    |  | 3.58%   
|Time Deposits                               |  | 31,972      |  | 5.36%          |  |          |  | 1,237    |  | 3.87%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Total Interest Bearing Deposits             |  | 419,789     |  | 70.36%         |  |          |  | 16,190   |  | 3.86%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Noninterest Bearing Demand Deposits         |  | 176,879     |  | 29.64%         |  |          |  |          |  |         
|                                            |  |             |  |                |  |          |  |          |  |         
|Total                                       |  | $ 596,668   |  | 100.00%        |  | $ 16,190 |  | 2.71%   
|                                            |  |             |  |                |  |          |  |         
|                                            |  |             |  | 2005           |  |          |  |         
|                                            |  |            
|                                            |  |             |  | Percent of     |  |          |  |          |  |         
|Interest Bearing Deposits:                  |  | Avg Balance |  | Total Deposits |  |          |  | Interest |  | Avg Rate
|                                            |  |             |  |                |  |          |  |          |  |         
|Now and Money Market                        |  | $ 213,249   |  | 41.77%         |  | $ 5,471  |  | 2.57%   
|Savings                                     |  | 106,552     |  | 20.87%         |  |          |  | 2,602    |  | 2.44%   
|Time Deposits                               |  | 24,171      |  | 4.73%          |  |          |  | 558      |  | 2.31%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Total Interest Bearing Deposits             |  | 343,972     |  | 67.37%         |  |          |  | 8,631    |  | 2.51%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Noninterest Bearing Demand Deposits         |  | 166,573     |  | 32.63%         |  |          |  |          |  |         
|                                            |  |             |  |                |  |          |  |          |  |         
|Total                                       |  | $ 510,545   |  | 100.00%        |  | $ 8,631  |  | 1.69%   
|                                            |  |             |  |                |  |          |  |         
|                                            |  |             |  | 2004           |  |          |  |         
|                                            |  |            
|                                            |  |             |  | Percent of     |  |          |  |          |  |         
|Interest Bearing Deposits:                  |  | Avg Balance |  | Total Deposits |  |          |  | Interest |  | Avg Rate
|                                            |  |             |  |                |  |          |  |          |  |         
|Now and Money Market                        |  | $ 168,403   |  | 40.92%         |  | $ 1,522  |  | 0.90%   
|Savings                                     |  | 86,972      |  | 21.13%         |  |          |  | 1,377    |  | 1.58%   
|Time Deposits                               |  | 24,268      |  | 5.90%          |  |          |  | 377      |  | 1.55%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Total Interest Bearing Deposits             |  | 279,643     |  | 67.94%         |  |          |  | 3,276    |  | 1.17%   
|                                            |  |             |  |                |  |          |  |          |  |         
|Noninterest Bearing Demand Deposits         |  | 131,935     |  | 32.06%         |  |          |  |          |  |         
|                                            |  |             |  |                |  |          |  |          |  |         
|Total                                       |  | $ 411,578   |  | 100.00%        |  | $ 3,276  |  | 0.80%   
|                                            |  |             |  |                |  |          |  |         

42

---

Maturity Distribution of Time deposits in amounts of $100,000 or more

The following table summarizes time remaining to maturity of time deposits and IRAs of $100,000 or more:

|Time deposits of $100,000 or more with a remaining maturity of: |  |         
|--------------------------------------------------------------- |  | --------
|(dollars in thousands)                                          |  |         
|Three months or less                                            |  | $ 39,405
|Over three months through six months                            |  | 3,851   
|Over six months through one year                                |  | 1,102   
|Over one year                                                   |  | 223     
|                                                                |  |         
|Total                                                           |  | $ 44,581
|                                                                |  |         

The Company may occasionally obtain brokered deposits as an additional source of funding. At December 31, 2006, the Company held brokered time deposits totaling $11,498,000. Of
these balances, $1,502,000 are included in time deposits of less than $100,000 and have a remaining maturity of 1 year or less. The remaining 9,996,000 are included in time deposits of $100,000 or more and have a remaining maturity of 1
year or less.



|Short Term Borrowings
|---------------------

The following table sets forth the short-term borrowings of the Company for the periods indicated:

|(dollars in thousands)     |  | 2006     |  | 2005  |  | 2004    |  | 2003    |  | 2002   
|-------------------------- |  | -------- |  | ----- |  | ------- |  | ------- |  | -------
|                           |  |          |  |       |  |         |  |         |  |        
|Repurchase agreements      |  |          |  |       |  |         |  |         |  |        
|Balance at end of period   |  | $ -      |  | $ -   |  | $ 6,663 |  | $ 6,380 |  | $ 4,919
|Maximum Balance            |  | -        |  | 6,796 |  | 7,452   |  | 7,913   |  | 5,777  
|Average Balance            |  | -        |  | 2,042 |  | 6,741   |  | 6,424   |  | 4,839  
|Interest                   |  | -        |  | 35    |  | 55      |  | 55      |  | 75     
|Average rate for the year  |  | 0.00%    |  | 1.72% |  | 0.82%   |  | 0.86%   |  | 1.55%  
|Average rate at period end |  | 0.00%    |  | 0.00% |  | 0.83%   |  | 0.86%   |  | 1.52%  
|FHLB advances              |  |          |  |       |  |         |  |         |  |        
|Balance at end of period   |  | $ 32,200 |  | $ -   |  | $ -     |  | $ -     |  | $ -    
|Maximum Balance            |  | 64,800   |  | -     |  | -       |  | -       |  | -      
|Average Balance            |  | 17,144   |  | -     |  | -       |  | -       |  | -      
|Interest                   |  | 896      |  | -     |  | -       |  | -       |  | -      
|Average rate for the year  |  | 5.23%    |  | 0.00% |  | 0.00%   |  | 0.00%   |  | 0.00%  
|Average rate at period end |  | 5.31%    |  | 0.00% |  | 0.00%   |  | 0.00%   |  | 0.00%  

See Note 8 to the consolidated financial statements for further information.



|Off-Balance Sheet Items
|-----------------------

As of December 31, 2006 and December 31, 2005, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk, except for the
interest rate cap contracts and interest rate swap agreements described herein. See Note 6 to the consolidated financial statements for further information.



|Derivatives
|-----------

The use of derivatives allows the Company to meet the needs of its customers while reducing the interest rate risk associated with certain transactions. Currently, the Company uses
interest rate cap contracts, which are cash flow hedges, and interest rate swap agreements, which are fair value hedges, to limit exposure to changes in interest rates. The Board has approved a hedging policy, and the Asset Liability Committee is
responsible for ensuring that the Board is knowledgeable about general hedging theory, usage and accounting; and that based upon this understanding, approves all hedging transactions. The derivatives are carried at fair value and are included in
other assets or other liabilities in the consolidated balance sheet if they have a positive or negative fair value, respectively.

43

---



|Cash Flow Hedges
|----------------

We entered into two interest rate cap contracts with a third party, to manage the risk that changes in interest rates will affect the amount of interest expense of our deposits. The
interest rate cap contracts qualify as derivative financial instruments. Under an interest rate cap contract, we agree to pay an initial fixed amount at the beginning of the contract in exchange for quarterly payments from the third party when the
three-month LIBOR rate exceeds a certain fixed level.

The interest rate cap contracts are considered to be a hedge against changes in the amount of future cash flows associated with our interest expense for our deposits. Accordingly, the
interest rate cap contracts are recorded at fair value in our consolidated balance sheet and the related unrealized gains or losses on these contracts are recorded in shareholders equity as a component of other comprehensive income. These
deferred gains and losses are amortized as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in income. Over the twelve months ending December 31, 2007, the Company expects to
amortize $61,000 of the unrealized loss as an adjustment to interest expense. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being
hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.

At December 31, 2006, we had interest rate cap contracts on $14,000,000 notional amount of indebtedness. Interest rate cap contracts with notional amounts of $7,000,000 and
$7,000,000 have cap rates of 6.50%, and 6.00%, respectively. Notional amount of $14,000,000 outstanding contracts will mature on June 2, 2008. The net gain or loss on the ineffective portion of these interest rate cap contracts was not
material for the year ended December 31, 2005, or for the year ended December 31, 2006.



|Fair Value Hedges
|-----------------

The Company entered into interest rate swap agreements with a third party, to hedge against changes in fair value of certain fixed rate loans. The Company uses this as a means to
offer fixed rate loans to customers, while maintaining a variable rate income that better suits the Company's needs. Under an interest rate swap agreement, the Company agrees to pay a fixed rate to the counter party while receiving a floating rate
based on the 1-month LIBOR.

The interest rate swap agreements are considered to be a hedge against changes in the fair value of certain fixed rate loans. The interest rate swap agreements are fair value hedges
that qualify as derivative financial instruments under SFAS No. 133 and are accounted for under the short-cut method. These hedges are considered perfectly effective against changes in the fair value of the loan due to changes in the benchmark
interest rate over its term. Accordingly, the hedges are recorded at fair value on the balance sheet and any changes in fair value of the swap is recognized currently in earnings and the offsetting gain or loss on the hedged assets attributable to
the hedged risk is recognized currently in earnings.

As of December 31, 2006, we had interest rate swap agreements on $29,915,000 notional amount of indebtedness. At December 31, 2006, the fair value of the swaps was a liability of
$796,000 and is included with other liabilities on the balance sheet. A corresponding fair value adjustment is included on the balance sheet with the hedged item. No portion of the interest rate swap agreements was ineffective for the years
ended December 31, 2006, 2005, and 2004; therefore, no gain or loss was recognized in earnings for these periods.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The goal for managing our assets and liabilities is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing ourselves to undue
interest rate risk. Our Board of Directors has overall responsibility for our interest rate risk management policies. We have an Asset/Liability Management Committee (ALCO), which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates. The company does not engage in trading activities to manage interest rate risk, however, the Board of Directors has approved, and the Company currently uses, derivatives to manage interest rate risk. These
derivatives are discussed in Item 7 under the caption "Off-Balance Sheet Items" and in Note 6 to the consolidated financial statements. Interest rate risk is the most significant market risks affecting the Company. Management does not believe the
Company faces other significant market risks such as foreign currency exchange risks, commodity risks, or equity price risks.

44

---



|Asset and Liability Management
|------------------------------

Activities involved in asset/liability management include but are not limited to lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk
is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates.
The asset/liability management policy sets limits on the acceptable amount of variance in net income, net interest income and market value of equity.

The market values of assets or liabilities on which the interest rate is fixed will increase or decrease with changes in market interest rates. If the Company invests funds in a fixed
rate long-term security and then interest rates rise, the security is worth less than a comparable security just issued because of the lower yield on the original fixed rate security. If the lower yielding security had to be sold, the Company would
have to recognize a loss. Correspondingly, if interest rates decline after a fixed rate security is purchased, its value increases. Therefore, while the value of the fixed rate investment changes regardless of which direction interest rates move,
the adverse exposure to market risk is primarily due to rising interest rates. This exposure is lessened by managing the amount of fixed rate assets and by keeping maturities relatively short. However, this strategy must be balanced
against the need for adequate interest income because variable rate and shorter fixed rate securities generally earn less interest than longer term fixed rate securities.

There is market risk relating to the Company's fixed rate or term liabilities as well as its assets. For liabilities, the adverse exposure to market risk is to lower rates because the
Company must continue to pay the higher rate until the end of the term.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, we are able to estimate the
potential impact of changing interest rates on future earnings. A balance sheet forecast is prepared using inputs of actual loan, securities and interest bearing liabilities (i.e., deposits and borrowings) positions and characteristics as the
beginning base. The forecast balance sheet is processed against multiple interest rate scenarios. The scenarios include a 100, 200, and 300 basis point rising rate forecast, a flat rate forecast and a 100, 200, and 300 basis point falling rate
forecast which take place within a one year time frame. The latest simulation forecast used December 31, 2006 balances. The basic structure of the balance sheet has not changed significantly from the last simulation run.

The following table shows the estimated impact on net interest income over the next twelve months that would result from an instantaneous shift in various interest rates as compared
to a flat rate environment:

|(dollars in thousands)   |  | Estimated Change in
|------------------------ |  | -------------------
|Change in Interest Rates |  | Net Interest Income
|                         |  |                    
|+                        |  | 300 basis points   
|+                        |  | 200 basis points   
|+                        |  | 100 basis points   
|-                        |  | 100 basis points   
|-                        |  | 200 basis points   
|-                        |  | 300 basis points   

The simulations of earnings do not incorporate any management actions which might moderate the negative consequences of interest rate deviations. Therefore, in Managements view,
they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. Our risk profile has not changed materially from that at year-end 2006.

The Company has adequate capital to absorb any potential losses as described above as a result of a decrease in interest rates. Periods of more than one year are not estimated because
it is believed that steps can be taken to mitigate the adverse effects of such interest rate changes.

45

---



|Repricing Risk
|--------------

One component, among others, of interest rate risk arises from the fact that when interest rates change, the changes do not occur equally for the rates of interest earned and paid
because of differences in contractual terms of the assets and liabilities held. The Company has a large portion of its loan portfolio tied to the prime interest rate. If the prime rate is lowered because of general market conditions, e.g., other
money-center banks are lowering their lending rates, these loans will be repriced. If the Company were at the same time to have a large portion of its deposits in long-term fixed rate certificates, net interest income would decrease immediately.
Interest earned on loans would decline while interest expense would remain at higher levels for a period of time because of the higher rate still being paid on deposits.

A decrease in net interest income could also occur with rising interest rates if the Company had a large portfolio of fixed rate loans and securities funded by deposit accounts on
which the rate is steadily rising. This exposure to repricing risk is managed by matching the maturities and repricing opportunities of assets and liabilities. This is done by varying the terms and conditions of the products that are
offered to depositors and borrowers. For example, if many depositors want longer-term certificates while most borrowers are requesting loans with floating interest rates, the Company will adjust the interest rates on the certificates and loans to
try to match up demand. The Company can then partially fill in mismatches by purchasing securities with the appropriate maturity or repricing characteristics.



|Basis Risk
|----------

Another component of interest rate risk arises from the fact that interest rates rarely change in a parallel or equal manner. The interest rates associated with the various assets and
liabilities differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a specific asset and a specific liability may fall in the same
period of a gap report, the interest rate on the asset may rise 100 basis points, while market conditions dictate that the liability increases only 50 basis points. While evenly matched in the gap report, the Company would experience an increase in
net interest income. This exposure to basis risk is the type of interest risk least able to be managed, but is also the least dramatic. Avoiding concentration in only a few types of assets or liabilities is the best insurance that the
average interest received and paid will move in tandem, because the wider diversification means that many different rates, each with their own volatility characteristics, will come into play. The Company has made an effort to minimize concentrations
in certain types of assets and liabilities.

46

---

|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                        |  |     
|------------------------------------------------------------------------------------------ |  | ----
|                                                                                          
|San Joaquin Bancorp and Subsidiaries                                                       |  |     
|Index to Financial Statements                                                              |  |     
|                                                                                           |  | Page
|                                                                                           |  |     
|Report of Independent Registered Public Accounting Firm                                    |  | 48  
|Consolidated Balance Sheet as of December 31, 2006 and 2005                                |  | 50  
|Consolidated Statement of Income for the years ended December 31, 2006, 2005, and 2004     |  | 51  
|Consolidated Statement of Changes in Shareholders' Equity for the years                    |  |     
|ended December 31, 2006, 2005, and 2004                                                    |  | 52  
|Consolidated Statement of Cash Flows for the years ended December 31, 2006, 2005, and 2004 |  | 53  
|Notes to Consolidated Financial Statements                                                 |  | 54  

47

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



|To the Board of Directors andShareholders of San Joaquin Bancorp
|----------------------------------------------------------------

We have audited the consolidated balance sheet of San Joaquin Bancorp and its subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2006. We also have audited managements assessment, included in the accompanying Managements Report on Internal Control over
Financial Reporting, that San Joaquin Bancorp and its subsidiary maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). San Joaquin Bancorp and its subsidiarys management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on managements assessment, and an opinion on the effectiveness of the
companys internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of San Joaquin Bancorp and its subsidiary as of December
31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, managements assessment that San Joaquin Bancorp and its subsidiary maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, San Joaquin Bancorp and its subsidiary maintained, in all material respects, effective
internal control over financial reporting

48

---

as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

As discussed in Note 1 to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment
and No. 158 Employers Accounting for Defined Benefit Pension and Postretirement Plans.



|/S/ BROWN ARMSTRONG PAULDENMcCOWN STARBUCK THORNBURGH & KEETERACCOUNTANCY CORPORATION
|-------------------------------------------------------------------------------------

|Bakersfield, California
|-----------------------
|March 14, 2007         

49

---

|San Joaquin Bancorp and Subsidiaries                                                    |  |                   |  |                  
|--------------------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|Consolidated Balance Sheet                                                              |  |                   |  |                  
|                                                                                       
|                                                                                        |  | December 31, 2006 |  | December 31, 2005
|                                                                                        |  |                   |  |                  
|ASSETS                                                                                  |  |                   |  |                  
|Cash and due from banks                                                                 |  | $ 31,869,000      |  | $ 24,355,000     
|Interest-bearing deposits in banks                                                      |  | 1,660,000         |  | 390,000          
|Federal funds sold                                                                      |  | 4,250,000         |  | 1,700,000        
|                                                                                        |  |                   |  |                  
|Total cash and cash equivalents                                                         |  | 37,779,000        |  | 26,445,000       
|Investment securities:                                                                  |  |                   |  |                  
|Held-to-maturity (market value of $138,315,000 and                                      |  |                   |  |                  
|$164,959,000 at December 31, 2006 and 2005, respectively)                               |  | 140,822,000       |  | 167,636,000      
|Available-for-sale                                                                      |  | 7,072,000         |  | 2,428,000        
|                                                                                        |  |                   |  |                  
|Total Investment Securities                                                             |  | 147,894,000       |  | 170,064,000      
|Loans, net of unearned income                                                           |  | 536,408,000       |  | 407,400,000      
|Allowance for loan losses                                                               |  | (8,409,000)       |  | (7,003,000)      
|                                                                                        |  |                   |  |                  
|Net Loans                                                                               |  | 527,999,000       |  | 400,397,000      
|Premises and equipment                                                                  |  | 7,622,000         |  | 7,677,000        
|Investment in real estate                                                               |  | 643,000           |  | 710,000          
|Interest receivable and other assets                                                    |  | 26,993,000        |  | 21,805,000       
|                                                                                        |  |                   |  |                  
|TOTAL ASSETS                                                                            |  | $ 748,930,000     |  | $ 627,098,000    
|                                                                                        |  |                   |  |                  
|LIABILITIES                                                                             |  |                   |  |                  
|Deposits:                                                                               |  |                   |  |                  
|Noninterest-bearing                                                                     |  | $ 189,792,000     |  | $ 186,266,000    
|Interest-bearing                                                                        |  | 452,862,000       |  | 389,267,000      
|                                                                                        |  |                   |  |                  
|Total Deposits                                                                          |  | 642,654,000       |  | 575,533,000      
|Short-term borrowings                                                                   |  | 32,200,000        |  | -                
|Long-term debt and other borrowings                                                     |  | 17,098,000        |  | 6,797,000        
|Accrued interest payable and other liabilities                                          |  | 11,112,000        |  | 5,576,000        
|                                                                                        |  |                   |  |                  
|Total Liabilities                                                                       |  | 703,064,000       |  | 587,906,000      
|                                                                                        |  |                   |  |                  
|SHAREHOLDERS' EQUITY                                                                    |  |                   |  |                  
|Common stock, no par value - 20,000,000 shares authorized;                              |  |                   |  |                  
|3,486,222 and 3,435,896 issued and outstanding                                          |  |                   |  |                  
|at December 31, 2006 and December 31, 2005, respectively                                |  | 10,368,000        |  | 9,970,000        
|Additional paid-in capital                                                              |  | 145,000           |  | -                
|Retained earnings                                                                       |  | 36,986,000        |  | 29,347,000       
|Accumulated other comprehensive income (loss)                                           |  | (1,633,000)       |  | (125,000)        
|                                                                                        |  |                   |  |                  
|Total Shareholders' Equity                                                              |  | 45,866,000        |  | 39,192,000       
|                                                                                        |  |                   |  |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                              |  | $ 748,930,000     |  | $ 627,098,000    
|                                                                                        |  |                   |  |                  
|                                                                                       
|                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements. |  |                  

50

---

|San Joaquin Bancorp and Subsidiaries          |  |                                 |  |              |  |             
|--------------------------------------------- |  | ------------------------------- |  | ------------ |  | ------------
|Consolidated Statement of Income              |  |                                 |  |              |  |             
|                                             
|                                             
|                                              |  | Twelve Months Ended December 31
|                                              |  |                                
|                                              |  | 2006                            |  | 2005         |  | 2004        
|                                              |  |                                 |  |              |  |             
|                                             
|INTEREST INCOME                               |  |                                 |  |              |  |             
|Loans (including fees)                        |  | $ 39,615,000                    |  | $ 26,212,000 |  | $ 19,472,000
|Investment securities                         |  | 6,456,000                       |  | 5,337,000    |  | 2,332,000   
|Fed funds & other interest-bearing balances   |  | 457,000                         |  | 720,000      |  | 251,000     
|                                              |  |                                 |  |              |  |             
|Total Interest Income                         |  | 46,528,000                      |  | 32,269,000   |  | 22,055,000  
|                                              |  |                                 |  |              |  |             
|                                             
|INTEREST EXPENSE                              |  |                                 |  |              |  |             
|Deposits                                      |  | 16,190,000                      |  | 8,631,000    |  | 3,276,000   
|Short-term borrowings                         |  | 905,000                         |  | 37,000       |  | 56,000      
|Long-term borrowings                          |  | 733,000                         |  | 378,000      |  | 283,000     
|                                              |  |                                 |  |              |  |             
|Total Interest Expense                        |  | 17,828,000                      |  | 9,046,000    |  | 3,615,000   
|                                              |  |                                 |  |              |  |             
|                                             
|Net Interest Income                           |  | 28,700,000                      |  | 23,223,000   |  | 18,440,000  
|Provision for loan losses                     |  | 1,730,000                       |  | 1,200,000    |  | 1,200,000   
|                                              |  |                                 |  |              |  |             
|Net Interest Income After Loan Loss Provision |  | 26,970,000                      |  | 22,023,000   |  | 17,240,000  
|                                              |  |                                 |  |              |  |             
|                                             
|NONINTEREST INCOME                            |  |                                 |  |              |  |             
|Service charges & fees on deposits            |  | 787,000                         |  | 887,000      |  | 984,000     
|Other customer service fees                   |  | 1,322,000                       |  | 1,151,000    |  | 1,014,000   
|Other                                         |  | 966,000                         |  | 673,000      |  | 1,072,000   
|                                              |  |                                 |  |              |  |             
|Total Noninterest Income                      |  | 3,075,000                       |  | 2,711,000    |  | 3,070,000   
|                                              |  |                                 |  |              |  |             
|                                             
|NONINTEREST EXPENSE                           |  |                                 |  |              |  |             
|Salaries and employee benefits                |  | 9,494,000                       |  | 7,907,000    |  | 6,888,000   
|Occupancy                                     |  | 942,000                         |  | 895,000      |  | 508,000     
|Furniture & equipment                         |  | 1,029,000                       |  | 1,025,000    |  | 762,000     
|Promotional                                   |  | 568,000                         |  | 667,000      |  | 473,000     
|Professional                                  |  | 1,227,000                       |  | 934,000      |  | 719,000     
|Other                                         |  | 1,945,000                       |  | 1,940,000    |  | 2,077,000   
|                                              |  |                                 |  |              |  |             
|Total Noninterest Expense                     |  | 15,205,000                      |  | 13,368,000   |  | 11,427,000  
|                                              |  |                                 |  |              |  |             
|                                             
|Income Before Taxes                           |  | 14,840,000                      |  | 11,366,000   |  | 8,883,000   
|Income Taxes                                  |  | 6,366,000                       |  | 4,742,000    |  | 3,475,000   
|                                              |  |                                 |  |              |  |             
|                                             
|NET INCOME                                    |  | $ 8,474,000                     |  | $ 6,624,000  |  | $ 5,408,000 
|                                              |  |                                 |  |              |  |             
|                                             
|                                             
|Basic Earnings per Share                      |  | $ 2.44                          |  | $ 1.94       |  | $ 1.60      
|                                              |  |                                 |  |              |  |             
|                                             
|Diluted Earnings per Share                    |  | $ 2.29                          |  | $ 1.81       |  | $ 1.50      
|                                              |  |                                 |  |              |  |             

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

51

---

|San Joaquin Bancorp and Subsidiaries                                                    |  |              |  |              |  |               |  |              
|--------------------------------------------------------------------------------------- |  | ------------ |  | ------------ |  | ------------- |  | -------------
|Consolidated Statement of Changes in Shareholders' Equity                               |  |              |  |              |  |              
|                                                                                       
|                                                                                        |  |              |  |              |  |               |  | Accumulated  
|                                                                                        |  |              |  |              |  | Additional    |  | Other        
|                                                                                        |  | Common Stock |  | Paid-In      |  | Comprehensive |  | Retained     
|                                                                                        |  | Shares       |  | Amount       |  | Capital       |  | Income (Loss)
|                                                                                        |  |              |  |              |  |               |  |              
|Balance, December 31, 2003                                                              |  | 3,352,151    |  | $ 9,597,000  |  | $ -           |  | $ (134,000)  
|                                                                                       
|Net income                                                                              |  | -            |  | -            |  | -             |  | -            
|Other comprehensive income (loss),                                                      |  |              |  |              |  |               |  |              
|net of tax                                                                              |  | -            |  | -            |  | -             |  | (18,000)     
|Stock options exercised                                                                 |  | 43,983       |  | 187,000      |  | -             |  | -            
|Cash dividends                                                                          |  | -            |  | -            |  | -             |  | -            
|                                                                                        |  |              |  |              |  |               |  |              
|Balance, December 31, 2004                                                              |  | 3,396,134    |  | 9,784,000    |  | -             |  | (152,000)    
|                                                                                       
|Net income                                                                              |  | -            |  | -            |  | -             |  | -            
|Other comprehensive income (loss),                                                      |  |              |  |              |  |               |  |              
|net of tax                                                                              |  | -            |  | -            |  | -             |  | 27,000       
|Stock options exercised                                                                 |  | 39,762       |  | 186,000      |  | -             |  | -            
|Cash dividends                                                                          |  | -            |  | -            |  | -             |  | -            
|                                                                                        |  |              |  |              |  |               |  |              
|Balance December 31, 2005                                                               |  | 3,435,896    |  | $ 9,970,000  |  | -             |  | $ (125,000)  
|                                                                                       
|Net income                                                                              |  | -            |  | -            |  | -             |  | -            
|Other comprehensive income (loss),                                                      |  |              |  |              |  |               |  |              
|net of tax                                                                              |  | -            |  | -            |  | -             |  | (1,508,000)  
|Stock options exercised                                                                 |  | 50,316       |  | 398,000      |  | -             |  | -            
|Stock-based compensation                                                                |  | -            |  | -            |  | 145,000       |  | -            
|Stock issued in connection with                                                         |  |              |  |              |  |               |  |              
|corporate reorganization                                                                |  | 10           |  | -            |  | -             |  | -            
|Cash dividends                                                                          |  | -            |  | -            |  | -             |  | -            
|                                                                                        |  |              |  |              |  |               |  |              
|Balance December 31, 2006                                                               |  | 3,486,222    |  | $ 10,368,000 |  | $ 145,000     |  | $ (1,633,000)
|                                                                                        |  |              |  |              |  |               |  |              
|                                                                                       
|                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements. |  |              |  |             

52

---

|San Joaquin Bancorp and Subsidiaries                                                    |  |                                 |  |               |  |              
|--------------------------------------------------------------------------------------- |  | ------------------------------- |  | ------------- |  | -------------
|Consolidated Statement of Cash Flows                                                    |  |                                 |  |               |  |              
|                                                                                       
|                                                                                       
|                                                                                        |  | Twelve Months Ended December 31
|                                                                                        |  |                                
|                                                                                        |  | 2006                            |  | 2005          |  | 2004         
|                                                                                        |  |                                 |  |               |  |              
|Cash Flows From Operating Activities:                                                   |  |                                 |  |               |  |              
|Net Income                                                                              |  | $8,474,000                      |  | $ 6,624,000   |  | $ 5,408,000  
|Adjustments to reconcile net income                                                     |  |                                 |  |               |  |              
|to net cash provided by operating activities:                                           |  |                                 |  |               |  |              
|Provision for possible loan losses                                                      |  | 1,730,000                       |  | 1,200,000     |  | 1,200,000    
|Depreciation and amortization                                                           |  | 894,000                         |  | 939,000       |  | 627,000      
|Stock-based compensation expense                                                        |  | 145,000                         |  | -             |  | -            
|Net Gain on sale of assets                                                              |  | (17,000)                        |  | (11,000)      |  | (43,000)     
|Deferred income taxes                                                                   |  | (841,000)                       |  | (549,000)     |  | (417,000)    
|Amortization of investment securities' premiums                                         |  |                                 |  |               |  |              
|and discounts                                                                           |  | (17,000)                        |  | 167,000       |  | 381,000      
|Increase in interest receivable and other assets                                        |  | (3,510,000)                     |  | (3,025,000)   |  | (82,000)     
|Increase in accrued interest payable and other liabilities                              |  | 3,989,000                       |  | 1,219,000     |  | 1,323,000    
|                                                                                        |  |                                 |  |               |  |              
|Total adjustments                                                                       |  | 2,373,000                       |  | (60,000)      |  | 2,989,000    
|                                                                                        |  |                                 |  |               |  |              
|Net Cash Provided by Operating Activities                                               |  | 10,847,000                      |  | 6,564,000     |  | 8,397,000    
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|Cash Flows From Investing Activities:                                                   |  |                                 |  |               |  |              
|Proceeds from maturing and called investment securities                                 |  | 39,150,000                      |  | 62,065,000    |  | 62,028,000   
|Purchases of investment securities                                                      |  | (16,966,000)                    |  | (106,927,000) |  | (109,139,000)
|Net increase in loans made to customers                                                 |  | (130,128,000)                   |  | (82,106,000)  |  | (58,353,000) 
|Net additions to premises and equipment                                                 |  | (755,000)                       |  | (877,000)     |  | (5,289,000)  
|                                                                                        |  |                                 |  |               |  |              
|Net Cash Applied to Investing Activities                                                |  | (108,699,000)                   |  | (127,845,000) |  | (110,753,000)
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|Cash Flows From Financing Activities:                                                   |  |                                 |  |               |  |              
|Net increase (decrease) in demand deposits and savings accounts                         |  | 41,375,000                      |  | 126,921,000   |  | 69,294,000   
|Net increase (decrease) in certificates of deposit                                      |  | 25,746,000                      |  | 5,636,000     |  | (2,579,000)  
|Net increase (decrease) in short-term borrowings                                        |  | 32,200,000                      |  | (8,663,000)   |  | 2,282,000    
|Payments on long-term debt and other borrowings                                         |  | (9,000)                         |  | (8,000)       |  | (7,000)      
|Proceeds from long term debt and other borrowings                                       |  | 10,310,000                      |  | -             |  | 6,000,000    
|Cash dividends paid                                                                     |  | (834,000)                       |  | (755,000)     |  | (676,000)    
|Proceeds from issuance of common stock                                                  |  | 398,000                         |  | 186,000       |  | 187,000      
|                                                                                        |  |                                 |  |               |  |              
|Net Cash Provided by Financing Activities                                               |  | 109,186,000                     |  | 123,317,000   |  | 74,501,000   
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|Net Increase in Cash and Cash Equivalents                                               |  | 11,334,000                      |  | 2,036,000     |  | (27,855,000) 
|Cash and cash equivalents, at beginning of period                                       |  | 26,445,000                      |  | 24,409,000    |  | 52,264,000   
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|Cash and Cash Equivalents, at End of Period                                             |  | $ 37,779,000                    |  | $ 26,445,000  |  | $ 24,409,000 
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|Supplemental disclosures of cash flow information                                       |  |                                 |  |               |  |              
|Cash paid during the period for:                                                        |  |                                 |  |               |  |              
|Interest on deposits                                                                    |  | $ 15,897,000                    |  | $ 8,485,000   |  | $ 3,648,000  
|                                                                                        |  |                                 |  |               |  |              
|Income taxes                                                                            |  | $ 7,525,000                     |  | $ 5,622,000   |  | $ 3,918,000  
|                                                                                        |  |                                 |  |               |  |              
|                                                                                       
|                                                                                       
|The accompanying notes are an integral part of these consolidated financial statements. |  |                                 |  |              

53

---



|San Joaquin Bancorp and SubsidiariesNotes to Consolidated Financial Statements
|------------------------------------------------------------------------------

NOTE 1 -THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES



|Nature of operations
|--------------------

San Joaquin Bancorp is a bank holding company, incorporated in the state of California, for the purpose of acquiring all the capital stock of San Joaquin Bank, an insured member bank,
through a holding company reorganization.  The Reorganization was effective at the close of business July 31, 2006. San Joaquin Bank is a California state-chartered Bank that commenced operations in December 1980. The Company has four operating
branches, three located in Bakersfield, California, and one in Delano, California. San Joaquin Bank is insured by the Federal Deposit Insurance Corporation and is a member of the Federal Reserve. The majority of the Company's business activity is
with customers located within the County of Kern, California.

In 1987, San Joaquin Bank formed a subsidiary, Kern Island Company, to acquire, develop, sell or operate commercial or residential real property located in the Company's market area.
In 1993, the Bank formed a limited partnership, Farmersville Village Grove Associates (a California limited partnership), to acquire and operate low-income housing projects under the auspices of the Rural Economic and Community Development
Department (formerly Farmers Home Administration), United States Department of Agriculture. Kern Island Company is the 5% general partner and San Joaquin Bank is the 95% limited partner.

During August 2006, San Joaquin Bancorp formed San Joaquin Bancorp Trust #1, a Delaware statutory business trust, for the purpose of completing a private placement of $10 million
in floating rate trust preferred securities.

The following is a summary of the Company's significant accounting policies.

The accounting and reporting policies of San Joaquin Bancorp and its subsidiaries conform to accounting principles generally accepted in the United States of America and general
practice in the banking industry.



|Use of estimates
|----------------

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired
in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties

While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize
additions to the allowances based on their judgments about information available to them at the time of their examination.



|Basis of consolidation
|----------------------

The consolidated financial statements include San Joaquin Bancorp, and its wholly owned subsidiaries. All financial information presented in these financial statements includes the
operations of the Bank year-to-date and on a comparative basis in prior years. All material intercompany accounts and transactions have been eliminated in consolidation. San Joaquin Bancorp Trust #1 was established for the purpose of issuing trust
preferred securities. Based on the requirements of the Financial Accounting Standards Board Interpretation (FIN) 46R and accepted industry interpretation and presentation, the trust has not been consolidated. Instead, the Companys investment
in the trust are

54

---

included in other assets on the balance sheet and junior subordinated debentures are presented in long-term debt (Note 9).



|Cash and Cash Equivalents
|-------------------------

Cash and cash equivalents from banks include cash on hand, balances with the Federal Reserve Bank, balances due from other banks, and federal funds sold readily convertible to known
amounts of cash and are generally 90 days or less from maturity at the time of purchase, presenting insignificant risk of changes in value due to interest rate changes. The Company is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve, based primarily on the Companys average daily deposit balances. At December 31, 2006, the Company had required balances and compensating balances with the Federal Reserve of $1,681,000.



|Investment securities
|---------------------

The Company classifies its qualifying investments as trading, available-for-sale or held-to-maturity, in accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management has reviewed the securities portfolio and classified securities as either held-to-maturity or available-for-sale. The
Companys policy of classifying investments as held-to-maturity is based upon its ability and managements intent to hold such securities to maturity. Securities expected to be held-to-maturity are carried at amortized historical cost. All
other securities are classified as available-for-sale and are carried at fair value. Fair value is determined based upon quoted market prices. Unrealized gains and losses on securities available-for-sale are included in shareholders equity on
an after-tax basis. Gains and losses on dispositions of investment securities are included in noninterest income and are determined using the specific identification method.



|Loans
|-----

Loans are stated at the principal amount outstanding, net of deferred and unearned income and the allowance for possible loan losses. Interest on loans is accrued monthly on a simple
interest basis.

In general, loans are placed on a non-accrual basis when there is significant doubt as to collectibility of interest or principal, or when interest or principal becomes 90 days past
due unless the loan is secured and in the process of collection. Interest accrued but uncollected is reversed when a loan is placed on a non-accrual basis. Loans are restored to an accrual basis only when payments are current and the borrower has
demonstrated an ability and an intent to perform in accordance with the terms of the loan agreement. Foreclosed assets to be held and used are treated the same way they would be had the assets been acquired in a manner other than through
foreclosure. These assets are periodically reviewed for impairment if conditions indicate that the carrying amount of the asset may not be recoverable.

The Company defers both non-refundable loan fees and direct origination costs of loans. The deferred fees and costs are amortized into income over the expected lives of the related
loans.

Allowance for possible loan losses and liability for off-balance sheet exposure

SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended, and SFAS No. 5, "Accounting for Contingencies", are the primary sources of guidance on accounting for
loan losses and liability for off-balance sheet exposure. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb potential losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. A loan is considered
impaired if it is probable that the lender will be unable to collect all amounts due under 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
effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Allowances for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.

55

---

Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, review the allowance for possible loan losses. These agencies may require additions to the
allowance based on their judgment about information available at the time of their examination.

Management also evaluates the liability for off-balance sheet exposure from unfunded commitments and standby letters of credit in accordance with SFAS No. 5. SFAS No. 5 states that if
a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset can range from remote to probable. Recognition of a liability is required only if a loss is probable and can reasonably be
estimated. The liability for unfunded commitments and standby letters of credit is presented as part of other liabilities in the balance sheet. The liability for unfunded commitments and standby letters of credit was $0 at December 31, 2006 and
2005.



|Premises and equipment
|----------------------

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated
useful lives of the assets which range from 25 years for buildings, 5 to 20 years for leasehold improvements and 3 to 10 years for furniture and equipment. Maintenance and repairs are charged to operating expenses and betterments are
capitalized.



|Leases
|------

The Company leases two of its branch offices. Leases are accounted for as capital leases or operating leases based upon the requirements of GAAP. Specifically, when the terms of the
lease indicate that the company is leasing the building for most of its useful economic life or the sum of the lease payments represents most of the fair value of the building, the transaction is accounted for as a capital lease wherein the building
is recognized as an asset of the Company and the net present value of the contracted lease payments is recognized as a long-term liability.



|Other real estate owned
|-----------------------

Other real estate owned consisting of properties acquired as a result of foreclosure of loans or loans considered in-substance foreclosures where the Company is in the process of
foreclosing are carried at the lower of the loan balance or appraised value net of estimated selling costs. Foreclosed assets to be held and used are treated the same way they would be had the assets been acquired in a manner other than through
foreclosure. These assets are periodically reviewed for impairment if conditions indicate that the carrying amount of the asset may not be recoverable.



|Income taxes
|------------

There are two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the applicable period. Balance sheet
amounts of deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported net amounts. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. The provision for income taxes is based on pretax financial accounting income.



|Advertising Costs
|-----------------

The Company expenses advertising costs as they are incurred. Advertising expense was $254,000, $281,000 and $207,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.

Derivative financial instruments

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, provides guidance on accounting for derivative instruments. A derivative is typically defined
as an instrument whose value is derived from an underlying instrument, index or rate, such as a future, forward, swap, or option contract, or other financial instrument with similar characteristics. SFAS No. 133 requires that all
derivatives be recorded at fair value on the balance sheet. Certain derivatives that meet specific criteria qualify for hedge accounting under SFAS No. 133. If a derivative does not

56

---

meet specific criteria, the ineffective portion of gains or losses associated with changes in its fair value are immediately recognized in the income statement.



|Federal Home Loan Bank stock, Federal Reserve Stock
|---------------------------------------------------

As a member of the Federal Home Loan Bank (FHLB), the Company is required to maintain an investment in capital stock of the FHLB. In addition, as a member of the Federal Reserve Bank
(FRB), the Company is required to maintain an investment in capital stock of the FRB. The investments in both the FHLB and the FRB are carried at cost in the accompanying consolidated statements of condition under other assets and are subject to
certain redemption requirements by the FHLB and FRB.



|Common stock
|------------

The Company has authorized 20,000,000 shares of common stock. Each share entitles the holder to one vote. There are no dividend or liquidation preferences, participation rights, call
prices or dates, conversion prices or rates, sinking fund requirements, or unusual voting rights associated with these shares. The Company has also authorized 5,000,000 shares of preferred stock. However, no preferred stock was issued and
outstanding at December 31, 2006 and 2005.



|Comprehensive income (loss)
|---------------------------

The Company has adopted SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is equal to net income plus the change in other comprehensive
income, as defined by SFAS No. 130. This statement requires the Company to report income and (loss) from non-owner sources. The components of other comprehensive income currently applicable to the Company are net unrealized gains and losses on
interest rate cap contracts, net unrealized gains and losses on available-for-sale investment securities, and unamortized post-retirement benefit obligation resulting from the implementation of the requirements under SFAS No. 158. SFAS No. 130
requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity
section of the balance sheet.



|Earnings per share
|------------------

In February 1997, the FASB issued SFAS No. 128, Earnings per Share, which was adopted by the Company for the year ended December 31, 1997. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings per share based upon the weighted average number of common shares for the period. It also requires dual presentation of basic and diluted earnings per share for
companies with complex capital structures.



|Stock-based compensation
|------------------------

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. This statement applies to financial statements
for fiscal years ending after December 15, 2002. It is an amendment of SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based employee compensation and also amends the disclosure provisions of SFAS No. 123. SFAS No. 123 defines a fair value based method of accounting for employee stock options or similar equity instruments.

However, both also allow an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock.

Prior to January 1, 2006, the Company accounted for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Bulletin ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations. No compensation expense was recognized in the financial statements for employee stock arrangements, as the Companys stock option plans provide for the issuance of
options at a price of no less than the fair

57

---

market value at the date of the grant. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share, had the Company
adopted the fair value method of accounting for stock-based compensation. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differs from the Companys stock option awards. The Companys calculations were made using the Black-Scholes option
pricing model and requires subjective assumptions, including future stock price volatility, future dividends, and expected time to exercise, which greatly affect the calculated values.

A summary of the pro forma effects to reported net income and earnings per share, as if the Company had elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, for the years ended December 31, 2005 and 2004:

|                                         |  | Twelve Months Ended |  | Twelve Months Ended
|---------------------------------------- |  | ------------------- |  | -------------------
|                                         |  | December 31, 2005   |  | December 31, 2004  
|                                         |  |                     |  |                    
|                                        
|Net Income, as reported                  |  | $6,624,000          |  | $5,408,000         
|                                        
|Add: Stock-based employee compensation   |  |                     |  |                    
|expense included in reported net income  |  |                     |  |                    
|net of related tax effects               |  | -                   |  | -                  
|                                        
|Deduct: Total stock-based employee       |  |                     |  |                    
|compensation expense determined under    |  |                     |  |                    
|fair value method for all awards, net of |  |                     |  |                    
|related tax effects                      |  | (1,153,000)         |  | (150,000)          
|                                         |  |                     |  |                    
|                                        
|Pro Forma Net Income                     |  | $ 5,471,000         |  | $ 5,258,000        
|                                         |  |                     |  |                    
|                                        
|Earnings per Share:                      |  |                     |  |                    
|Basic -- as reported                     |  | $ 1.94              |  | $ 1.60             
|Basic -- pro forma                       |  | $ 1.60              |  | $ 1.55             
|                                        
|Diluted -- as reported                   |  | $ 1.81              |  | $ 1.50             
|Diluted -- pro forma                     |  | $ 1.50              |  | $ 1.46             

SFAS No. 123 was revised in December 2004 (SFAS 123(R)) to require that, effective for periods beginning after June 15, 2005, the Company begin using the fair market value method for
valuing and accounting for stock options. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a new rule which delayed the implementation date for the new requirements until 2006. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of SFAS 123(R) on a prospective basis.



|Recent Accounting Pronouncements
|--------------------------------

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivatives and Hedging Activities, and
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid financial instruments are single financial instruments that contain an embedded derivative. Under SFAS No. 155, entities can elect to
record certain hybrid financial instruments at fair value as individual financial instruments. Prior to this amendment, certain hybrid financial instruments were required to be separated into two instruments  a derivative and host  and
generally only the derivative was recorded at fair value. SFAS No. 155 also requires that beneficial interests in securitized assets be evaluated for either freestanding or embedded derivatives. SFAS No. 155 is effective for all financial
instruments acquired or issued after January 1, 2007. The Company does not expect the adoption of this new standard to have a material impact on its financial position or results of operations.

In March 2006, FASB SFAS No. 156, Accounting for Servicing of Financial AssetsAn Amendment of SFAS No. 140., was issued.  SFAS No. 156 requires that all separately recognized
servicing assets and servicing liabilities be

58

---

initially measured at fair value, if practicable, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date. SFAS No. 156 permits an entity to reclassify certain available-for-sale securities to trading securities provided that they are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities subsequently measured at fair value. The provisions of SFAS No. 156 are effective for an entity as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of this new standard to have a material impact on its financial position or results of operations.

On July 13, 2006, FASB issued FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 (the "Interpretation"). FIN 48 clarifies SFAS No. 109, Accounting for Income Taxes, to indicate a criterion that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entitys financial statements. Under the guidelines of the Interpretation, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term more likely than not means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.

FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying FIN 48 should be reported as an adjustment to retained earnings at the beginning of the period in which the Interpretation is adopted. The Company plans to adopt the new interpretation in 2007. The Company does not expect the adoption of this new standard to have a material impact on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for the year beginning January 1, 2008, with early adoption permitted on January 1, 2007. The Company does not expect the adoption of this new standard to have a material impact on its financial position or results of operations.

In September 2006, FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 123(R)". SFAS No. 158 requires the recognition of the funded status of the Company's benefit plans as a net liability or asset, which requires an offsetting adjustment to accumulated other comprehensive income in shareholders' equity. SFAS No. 158 further requires the Company to measure its benefit obligations as of the balance sheet date. The Company adopted these recognition and disclosure provisions of SFAS No. 158 effective December 31, 2006, which required recognition of the previously unrecognized transition obligation for the Companys pension benefits and postretirement medical benefit program. The following table illustrates the adjustments recorded to adopt SFAS No. 158:



|Incremental Effect of Applying SFAS No. 158on Individual Line Items in the Statement of Financial PositionDecember 31, 2006
|---------------------------------------------------------------------------------------------------------------------------

|                                              |  | Before         |  |               |  | After         
|--------------------------------------------- |  | -------------- |  | ------------- |  | --------------
|                                              |  | Application of |  |               |  | Application of
|                                              |  | SFAS No. 158   |  | Adjustments   |  | SFAS No. 158  
|                                              |  |                |  |               |  |               
|Deferred Income Taxes                         |  | $ 4,923,000    |  | $ 1,309,000   |  | $ 6,232,000   
|Total Assets                                  |  | 747,621,000    |  | 1,309,000     |  | 748,930,000   
|Liability for Pension Benefits                |  | 4,891,000      |  | 2,857,000     |  | 7,748,000     
|Total Liabilities                             |  | 700,207,000    |  | 2,857,000     |  | 703,064,000   
|Accumulated Other Comprehensive Income/(Loss) |  | (85,000)       |  | (1,548,000)   |  | (1,633,000)   
|Total Stockholders' Equity                    |  | $ 47,414,000   |  | $ (1,548,000) |  | $ 45,866,000  

59

---

FAS 158 requires the Company to measure its benefit obligations as of the balance sheet date effective December 31, 2008. The Company currently uses a December 31 measurement
date.

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. 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 No. 159 is effective as of the beginning of an entitys first 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 September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company has historically focused on the impact of misstatements
on the income statement, including the reversing effect of prior year misstatements. With a focus on the income statement, the Companys analysis can lead to the accumulation of misstatements in the balance sheet. In applying SAB 108, the
Company must also consider accumulated misstatements in the balance sheet. SAB 108 permits companies to initially apply its provisions by recording the cumulative effect of misstatements as adjustments to the balance sheet as of the first day of the
fiscal year, with an offsetting adjustment recorded to retained earnings, net of tax. As a result of the implementation, the Company corrected certain misstatements in prior year financial statements. These misstatements were not material for each
of the years in which they were made, nor were they material on a cumulative basis.



|Reclassifications
|-----------------

Certain prior period amounts have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.

60

---



|NOTE 2 -INVESTMENT SECURITIES
|-----------------------------

At December 31, 2006, the investment securities portfolio was comprised of securities classified by the Company as held-to-maturity and as available-for-sale, in accordance with SFAS No. 115. The Company has the ability and intent to hold the held-to-maturity securities in its investment portfolio to maturity. Therefore, the resulting investment securities classified as held-to-maturity are being carried at amortized cost. The available-for-sale securities are carried at fair value at December 31, 2006 with unrealized gains or losses included as a component of other comprehensive income recorded in shareholders equity. The amortized cost and estimated market value of total investment securities at December 31, 2006 and 2005 are as follows:

|                                    |  |                |  | Gross Unrealized |  | Gross Unrealized |  |              
|----------------------------------- |  | -------------- |  | ---------------- |  | ---------------- |  | -------------
|December 31, 2006                   |  | Amortized Cost |  | Gains            |  | Losses           |  | Market Value 
|                                    |  |                |  |                  |  |                  |  |              
|Held-to-Maturity Securities:        |  |                |  |                  |  |                  |  |              
|U.S. Treasury securities            |  | $ 16,983,000   |  | $ 5,000          |  | $ (74,000)       |  | $ 16,914,000 
|Securities of U.S. government       |  |                |  |                  |  |                  |  |              
|agencies and corporations           |  | 72,755,000     |  | 4,000            |  | (979,000)        |  | 71,780,000   
|Obligations of states and           |  |                |  |                  |  |                  |  |              
|political subdivisions              |  | -              |  | -                |  | -                |  | -            
|Mortgage-backed securities          |  | 51,084,000     |  | -                |  | (1,463,000)      |  | 49,621,000   
|Other securities                    |  | -              |  | -                |  | -                |  | -            
|                                    |  |                |  |                  |  |                  |  |              
|Total Held-to-Maturity Securities   |  | 140,822,000    |  | 9,000            |  | (2,516,000)      |  | 138,315,000  
|                                    |  |                |  |                  |  |                  |  |              
|                                   
|Available-for-Sale Securities:      |  |                |  |                  |  |                  |  |              
|U.S. Treasury securities            |  | $ -            |  | $ -              |  | $ -              |  | $ -          
|Securities of U.S. government       |  |                |  |                  |  |                  |  |              
|agencies and corporations           |  | -              |  | -                |  | -                |  | -            
|Obligations of states and           |  |                |  |                  |  |                  |  |              
|political subdivisions              |  | 4,646,000      |  | 18,000           |  | (15,000)         |  | 4,649,000    
|Mortgage-backed securities          |  | -              |  | -                |  | -                |  | -            
|Other securities                    |  | 2,500,000      |  | -                |  | (77,000)         |  | 2,423,000    
|                                    |  |                |  |                  |  |                  |  |              
|Total Available-for-Sale Securities |  | 7,146,000      |  | 18,000           |  | (92,000)         |  | 7,072,000    
|                                    |  |                |  |                  |  |                  |  |              
|Total Investment Securities         |  | $ 147,968,000  |  | $ 27,000         |  | $ (2,608,000)    |  | $ 145,387,000
|                                    |  |                |  |                  |  |                  |  |              
|                                   
|                                   
|                                    |  |                |  | Gross Unrealized |  | Gross Unrealized |  |              
|December 31, 2005                   |  | Amortized Cost |  | Gains            |  | Losses           |  | Market Value 
|                                    |  |                |  |                  |  |                  |  |              
|Held-to-Maturity Securities:        |  |                |  |                  |  |                  |  |              
|U.S. Treasury securities            |  | $ 29,016,000   |  | $ -              |  | $ (215,000)      |  | $ 28,801,000 
|Securities of U.S. government       |  |                |  |                  |  |                  |  |              
|agencies and corporations           |  | 74,587,000     |  | 10,000           |  | (936,000)        |  | 73,661,000   
|Obligations of states and           |  |                |  |                  |  |                  |  |              
|political subdivisions              |  | 1,876,000      |  | 9,000            |  | (12,000)         |  | 1,873,000    
|Mortgage-backed securities          |  | 62,157,000     |  | 1,000            |  | (1,534,000)      |  | 60,624,000   
|Other securities                    |  | -              |  | -                |  | -                |  | -            
|                                    |  |                |  |                  |  |                  |  |              
|Total Held-to-Maturity Securities   |  | 167,636,000    |  | 20,000           |  | (2,697,000)      |  | 164,959,000  
|                                    |  |                |  |                  |  |                  |  |              
|                                   
|Available-for-Sale Securities:      |  |                |  |                  |  |                  |  |              
|U.S. Treasury securities            |  | $ -            |  | $ -              |  | $ -              |  | $ -          
|Securities of U.S. government       |  |                |  |                  |  |                  |  |              
|agencies and corporations           |  | -              |  | -                |  | -                |  | -            
|Obligations of states and           |  |                |  |                  |  |                  |  |              
|political subdivisions              |  | -              |  | -                |  | -                |  | -            
|Mortgage-backed securities          |  | -              |  | -                |  | -                |  | -            
|Other securities                    |  | 2,500,000      |  | -                |  | (72,000)         |  | 2,428,000    
|                                    |  |                |  |                  |  |                  |  |              
|Total Available-for-Sale Securities |  | 2,500,000      |  | -                |  | (72,000)         |  | 2,428,000    
|                                    |  |                |  |                  |  |                  |  |              
|Total Investment Securities         |  | $ 170,136,000  |  | $ 20,000         |  | $ (2,769,000)    |  | $ 167,387,000
|                                    |  |                |  |                  |  |                  |  |              

61

---

As of December 31, 2006, securities carried at $121,427,000 were pledged to secure public deposits, other deposits, and short-term funding needs as compared to $15,029,000 at December 31, 2005.

The book value and market value of securities at December 31, 2006, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

|                                       |  |                |  | Unrealized Gain |  |              
|-------------------------------------- |  | -------------- |  | --------------- |  | -------------
|                                       |  | Amortized Cost |  | (Loss)          |  | Market Value 
|                                       |  |                |  |                 |  |              
|Held-to-Maturity Securities:           |  |                |  |                 |  |              
|Due in one year or less                |  | $ 22,974,000   |  | $ (120,000)     |  | $ 22,854,000 
|Due after one year through five years  |  | 59,288,000     |  | (798,000)       |  | 58,490,000   
|Due after five years through ten years |  | 13,216,000     |  | (316,000)       |  | 12,900,000   
|Due after ten years                    |  | 45,344,000     |  | (1,273,000)     |  | 44,071,000   
|                                       |  |                |  |                 |  |              
|Total Held-to-Maturity Securities      |  | $140,822,000   |  | $(2,507,000)    |  | $138,315,000 
|                                       |  |                |  |                 |  |              
|                                      
|Available-for-Sale Securities:         |  |                |  |                 |  |              
|Due in one year or less                |  | $ 627,000      |  | $ 4,000         |  | $ 631,000    
|Due after one year through five years  |  | 1,016,000      |  | (10,000)        |  | 1,006,000    
|Due after five years through ten years |  | 421,000        |  | (5,000)         |  | 416,000      
|Due after ten years                    |  | 2,582,000      |  | 14,000          |  | 2,596,000    
|No stated maturity                     |  | 2,500,000      |  | (77,000)        |  | 2,423,000    
|                                       |  |                |  |                 |  |              
|Total Available-for-Sale Securities    |  | $ 7,146,000    |  | $ (74,000)      |  | $ 7,072,000  
|                                       |  |                |  |                 |  |              
|                                      
|Total Investment Securities            |  | $ 147,968,000  |  | $ (2,581,000)   |  | $ 145,387,000
|                                       |  |                |  |                 |  |              

Substantially all of the held-to-maturity securities set forth in the preceding table are investment-grade debt securities which have experienced a decline in fair value due to changes in market interest rates, not in estimated cash flows. Since the Company has the intent and ability to retain its investment in these securities for a period of time to allow for any anticipated recovery in market value, no other than temporary impairment was recorded on these securities during 2006.

In March 2006, certain securities were transferred from held-to-maturity to available-for-sale. At the time of transfer, these securities had a carrying value of $2,834,000 and a net unrealized loss of $21,000. The transfer of the securities to the available-for sale category was based upon a change in the Company's intent with respect to holding the securities to maturity.

NOTE 3 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

Loans by major category consist of the following as of December 31:

|                                         |  | 2006          |  | 2005         
|---------------------------------------- |  | ------------- |  | -------------
|                                         |  |               |  |              
|Commercial and industrial loans          |  | $63,753,000   |  | $ 55,895,000 
|Real estate loans                        |  | 451,608,000   |  | 333,121,000  
|Installment loans                        |  | 1,535,000     |  | 1,719,000    
|Loans to finance agricultural production |  | 20,864,000    |  | 18,211,000   
|All other loans                          |  | 1,000         |  | 4,000        
|                                         |  |               |  |              
|                                         |  | 537,761,000   |  | 408,950,000  
|Less: Allowance for possible loan losses |  | 8,409,000     |  | 7,003,000    
|Less: Deferred loan fees                 |  | 1,353,000     |  | 1,550,000    
|                                         |  |               |  |              
|                                        
|Net Loans                                |  | $ 527,999,000 |  | $ 400,397,000
|                                         |  |               |  |              

62

---

|Changes in the allowance for possible loan losses are as follows:    |  |                                 |  |             |  |            
|-------------------------------------------------------------------- |  | ------------------------------- |  | ----------- |  | -----------
|                                                                    
|                                                                     |  | Twelve Months Ended December 31
|                                                                     |  |                                
|                                                                     |  | 2006                            |  | 2005        |  | 2004       
|                                                                     |  |                                 |  |             |  |            
|Beginning Balance                                                    |  | $ 7,003,000                     |  | $ 5,487,000 |  | $ 4,819,000
|Provision charged to expense                                         |  | 1,730,000                       |  | 1,200,000   |  | 1,200,000  
|Loans charged off                                                    |  | (514,000)                       |  | (860,000)   |  | (819,000)  
|Recoveries                                                           |  | 190,000                         |  | 298,000     |  | 335,000    
|Reclassification from (to) allowance for off-balance sheet risks (*) |  | -                               |  | 878,000     |  | (48,000)   
|                                                                     |  |                                 |  |             |  |            
|Ending Balance                                                       |  | $ 8,409,000                     |  | $ 7,003,000 |  | $ 5,487,000
|                                                                     |  |                                 |  |             |  |            

(*) Allowance for off-balance sheet risks is presented as part of the accrued interest and other liabilities in the balance sheet.

At December 31, 2006 and 2005, the Company had loans amounting to approximately $3,045,000 and $4,676,000, respectively, that were specifically classified as loans that when based on current information and events, it is possible that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Of these loans, $457,000 and $1,664,000, respectively, are secured by real estate, and $0 and $196,000, respectively, are SBA loans guaranteed by the U.S. Government. Total reserves allocated to classified loans were $1,059,000 for 2006 and $1,412,000 for 2005.

At December 31, the recorded investment in loans that were considered impaired under SFAS No. 114 was $0 in 2006 and 2005. As such, there were no reserves allocated to impaired loans at these dates.

There are no commitments to lend additional funds to the borrowers of impaired or non-accrual loans at December 31, 2006.



|Concentrations of Credit risk
|-----------------------------

Most of the Company's business is with customers located within the County of Kern, California. The loan portfolio is well diversified, although the Company has significant credit arrangements that are secured by real estate collateral. The Company makes real estate loans for both development and long-term financing. The Company's real estate loan portfolio was as follows at December 31:

|                                  |  | 2006          |  | 2005         
|--------------------------------- |  | ------------- |  | -------------
|                                  |  |               |  |              
|Construction and land development |  | $177,493,000  |  | $ 100,115,000
|Secured by residential properties |  | 19,950,000    |  | 13,468,000   
|Secured by farmland               |  | 54,974,000    |  | 47,665,000   
|Secured by commercial properties  |  | 199,191,000   |  | 171,873,000  
|                                  |  |               |  |              
|                                 
|                                  |  | $ 451,608,000 |  | $ 333,121,000
|                                  |  |               |  |              

In addition to real estate loans outstanding, the Company had loan commitments and standby letters of credit related to real estate loans of $102,994,000 and $96,069,000 at December 31, 2006 and 2005, respectively.

The Company extends credit to a number of borrowers that may be engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At December 31, 2006, 2005, and 2004 there were extensions of credits to churches totaling approximately $77,920,000, $64,167,000, and $24,287,000, respectively.

63

---

|NOTE 4 -PREMISES AND EQUIPMENT                                   |  |             |  |            
|---------------------------------------------------------------- |  | ----------- |  | -----------
|                                                                
|Premises and equipment at December 31 are summarized as follows: |  |            
|                                                                
|                                                                 |  | 2006        |  | 2005       
|                                                                 |  |             |  |            
|Cost:                                                            |  |             |  |            
|Land                                                             |  | $ 909,000   |  | $ 909,000  
|Building                                                         |  | 5,927,000   |  | 5,428,000  
|Leasehold improvements - building                                |  | 837,000     |  | 823,000    
|Furniture and equipment                                          |  | 4,169,000   |  | 4,062,000  
|Construction in process                                          |  | 190,000     |  | 217,000    
|Total Cost                                                       |  | 12,032,000  |  | 11,439,000 
|Less: Accumulated depreciation and amortization                  |  | 4,410,000   |  | 3,762,000  
|                                                                
|Total Premises and Equipment                                     |  | $ 7,622,000 |  | $ 7,677,000
|                                                                 |  |             |  |            

Depreciation and amortization expense for premises and equipment amounted to $894,000, $939,000, and $627,000 in 2006, 2005, and 2004, respectively.

One of the Company's branch office locations is subject to a non-cancelable operating lease agreement expiring in 2016 with renewal option periods extending through 2026. At December 31, 2006, minimum rental commitments for non-cancelable operating leases are as follows:

|Year Ending            |  | Minimum  
|---------------------- |  | ---------
|December 31            |  | Payments 
|2007                   |  | $ 82,000 
|2008                   |  | 82,000   
|2009                   |  | 82,000   
|2010                   |  | 82,000   
|2011                   |  | 82,000   
|Thereafter             |  | 341,000  
|                       |  |          
|                      
|Total Minimum Payments |  | $ 751,000
|                       |  |          

Minimum payments do not include rental payments that would be due if the Company were to renew the leases when they expire. Management does not expect to renew both leases when they expire. Rent expense for the years ended December 31, 2006, 2005, and 2004 amounted to $126,000, $139,000, and $142,000, respectively.



|NOTE 5 -INVESTMENT IN REAL ESTATE
|---------------------------------

The investment in other real estate owned consists of a 48-unit seniors apartment project located in Farmersville, California. This project is financed by the Rural Economic and Community Development Department (formerly Farmers Home Administration), United States Department of Agriculture (RECD). The Company acquired the project by a grant deed executed in lieu of foreclosure pursuant to a judgment entered December 3, 1991, in Kern County Superior Court. The deed was executed in settlement of a $400,000 loan owed to the Company. Concurrent with the acquisition, the Company assumed an $880,000 loan payable to the RECD. The project is operated by Farmersville Village Grove Associates, a California limited partnership, in which San Joaquin Bank is the 95% limited partner and its wholly-owned subsidiary, Kern Island Company, is the 5% general partner.

64

---

The investment in other real estate owned was originally recorded at the outstanding loan amount in addition to the balance of the note payable assumed by the Company as noted above,
and consists of the following at December 31:

|                                |  | 2006        |  | 2005       
|------------------------------- |  | ----------- |  | -----------
|                                |  |             |  |            
|Cost:                           |  |             |  |            
|Building & improvements         |  | $ 1,430,000 |  | $ 1,430,000
|Land                            |  | 49,000      |  | 49,000     
|Total Cost                      |  | 1,479,000   |  | 1,479,000  
|Less: Accumulated depreciation  |  | 836,000     |  | 769,000    
|                               
|Total Investment in Real Estate |  | $ 643,000   |  | $ 710,000  
|                                |  |             |  |            

Depreciation expense for the investment in real estate was $67,000, $60,000, and $59,000 for the years ended December 31, 2006, 2005, and 2004, respectively. The carrying
value is not considered to be impaired. The Company accounts for this property as a foreclosed asset to be held and used, as the Company applied for and was granted an exemption by the FDIC from the regulatory requirement to divest of real estate
owned within specified time periods.



|NOTE 6 -DERIVATIVES
|-------------------

It is the objective of the Company to manage exposure of its assets and liabilities to interest rate risk including repricing mismatch risk and basis risk. These risks are explained
below:

- Interest rate riskoverall is the potential for loss of future income or economic value of equity
caused by an adverse change in interest rates;
- Repricing mismatch riskis the potential for loss of earnings or economic value of equity that occurs
when assets and liabilities have different average maturities or repricing dates;
- Basis riskis the potential for loss of earnings or economic value of equity that most commonly occurs
when variable-rate assets and liabilities are tied to different indices.

The Company uses derivatives as part of its risk management to hedge exposure to the above risks. In particular, the Company uses two types of hedge instruments to manage these
risks:

- Cash flow hedges, in the form of interest rate caps, that hedge against interest rate changes that may
affect expected future cash flows in the form of additional interest expense on deposit liabilities; and
- Fair value hedges, in the form of interest rate swaps, that hedge against interest rate changes that
may affect the fair value of loan assets and lower interest income.

During the term of the hedges, both the cash flow and fair value hedge relationships are expected to be highly effective in achieving offsetting cash flows and changes in fair value,
respectively, attributed to the hedged risks. An assessment of effectiveness is performed at least quarterly in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, to correspond to
financial statement reporting. Any amounts of the hedges ineffectiveness are recognized in earnings during the period being reported.  Under SFAS No. 133, these derivatives are carried at fair value and are included in other assets or other
liabilities in the consolidated balance sheet if they have a positive or negative fair value, respectively.

Each derivative instrument utilized is explained in more detail below.



|Cash Flow Hedges
|----------------

The Company entered into two interest rate cap contracts with a third party for non-trading purposes, to manage the risk that changes in interest rates will affect the amount of
interest expense of our deposits. The interest rate cap contracts qualify as derivative financial instruments as an end user to hedge the interest rate exposure of existing assets and liabilities. Interest rate caps are agreements where, for a fee,
the purchaser obtains the right to receive interest payments when a variable interest rate moves above or below a specified cap rate. Such instruments are typically linked to long-term debt, short-term borrowings and pools of similar residential
mortgages. Interest rate cap contracts are accounted for on an accrual basis with revenue or expenses recognized as adjustments to income or expense on the underlying linked assets or liabilities. These contracts are recorded at fair market value
and the related unrealized gains or losses on these

65

---

contracts are deferred as a component of other comprehensive income recorded in shareholders equity. These deferred gains and losses are amortized as an adjustment to interest
expense over the same period in which the related interest payments being hedged are recognized in income. Over the 12 months ending December 31, 2007, the Company expects to amortize $61,000 of the unrealized loss as an adjustment to interest
expense. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of
these contracts are immediately recognized in income.

Interest rate cap contracts generally are not terminated. When terminations do occur, gain or losses are recorded as adjustments to the carrying value of the underlying assets or
liabilities and recognized as income or expense over either the remaining expected lives of such underlying assets or liabilities or the remaining life of the instrument. In circumstances where the underlying assets or liabilities are sold, any
remaining carrying value adjustments and the cumulative change in value of any open positions are recognized immediately as a component of the gain or loss on disposition of such underlying assets or liabilities. If an interest rate cap contract is
considered to be no longer effective, any deferred gain or loss on the contract is recognized immediately in income.

At December 31, 2006, we had interest rate cap contracts on $14,000,000 notional amount of indebtedness. Interest rate cap contracts with notional amounts of $7,000,000 and
$7,000,000 have cap rates of 6.50%, and 6.00%, respectively. Notional amount of $14,000,000 outstanding contracts will mature on June 2, 2008. No portion of the interest rate cap contracts was ineffective for the years ended December 31,
2006, 2005, and 2004; therefore, no gain or loss was recognized in earnings for these periods.



|Fair Value Hedges
|-----------------

The Company entered into interest rate swap agreements with a third party, to hedge against changes in fair value of certain fixed rate loans. The Company uses this as a means to
offer fixed rate loans to customers, while maintaining a variable rate income that better suits the Company's needs. Under an interest rate swap agreement, the Company agrees to pay a fixed rate to the counter party while receiving a floating rate
based on the 1-month LIBOR.

The interest rate swap agreements are considered to be a hedge against changes in the fair value of certain fixed rate loans. The interest rate swap agreements are fair value hedges
that qualify as derivative financial instruments under SFAS No. 133 and are accounted for under the short-cut method. These hedges are considered perfectly effective against changes in the fair value of the loan due to changes in the benchmark
interest rate over its term. Accordingly, the hedges are recorded at fair value on the balance sheet and any changes in fair value of the swap is recognized currently in earnings and the offsetting gain or loss on the hedged assets attributable to
the hedged risk is recognized currently in earnings.

As of December 31, 2006, we had interest rate swap agreements on $29,915,000 notional amount of indebtedness. At December 31, 2006, the fair value of the swaps was a liability of
$796,000 and is included with other liabilities on the balance sheet. A corresponding fair value adjustment is included on the balance sheet with the hedged item. No portion of the interest rate swap agreements was ineffective for the years
ended December 31, 2006, 2005, and 2004; therefore, no gain or loss was recognized in earnings for these periods.

66

---

|NOTE 7 -DEPOSITS                         |  |              |  |             
|---------------------------------------- |  | ------------ |  | ------------
|                                        
|Deposits include the following:          |  |              |  |             
|                                        
|                                         |  | 2006         |  | 2005        
|                                         |  |              |  |             
|                                        
|Noninterest-bearing                      |  | $189,792,000 |  | $186,266,000
|                                        
|NOW                                      |  | 25,773,000   |  | 25,163,000  
|Money market                             |  | 255,126,000  |  | 237,415,000 
|Savings                                  |  | 119,132,000  |  | 99,604,000  
|Time deposits & IRAs of $100,000 or more |  | 44,581,000   |  | 20,209,000  
|Other time deposits & IRAs               |  | 8,250,000    |  | 6,876,000   
|                                         |  |              |  |             
|Total Interest-Bearing Deposits          |  | 452,862,000  |  | 389,267,000 
|                                         |  |              |  |             
|                                        
|Total Deposits                           |  | $642,654,000 |  | $575,533,000
|                                         |  |              |  |             

At December 31, 2006, the scheduled maturities of time certificates of deposit are as follows:

|2007 |  | $ 50,833,000
|---- |  | ------------
|     |  |             
|2008 |  | 1,711,000   
|     |  |             
|2009 |  | 287,000     
|     |  |             
|    
|     |  | $ 52,831,000
|     |  |             

The Company may occasionally obtain brokered deposits as an additional source of funding. At December 31, 2006, the Company held brokered time deposits totaling $11,498,000. Of these balances, $1,502,000 are included in time deposits of less than $100,000 and have a remaining maturity of 1 year or less. The remaining 9,996,000 are included in time deposits of $100,000 or more and have a remaining maturity of 1 year or less.



|NOTE 8 -SHORT TERM BORROWINGS
|-----------------------------

The Company had collateralized and uncollateralized federal fund lines of credit with other correspondent banks aggregating $15,000,000, and Federal Home Loan Bank (FHLB) lines of credit totaling $71,331,000 at December 31, 2006. At December 31, 2006 and 2005, the Company had advances on its lines of credit in the amount of $32,200,000 and $0, respectively. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by investment securities. As of December 31, 2006, $75,218,000 in investment securities were pledged as collateral for FHLB advances. All lines of credit are on an as available basis and can be revoked by the grantor at any time.

Securities sold under agreements to repurchase generally mature within one day from the transaction date. The Company agrees to sell certain U.S. Treasury and U.S. Agency securities, which are owned by the Company, to customers of the Company on an overnight basis, subject to master repurchase agreements executed in advance by the Company and its customers. U.S. Treasury and U.S. Agency securities sold under agreements to repurchase are delivered to a third-party correspondent Company where they are held in a separate account, segregated from the Companys other investment securities held at the same correspondent Company. The Company agrees, under the terms of the master repurchase agreements, to repurchase all securities sold under this program on the maturity date of the repurchase agreement.

67

---

Information concerning securities sold under agreements to repurchase is summarized as follows:

|                                                                        |  | 2006         |  |            
|----------------------------------------------------------------------- |  | ------------ |  | -----------
|                                                                        |  |              |  |            
|Average balance during the year                                         |  | $ -          |  |            
|Average interest rate during the year                                   |  | 0.00%        |  |            
|Maximum balance during the year                                         |  | $ -          |  |            
|                                                                       
|Securities underlying the agreements at year-end:                       |  |              |  |            
|Carrying value                                                          |  | -            |  |            
|Estimated fair value                                                    |  | -            |  |            
|                                                                       
|                                                                       
|                                                                        |  | 2005         |  |            
|                                                                        |  |              |  |            
|Average balance during the year                                         |  | $ 2,042,000  |  |            
|Average interest rate during the year                                   |  | 1.72%        |  |            
|Maximum balance during the year                                         |  | $ 6,796,000  |  |            
|                                                                       
|Securities underlying the agreements at year-end:                       |  |              |  |            
|Carrying value                                                          |  | -            |  |            
|Estimated fair value                                                    |  | -            |  |            
|                                                                       
|                                                                       
|NOTE 9 -LONG-TERM DEBT AND OTHER BORROWINGS                             |  |              |  |            
|                                                                       
|Long-term debt consists of the following at December 31:                |  |              |  |            
|                                                                       
|                                                                        |  | 2006         |  | 2005       
|                                                                        |  |              |  |            
|Mortgage note payable, 9% stated rate - matures 2030                    |  | $ 788,000    |  | $ 797,000  
|                                                                       
|Subordinated note, 3 month LIBOR + 2.7% floating rate - due 2019        |  | 6,000,000    |  | 6,000,000  
|                                                                       
|Junior subordinated note, 3 month LIBOR + 1.6% floating rate - due 2036 |  | 10,000,000   |  | -          
|                                                                       
|Junior subordinated note, 3 month LIBOR + 1.6% floating rate - due 2036 |  | 310,000      |  | -          
|                                                                        |  |              |  |            
|                                                                       
|Total Long-Term Debt                                                    |  | $ 17,098,000 |  | $ 6,797,000
|                                                                        |  |              |  |            

The mortgage note payable is secured by a 48-unit seniors apartment project and is payable in monthly installments of $2,300 including interest at a stated rate of 9%. The loan matures in 2030. The note is classified as a Rural Rental Housing (RRH) loan issued pursuant to the Housing Act of 1949. Under the RRH program, the borrower pays interest at a rate lower than the stated rate.

The subordinated note is a capital security that qualifies as Tier 2 capital pursuant to capital adequacy guidelines promulgated by the federal regulatory agencies. The subordinated note matures in 2019. The Company may redeem the subordinated note, at par, on or after April 23, 2009, subject to compliance with California and federal banking regulations. The subordinated note resets quarterly and bears interest at a rate equal to the three-month LIBOR index plus a margin of 2.70% .

Both junior subordinated notes are related to the issuance of trust preferred securities. On September 1, 2006, San Joaquin Bancorp and San Joaquin Bancorp Trust #1, a Delaware statutory trust, entered into a Purchase Agreement with TWE, Ltd. for the sale of $10 million of floating rate trust preferred securities issued by the Trust and guaranteed by the Company.

On September 1, 2006, the Trust issued $10 million of trust preferred securities to TWE, ltd. and $310,000 of common securities to the Company under an Amended and Restated Declaration of Trust, dated as of September 1, 2006. The

68

---

trust preferred securities are guaranteed by the Company on a subordinated basis pursuant to a Guarantee Agreement, dated as of September 1, 2006.

The trust preferred securities have a floating annual rate, reset quarterly, equal to the three-month LIBOR plus 1.60% . These securities mature September 30, 2036 and can be redeemed
after September 30, 2011. Each of the trust preferred securities represents an undivided interest in the assets of the Trust.

The Company owns all of the Trust's common securities. The Trust's only assets are the junior subordinated notes issued by the Company on substantially the same payment terms as the
trust preferred securities. The Company's junior subordinated notes were issued pursuant to an indenture dated as of September 1, 2006.

The Federal Reserve Bank of San Francisco has advised the Company that the trust preferred securities are eligible as Tier 1 capital.

Estimated future maturities of long-term debt at December 31, 2006 are as follows:

|Years Ending |  |             
|------------ |  | ------------
|December 31  |  |             
|2007         |  | $ 10,000    
|2008         |  | 11,000      
|2009         |  | 12,000      
|2010         |  | 13,000      
|2011         |  | 14,000      
|Thereafter   |  | 17,038,000  
|             |  | $ 17,098,000
|             |  |             



|NOTE 10 -CONTINGENCIES
|----------------------

In the normal course of business, the Company occasionally becomes party to litigation. In the opinion of management, based upon advice of legal counsel, pending or threatened
litigation involving the Company will not have a material adverse effect upon its financial condition or results of operations.

NOTE 11 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The balance sheet does not reflect various commitments relating to financial instruments with off-balance sheet risk which are used in the normal course of business. In addition to
derivatives, these instruments include commitments to extend credit and standby letters of credit. Management does not anticipate that the settlement of these financial instruments will have a material adverse effect on the Company's financial
position.

These financial instruments carry various degrees of credit risk. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform
according to the terms of the contract.

The contractual amounts of commitments to extend credit and standby letters of credit represent the amount of credit risk. Since many of the commitments and letters of credit are
expected to expire without being drawn, the contractual amounts do not necessarily represent future cash requirements.

Commitments to extend credit are legally binding loan commitments with set expiration dates. They are intended to be disbursed, subject to certain conditions, upon request of the
borrower. The Company receives a fee for providing a commitment. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon the extension of credit, is
based on management's evaluation. Collateral held varies but may include accounts receivable, inventory, property, equipment and real estate.

Standby letters of credit are provided to customers to guarantee their performance, generally in the production of goods and services or under contractual commitments in the financial
market.

69

---

The following is a summary of commitments to extend credit and standby letters of credit at December 31:

|                             |  | 2006          |  | 2005         
|---------------------------- |  | ------------- |  | -------------
|                             |  |               |  |              
|                            
|Commitments to extend credit |  | $ 291,717,000 |  | $ 224,027,000
|Standby letters of credit    |  | $ 10,537,000  |  | $ 8,676,000  



|NOTE 12 -STOCK BASED COMPENSATION PLANS
|---------------------------------------

The Bank has two stock option plans pursuant to which common stock of the Company may be acquired. The Company adopted the plans to retain and motivate key employees and enhance
shareholder value by aligning the financial interests of those employees with those of shareholders.

On May 1, 1989, the Board of Directors of the Bank adopted and approved the San Joaquin Bank Stock Option Plan dated May 1, 1989. The plan was approved by the shareholders on April
18, 1989. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and each option is exercisable in specified increments up to 10 years from the date of grant. A total of 463,000 new
shares of the Banks common stock were originally available for grant under the 1989 Plan. As of December 31, 2006, there were options outstanding under the 1989 Plan to purchase an aggregate of 83,150 shares of the Companys common stock.
The plan terminated on May 1, 1999. Accordingly, no new options can be granted under this plan.

On February 20, 1999, the Bank's Board of Directors adopted and approved the San Joaquin Bank 1999 Stock Incentive Plan. The plan was approved by shareholders on May 25, 1999 and
became effective on June 1, 1999. This Plan terminates on May 31, 2009. A total of 600,000 new shares of the Bancorps common stock were initially available for grant under the 1999 Plan. If an option granted under the 1999 Plan expires, is
cancelled, forfeited or terminates without having been fully exercised, the unpurchased shares which were subject to that option again become available for the grant of additional options under the 1999 Plan. As of December 31, 2006, 396,465 options
have been granted under the 1999 Plan, 17,500 have been exercised, 356,015 are currently outstanding, and 226,485 shares remain available for issuance under the 1999 Plan.

Following the Reorganization, San Joaquin Bancorp assumed sponsorship of the plans as the San Joaquin Bancorp Stock Option Plan (the "1989 Plan") and the San Joaquin Bancorp 1999
Stock Incentive Plan (the "1999 Plan") for the purpose of administering any and all outstanding option awards under the plans on a prospective basis. Subject to the terms of the 1999 Plan, the Board determines the number of options in the award as
well as the vesting and all other conditions.

The 1999 Plan provides for awards in the form of options, which may be ISOs under Section 422 of the Internal Revenue Code (the "Code") or which may be NSOs under Section 83 of the
Code. The 1999 Plan provides that ISOs may not be granted at less than 100% of fair market value of the Banks common stock on the date of the grant. The options vest at a rate of twenty percent annually over the first five years of the option
term and have a term of ten years. In the event that the Optionee possesses more than ten percent (10%) of the total combined voting power of all classes of stock of the Bank on the date the options are granted, then the exercisable price per share
of ISOs granted must be not less than one hundred ten percent (110%) of the fair market value of the underlying shares of the Banks common stock on the date the options were granted as determined by the Banks Board of Directors, and the
options must terminate on the fifth anniversary of the grant date.

Effective December 31, 2005, the Board of Directors voted to accelerate the vesting of all unvested options to acquire the Company's common stock that were outstanding at that date
(the "Acceleration"), except that no options to non-employee directors were affected by the Acceleration. A total of 158,870 shares subject to option were impacted by the Acceleration. As a result of the Acceleration, and based upon estimated
Black-Scholes value calculations, the Company will not be required to recognize pretax compensation expense related to the accelerated options of approximately $833,000. Had the Acceleration not occurred, the Company would have had to recognize
this expense over the next five years when the Company became subject to the requirements of Financial Accounting Standards Board Statement No. 123R, "Share-Based Payment," on January 1, 2006. Under applicable accounting guidance, the company does
not expect to record a charge related to the Acceleration. As a result of the acceleration, certain options granted to the Companys Chairman of the Board and Chief Executive Officer, Bruce Maclin, President, Bart Hill, and two other highest
paid executive officers (together the "Named Executive Officers") exceeded the $100,000 limit established by IRS regulation

70

---

§1.422 -4. As such, the excess options granted to the Named Executive Officers must be treated as non-statutory options. All other terms and conditions of the accelerated options
remained unchanged as a result of the Acceleration.

On December 19, 2006, based upon the recommendation of the Compensation Committee, the Board of Directors approved an amendment to the 1999 Plan, effective as of January 1, 2007. A
new section was added to the 1999 Plan which allows the inclusion of a provision in any stock option agreement for a key employee to elect to exercise the option prior to the full vesting. Any unvested shares purchased by a key employee will be
subject to forfeiture if the employee ceases to be eligible under the 1999 Plan prior to vesting. The Company will have a repurchase right upon forfeiture of the shares at the original purchase price. The Company also amended the definition of the
term Fair Market Value so that determination of the exercise price upon grant of options will be based on the closing sale price of the Companys common stock. The registrant also amended the terms of the 1999 Plan which clarify the
time period within which an option may be exercised, so that options shall be exercisable for a minimum period of six months, and a maximum period of one year, following termination of employment due to death or disability; and for a minimum period
of 30 days, and a maximum period of 90 days, following termination of employment for all other reasons.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model and the weighted-average assumptions shown in the following table.
Expected long-term future volatility is based upon the historical volatility of the Company's stock for a similar long-term period and then adjusted for the effects of expected future differences. The volatilities of stock prices tend to be "mean
reverting" over relatively long time periods, with highly volatile stocks becoming less volatile and low-volatile stocks becoming more volatile. The Company uses historical data on option exercises to determine the expected term within the valuation
model. The risk-free rate is based upon the U.S. Treasury yield curve at the time of option grant.

|                        |  | 2006   |  | 2005   |  | 2004  
|----------------------- |  | ------ |  | ------ |  | ------
|                        |  |        |  |        |  |       
|Expected volatility     |  | 18.62% |  | 29.05% |  | 34.69%
|Expected term (years)   |  | 7.99   |  | 7.91   |  | 7.86  
|Risk-free interest rate |  | 4.67%  |  | 3.99%  |  | 3.81% 
|Expected dividends      |  | 0.66%  |  | 0.88%  |  | 1.07% 

A summary of option activity, as of December 31, 2006, and changes during the year is presented below:

|                                 |  |         |  |          |  | Weighted    |  |            
|-------------------------------- |  | ------- |  | -------- |  | ----------- |  | -----------
|                                 |  |         |  | Weighted |  | Average     |  |            
|                                 |  |         |  | Average  |  | Remaining   |  | Aggregate  
|                                 |  |         |  | Exercise |  | Contractual |  | Intrinsic  
|Options                          |  | Shares  |  | Price    |  | Term        |  | Value      
|                                 |  |         |  |          |  |             |  |            
|Outstanding at January 1, 2006   |  | 436,666 |  | $ 14.09  |  |             |  |            
|Granted                          |  | 58,665  |  | 34.90    |  |             |  |            
|Exercised                        |  | 50,316  |  | 7.89     |  |             |  |            
|Forfeited or Expired             |  | 5,850   |  | 10.10    |  |             |  |            
|                                 |  |         |  |          |  |             |  |            
|Outstanding at December 31, 2006 |  | 439,165 |  | 17.63    |  | 4.76        |  | $ 8,945,791
|                                 |  |         |  |          |  |             |  |            
|Exercisable at December 31, 2006 |  | 368,600 |  | 14.79    |  | 4.08        |  | $ 8,555,206
|                                 |  |         |  |          |  |             |  |            

The weighted-average grant-date fair value of options granted during the years ended December 31, 2006, 2005, and 2004 was $11.05, $8.89, and $8.83, respectively. During
2006, 2005 and 2004, the Company awarded stock options with an aggregate fair value of $645,000, $578,000 and $517,000, respectively. The fair value of stock options that vested in 2006, 2005, and 2004 was $49,000, $1,317,000,
and $224,000, respectively. The Compensation cost that has been charged against income was $145,000 for 2006, and $0 in 2005 and 2004. The total income tax benefit recognized in the income statement for share-based compensation
arrangements was $28,000 in 2006 and $0 in 2005 and 2004. The total remaining unearned compensation related to all share-based compensation at December 31, 2006 was $598,000 and will be amortized over a weighted average remaining service
period of 3.84 years.

The total intrinsic value of options exercised during the years ended December 31, 2006, 2005, and 2004 was $1,395,000, $867,000, and $745,000, respectively. Cash received
from the exercise of stock options was $398,000,

71

---

$186,000, and $187,000 for 2006, 2005 and 2004, respectively. The Company did not realize a tax benefit from options exercised in 2006, 2005, or 2004.

|NOTE 13 -INCOME TAXES                                     |  |             |  |             |  |            
|--------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                         
|The provision for income taxes consists of the following: |  |             |  |            
|                                                         
|                                                          |  | 2006        |  | 2005        |  | 2004       
|                                                          |  |             |  |             |  |            
|Current:                                                  |  |             |  |             |  |            
|Federal                                                   |  | $ 5,350,000 |  | $ 3,935,000 |  | $ 2,887,000
|State                                                     |  | 1,773,000   |  | 1,399,000   |  | 1,046,000  
|                                                          |  |             |  |             |  |            
|                                                          |  | 7,123,000   |  | 5,334,000   |  | 3,933,000  
|Deferred:                                                 |  |             |  |             |  |            
|Federal                                                   |  | (569,000)   |  | (466,000)   |  | (127,000)  
|State                                                     |  | (188,000)   |  | (126,000)   |  | (331,000)  
|                                                          |  |             |  |             |  |            
|                                                          |  | (757,000)   |  | (592,000)   |  | (458,000)  
|                                                          |  |             |  |             |  |            
|                                                         
|Total Provision For Income Taxes                          |  | $ 6,366,000 |  | $ 4,742,000 |  | $ 3,475,000
|                                                          |  |             |  |             |  |            

The components of the net deferred tax asset (included in other assets) were as follows:

|                                                              |  | 2006        |  | 2005       
|------------------------------------------------------------- |  | ----------- |  | -----------
|                                                              |  |             |  |            
|Deferred Tax Assets:                                          |  |             |  |            
|Allowance for loan losses                                     |  | $ 2,173,000 |  | $ 2,161,000
|Unrecognized interest on nonaccrual loans                     |  | $ 173,000   |  | $ 106,000  
|Accumulated depreciation                                      |  | 131,000     |  | 62,000     
|Post retirement benefits                                      |  | 3,552,000   |  | 1,666,000  
|Directors' deferred compensation plan                         |  | 103,000     |  | 85,000     
|Unrealized loss on securities and other financial instruments |  | 73,000      |  | 96,000     
|Stock options - NSOs                                          |  | 27,000      |  | -          
|                                                             
|Net Deferred Tax Assets                                       |  | $ 6,232,000 |  | $ 4,176,000
|                                                              |  |             |  |            

The applicable rate for current and future years is based on the average rate as compared to the effective tax rate for the current period. The Company believes that no valuation allowance is necessary due to the adequacy of future taxable income from reversals of temporary differences and taxable income exclusive of temporary differences.

A reconciliation of the Company's provision for income taxes and the amount computed by applying the U.S. statutory federal income tax rate of 35% at December 31, 2006, 2005, and 2004, respectively, to pretax income is as follows:

|                                               |  | 2006        |  | 2005        |  | 2004       
|---------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                               |  |             |  |             |  |            
|Tax computed at 35%, respectively              |  | $ 5,194,000 |  | $ 3,978,000 |  | $ 3,109,000
|Increases (decreases) in taxes resulting from: |  |             |  |             |  |            
|State taxes, net of federal income tax benefit |  | 1,046,000   |  | 834,000     |  | 471,000    
|Other, net                                     |  | 126,000     |  | (70,000)    |  | (105,000)  
|                                               |  |             |  |             |  |            
|                                              
|Total Provision For Income Taxes               |  | $ 6,366,000 |  | $ 4,742,000 |  | $ 3,475,000
|                                               |  |             |  |             |  |            
|                                              
|Effective Tax Rate                             |  | 42.90%      |  | 41.72%      |  | 39.12%     
|                                               |  |             |  |             |  |            

In 1994, the California Tax Credit Allocation Committee (TCAC), in its role as administrator of the Federal and California low income housing tax credit program, granted approval to the Company for Federal low income housing tax credits in the amount of approximately $50,000 annually for each of the ten following years. Use of these credits was contingent on the Company performing certain capital improvements to a 48-unit senior apartment project owned by the Company (Note 5). The Company completed the capital improvements during 1994. As such, the Company began

72

---

utilizing the credits beginning in 1994. The credits expired in 2003. A portion of the tax credit is subject to recapture if the project is disposed of before 2009.



|NOTE 14 -OTHER COMPREHENSIVE INCOME
|-----------------------------------

Comprehensive income for the years ended December 31, 2006, 2005, and 2004 were as follows:

|                                                                          |  | 2006        |  | 2005        |  | 2004       
|------------------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                          |  |             |  |             |  |            
|Net Income                                                                |  | $ 8,474,000 |  | $ 6,624,000 |  | $ 5,408,000
|Other Comprehensive Income, Net of Tax:                                   |  |             |  |             |  |            
|Unrealized gains (losses) arising during the period on cash flow hedges   |  | 37,000      |  | 64,000      |  | (12,000)   
|Unrealized holding gains (losses) arising during the period on securities |  | 3,000       |  | (37,000)    |  | (6,000)    
|Unamortized post-retirement benefit obligation                            |  | (1,548,000) |  | -           |  | -          
|                                                                          |  |             |  |             |  |            
|Other Comprehensive Income (loss)                                         |  | (1,508,000) |  | 27,000      |  | (18,000)   
|                                                                          |  |             |  |             |  |            
|Comprehensive Income                                                      |  | $ 6,966,000 |  | $ 6,651,000 |  | $ 5,390,000
|                                                                          |  |             |  |             |  |            

The components of other comprehensive income and other related tax effects were as follows:

|                                                                        |  |               |  | December 31, 2006 |  |              
|----------------------------------------------------------------------- |  | ------------- |  | ----------------- |  | -------------
|                                                                        |  |               |  |                   |  |              
|                                                                        |  | Before Tax    |  | Tax effect        |  | Net Amount   
|                                                                        |  |               |  |                   |  |              
|Unrealized gains (losses) arising during the period on cash flow hedges |  | $ 68,000      |  | $ (31,000)        |  | $ 37,000     
|Unrealized gains (losses) arising during the period on securities       |  | 6,000         |  | (3,000)           |  | 3,000        
|Unamortized post-retirement benefit obligation                          |  | (2,857,000)   |  | 1,309,000         |  | (1,548,000)  
|                                                                        |  |               |  |                   |  |              
|Other Comprehensive Income (loss)                                       |  | $ (2,783,000) |  | $ 1,275,000       |  | $ (1,508,000)
|                                                                        |  |               |  |                   |  |              
|                                                                       
|                                                                       
|                                                                        |  |               |  | December 31, 2005 |  |              
|                                                                        |  |               |  |                   |  |              
|                                                                        |  | Before Tax    |  | Tax effect        |  | Net Amount   
|                                                                        |  |               |  |                   |  |              
|Unrealized gains (losses) arising during the period on cash flow hedges |  | $ 118,000     |  | $ (54,000)        |  | 64,000       
|Unrealized gains (losses) arising during the period on securities       |  | (68,000)      |  | 31,000            |  | (37,000)     
|Unamortized post-retirement benefit obligation                          |  | -             |  | -                 |  | -            
|                                                                        |  |               |  |                   |  |              
|Other Comprehensive Income (loss)                                       |  | $ 50,000      |  | $ (23,000)        |  | 27,000       
|                                                                        |  |               |  |                   |  |              
|                                                                       
|                                                                       
|                                                                        |  |               |  | December 31, 2004 |  |              
|                                                                        |  |               |  |                   |  |              
|                                                                        |  | Before Tax    |  | Tax effect        |  | Net Amount   
|                                                                        |  |               |  |                   |  |              
|Unrealized gains (losses) arising during the period on cash flow hedges |  | $ (22,000)    |  | $ 10,000          |  | (12,000)     
|Unrealized gains (losses) arising during the period on securities       |  | (11,000)      |  | 5,000             |  | (6,000)      
|Unamortized post-retirement benefit obligation                          |  | -             |  | -                 |  | -            
|                                                                        |  |               |  |                   |  |              
|Other Comprehensive Income (loss)                                       |  | $ (33,000)    |  | $ 15,000          |  | (18,000)     
|                                                                        |  |               |  |                   |  |              

73

---

|Cumulative other comprehensive income balances were:            |  |                   |  |                   |  |                    |  |                                
|--------------------------------------------------------------- |  | ----------------- |  | ----------------- |  | ------------------ |  | -------------------------------
|                                                               
|                                                                |  | Unrealized gains  |  |                   |  |                    |  |                                
|                                                                |  | (losses) arising  |  | Unrealized gains  |  |                    |  |                                
|                                                                |  | during the period |  | (losses) arising  |  | Unamortized post-  |  |                                
|                                                                |  | on cash flow      |  | during the period |  | retirement benefit |  |                                
|                                                                |  | hedges            |  |                   |  | on securities      |  |                                
|                                                                |  |                   |  |                   |  |                    |  |                                
|Balance at December 31, 2003                                    |  | $ (134,000)       |  | $ -               |  | $ -                |  | $ (134,000)                    
|Current period change                                           |  | (12,000)          |  |                   |  | (6,000)            |  |                                
|Balance at December 31, 2004                                    |  | (146,000)         |  |                   |  | (6,000)            |  |                                
|Current period change                                           |  | 64,000            |  |                   |  | (37,000)           |  |                                
|Balance at December 31, 2005                                    |  | (82,000)          |  |                   |  | (43,000)           |  |                                
|Current period change                                           |  | 37,000            |  |                   |  | 3,000              |  |                                
|                                                                |  |                   |  |                   |  |                    |  |                                
|Balance at December 31, 2006                                    |  | $ (45,000)        |  | $ (40,000)        |  | $ (1,548,000)      |  | $ (1,633,000)                  
|                                                                |  |                   |  |                   |  |                    |  |                                
|                                                               
|                                                               
|NOTE 15 -BASIC AND DILUTED EARNINGS PER SHARE                   |  |                   |  |                   |  |                    |  |                                
|                                                               
|Basic and diluted earnings per share are calculated as follows: |  |                   |  |                   |  |                    |  |                                
|                                                               
|                                                                |  |                   |  |                   |  |                    |  | Twelve Months Ended December 31
|                                                                |  |                   |  |                   |  | 2006               |  | 2005                           
|                                                                |  |                   |  |                   |  |                    |  |                                
|Basic Earnings per Share:                                       |  |                   |  |                   |  |                    |  |                                
|Net Income                                                      |  |                   |  |                   |  | $8,474,000         |  | $6,624,000                     
|Weighted average common shares outstanding                      |  |                   |  | 3,476,000         |  | 3,421,000          |  | 3,388,000                      
|                                                                |  |                   |  |                   |  |                    |  |                                
|Basic Earnings per Share                                        |  |                   |  |                   |  |                    |  | $2.44                          
|                                                                |  |                   |  |                   |  |                    |  |                                
|                                                               
|Diluted Earnings per Share:                                     |  |                   |  |                   |  |                    |  |                                
|Net Income                                                      |  |                   |  |                   |  | $8,474,000         |  | $6,624,000                     
|Weighted average common shares outstanding                      |  |                   |  | 3,476,000         |  | 3,421,000          |  | 3,388,000                      
|Dilutive effect of outstanding options                          |  |                   |  | 228,000           |  | 229,000            |  | 218,000                        
|                                                                |  |                   |  |                   |  |                    |  |                                
|Weighted average common shares outstanding - Diluted            |  | 3,704,000         |  | 3,650,000         |  | 3,606,000         
|                                                                |  |                   |  |                   |  |                   
|Diluted Earnings per Share                                      |  |                   |  |                   |  |                    |  | $2.29                          
|                                                                |  |                   |  |                   |  |                    |  |                                

Earnings per share are based on the weighted average number of shares outstanding during the year.

NOTE 16 -DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the estimated fair values of financial instruments are disclosed as of December 31, 2006 and 2005. SFAS No. 107 defines fair value as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

Fair value estimates were based on existing on-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Where possible, the Company has utilized quoted market prices to estimate fair value. Since quoted market prices were not available for a significant portion of the financial instruments, the fair values were approximated using discounted cash flow techniques.

Fair value estimates are made at a specific point in time, based on judgments regarding future expected loss experience, current economic conditions, risk conditions, risk characteristics of various financial instruments and other factors. These

74

---

estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Because no active market exists for
a significant portion of the financial instruments presented below and the inherent imprecision involved in the estimation process, management does not believe the information presented reflects the amounts that would be received if the Company's
assets and liabilities were sold nor does it represent the fair value of the Company as an entity. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors.

The following presents the carrying value and estimated fair value of the various classes of on-balance sheet financial instruments held by the Company at December 31, 2006 and
2005:

|                                                  |  | December 31, 2006 |  | December 31, 2005
|------------------------------------------------- |  | ----------------- |  | -----------------
|                                                  |  |                   |  |                  
|                                                  |  | Carrying          |  | Estimated        
|                                                  |  | Value             |  | Fair Value       
|                                                  |  |                   |  |                  
|Assets                                            |  |                   |  |                  
|Cash and cash equivalents                         |  | $ 37,779,000      |  | $ 37,779,000     
|Investment securities:                            |  | 147,894,000       |  | 145,387,000      
|Loans, net                                        |  | 527,999,000       |  | 518,921,000      
|Interest rate cap agreements                      |  | 2,000             |  | 2,000            
|Liabilities                                       |  |                   |  |                  
|Noninterest-bearing deposits                      |  | 189,792,000       |  | 189,792,000      
|Interest-bearing transaction and savings accounts |  | 400,031,000       |  | 400,031,000      
|Time deposits                                     |  | 52,831,000        |  | 52,810,000       
|Total deposits                                    |  | 642,654,000       |  | 642,633,000      
|Interest rate swap agreements                     |  | 796,000           |  | 796,000          
|Short-term borrowings                             |  | 32,200,000        |  | 32,200,000       
|Long-term borrowings                              |  | 17,098,000        |  | 16,591,000       

The following methods and assumptions were used to estimate the fair value of each class of financial instruments. These assumptions were based on subjective estimates of market
conditions and perceived risks of the financial instruments at a certain point in time.



|Cash and cash equivalents
|-------------------------

These financial instruments have maturities within 90 days and are valued at the carrying amounts included in the balance sheet.



|Investment securities
|---------------------

The carrying amounts for securities maturing within 90 days of the financial statement date are assumed to approximate fair value provided they do not present unanticipated credit
concerns. The fair value of longer term investments and mortgage-backed securities was estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers.



|Loans
|-----

Fair values were estimated for portfolios of loans with similar financial characteristics. Loans were segregated by type such as commercial, real estate, credit card and other
consumer. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.

75

---

The fair values of loans were determined based on discounted cash flow modeling techniques. The discount rate for all other loans was based on the current offer rates for loans made
to borrowers with similar credit risks and remaining maturities.

Fair value for significant nonperforming loans was based on the carrying value adjusted for anticipated credit loss risk, estimated time for resolution, valuation of the underlying
collateral and other related resolution costs.



|Deposit liabilities
|-------------------

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings and money market accounts, is equal to the amount payable on demand. The fair
value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate was estimated using the rates currently offered for deposits of similar remaining maturities.

The fair value estimated does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the
market.



|Short-term borrowing
|--------------------

The fair value of the Company's short-term debt were valued using historical cost due to the relatively short period of time between their origination and their expected
realization.



|Long-term debt
|--------------

The fair value of the Company's long-term debt was estimated by discounting contractual cash flows using discount rates based on current rate offered for debt of the same remaining
maturity.



|NOTE 17 -RELATED PARTY TRANSACTIONS
|-----------------------------------

As part of its normal banking activities, the Company has extended credit to and received deposits from certain members of its Board of Directors and executive officers and companies
in which directors have an interest. These related parties had outstanding deposits at the Company approximating $8,518,000 and $9,083,000; and outstanding loans of $4,607,000 and $6,640,000 at December 31, 2006 and 2005,
respectively. In the opinion of management, all such extensions of credit and deposit relationships are on terms similar to transactions with non-affiliated parties and involve only normal credit risk with no undue exposure. Each loan has been
approved by the Loan Committee of the Board of Directors. During 2006, loan disbursements to related parties amounted to $4,291,000 and repayments from such related parties amounted to $5,264,000, including interest payments.



|NOTE 18 -RETIREMENT PLAN401(k) profit sharing
|---------------------------------------------

The Company has a profit sharing plan covering substantially all employees. Under this plan, employees may contribute a percentage of their compensation up to the maximum allowable by
law. The employer contributes 50% of the employees' contributions not to exceed 2.5% of the participating employees' compensation, subject to IRS limitations. The Company also makes special discretionary contributions for non-officer employees.
Eligible employees become vested in employer contributions subject to a five-year vesting schedule.

Total employer contributions to the plan that were charged to noninterest expense for the years ended December 31, 2006, 2005, and 2004 were $184,000, $135,000, and
$122,000, respectively. The special discretionary contribution included in the 2006 total was $107,000.

76

---



|Deferred compensation plan
|--------------------------

During 1997, the Company implemented a Director Deferred Compensation Plan (DCP). This is a non-qualified plan for eligible directors.



|Salary continuation plan
|------------------------

During 1997, the Company implemented a Salary Continuation Plan (SCP). This is a non-qualified plan in which the company agrees to pay key executives additional benefits in the future, usually at retirement, in return for satisfactory performance by the executive.

The Company established a Rabbi Trust and purchased Bank Owned Life Insurance policies (the BOLI) which are designed to mitigate the Companys costs associated with the Continuation Agreements by taking advantage of favorable tax treatment associated with the anticipated appreciation in the cash surrender values of the BOLI. The Rabbi Trust is the owner and sole beneficiary of all of the BOLI, with none of the death proceeds shared with the Insureds. The Rabbi Trust is at all times entitled to an amount equal to the BOLIs cash value, less any policy loans and unpaid interest or cash withdrawals previously incurred and any applicable surrender charges. The aggregate cash surrender values of the BOLI approximated $10,566,000 and $10,179,000, as of December 31, 2006 and 2005, respectively.

The Company's obligation under the Continuation Agreements is that of an unfunded and unsecured promise by the Company to pay money in the future; and the executive, the executive's spouse and the executive's beneficiary are unsecured general creditors with respect to any benefits which may be payable under the terms of the Continuation Agreements.

The total benefits paid under the continuation agreements were designed to be recovered through the use of the BOLI applicable to each executive officer. The life insurance policies are not plan assets; however, the cash surrender value of such life insurance policies is included as an asset on the books of the Company. Based upon current actuarial projections, the entire cost of providing these benefits will ultimately be recovered by the Company through the receipt of the life insurance policy proceeds or redemption of cash surrender proceeds.

The following tables set forth the net periodic post-retirement benefit cost for the years ended December 3:

|                                     |  | Pension Benefits
|------------------------------------ |  | ----------------
|                                     |  |                 
|                                     |  |                 
|                                     |  |                 
|                                     |  | 2006            
|                                     |  |                 
|Service Cost                         |  | $ 594,000       
|Interest Cost                        |  | 351,000         
|Expected Return on Plan Assets       |  | -               
|Amortization of Net Obligation       |  |                 
|at Transition                        |  | -               
|Amortization of Prior Service Costs  |  | 248,000         
|Recognized Net Actuarial (Gain)/Loss |  | -               
|                                     |  |                 
|Net Periodic Cost                    |  | $ 1,193,000     
|                                     |  |                 

77

---

The net periodic post-retirement benefit cost was determined using the following assumptions:

|                               |  |       |  |               |  | Pension Benefits |  |                   |  |      
|------------------------------ |  | ----- |  | ------------- |  | ---------------- |  | ----------------- |  | -----
|                               |  |      
|                               |  |       |  | Pension Plans |  |                  |  | Health Care Plans |  |      
|                               |  |       |  |              
|                               |  | 2006  |  | 2005          |  | 2004             |  | 2006              |  | 2005 
|                               |  |       |  |               |  |                  |  |                   |  |      
|Discount Rate                  |  | 6.25% |  | 6.25%         |  | 6.25%            |  | 6.25%             |  | 6.25%
|Salary Scale                   |  | 5.00% |  | 5.00%         |  | 5.00%            |  | N/A               |  | N/A  
|Expected Return on Plan Assets |  | N/A   |  | N/A           |  | N/A              |  | N/A               |  | N/A  

As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Plan.

|The funded status of the plan at December 31 is as follows: |  |                  |  |               |  |             |  |                   |  |         |  |       
|----------------------------------------------------------- |  | ---------------- |  | ------------- |  | ----------- |  | ----------------- |  | ------- |  | ------
|                                                            |  | Pension Benefits
|                                                            |  |                 
|                                                            |  |                  |  | Pension Plans |  |             |  | Health Care Plans |  |        
|                                                            |  |                  |  |              
|                                                            |  |                  |  | 2006          |  |             |  | 2005              |  | 2006    |  | 2005  
|                                                            |  |                  |  |               |  |             |  |                   |  |         |  |       
|Change in Benefit Obligation:                               |  |                  |  |               |  |             |  |                   |  |         |  |       
|Benefit Obligation, January 1                               |  | $ 5,611,000      |  | $ 4,138,000   |  | $ 497,000   |  | $ 467,000        
|                                                           
|Service Cost                                                |  |                  |  | 594,000       |  |             |  | 560,000           |  | -       |  |       
|Interest Cost                                               |  |                  |  | 351,000       |  |             |  | 297,000           |  | 31,000  |  | 29,000
|Plan Amendments                                             |  |                  |  | -             |  |             |  | 616,000           |  | -       |  |       
|Benefits Paid and Premiums Paid                             |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|Actuarial (Gain)/Loss                                       |  |                  |  | 664,000       |  |             |  | -                 |  | -       |  |       
|                                                            |  |                  |  |               |  |             |  |                   |  |         |  |       
|Benefit Obligation, December 31                             |  | $ 7,220,000      |  | $ 5,611,000   |  | $ 528,000   |  | $ 496,000        
|                                                            |  |                  |  |               |  |             |  |                  
|                                                           
|Change in Plan Assets:                                      |  |                  |  |               |  |             |  |                   |  |         |  |       
|Plan Assets at Fair Value, January 1                        |  | $ -              |  | $ -           |  | $ -         |  | $ -              
|                                                           
|Actual Return on Plan Assets                                |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|Company Contributions                                       |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|Benefits Paid and Premiums Paid                             |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|                                                            |  |                  |  |               |  |             |  |                  
|Plan Assets at Fair Value, December 31                      |  | $ -              |  | $ -           |  | $ -         |  | $ -              
|                                                            |  |                  |  |               |  |             |  |                  
|                                                           
|Funded Status                                               |  | $ (7,220,000)    |  | $ (5,611,000) |  | $ (528,000) |  | $ (496,000)      
|Unrecognized Net Transitional Obligation                    |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|Unrecognized Prior Service Cost(1)                          |  |                  |  | 1,489,000     |  | 1,737,000   |  | 251,000           |  | 314,000
|Unrecognized Net Transitional Obligation(1)                 |  |                  |  | 1,117,000     |  |             |  | 453,000           |  | -       |  |       
|                                                            |  |                  |  |               |  |             |  |                  
|Net Amount Recognized                                       |  | $ (4,614,000)    |  | $ (3,421,000) |  | $ (277,000) |  | $ (182,000)      
|                                                            |  |                  |  |               |  |             |  |                  
|                                                           
|Amounts Recognized in the Statement of                      |  |                  |  |               |  |             |  |                   |  |         |  |       
|Financial Position:                                         |  |                  |  |               |  |             |  |                   |  |         |  |       
|Prepaid Benefit Cost                                        |  | $ -              |  | $ -           |  | $ -         |  | $ -              
|Accrued Benefit Liability                                   |  | (7,220,000)      |  | (3,421,000)   |  | (528,000)   |  | (182,000)        
|Intangible Asset                                            |  |                  |  | -             |  |             |  | -                 |  | -       |  |       
|Accumulated Other Comprehensive (Income)/Loss               |  |                  |  | 2,606,000     |  |             |  | -                 |  | 251,000 |  |       
|                                                            |  |                  |  |               |  |             |  |                  
|Net Amount Recognized                                       |  | $ (4,614,000)    |  | $ (3,421,000) |  | $ (277,000) |  | $ (182,000)      
|                                                            |  |                  |  |               |  |             |  |                  

|1.) |  | The unrecognized prior service cost and unrecognized net gain or loss of $1,489,000 and $1,117,000, respectively are now
|--- |  | ------------------------------------------------------------------------------------------------------------------------
|    |  | treated as Other Comprehensive Loss under SFAS No.158.                                                                  

78

---

The following table summarizes gains and (losses) net of tax recognized in accumulated other comprehensive income at December 31, 2006:

|                                                                                                  |  | Pension Benefits
|------------------------------------------------------------------------------------------------- |  | ----------------
|                                                                                                  |  |                 
|                                                                                                  |  | Pension Plans   
|                                                                                                  |  |                 
|                                                                                                  |  | 2006            
|                                                                                                  |  |                 
|Other Comprehensive Income Attributable to Change                                                 |  |                 
|in Additional Minimum Liability Recognition                                                       |  | $ (2,606,000)   
|                                                                                                 
|Additional Information for Aggregated Defined                                                     |  |                 
|Benefit Pension Plans:                                                                            |  |                 
|                                                                                                 
|Projected Benefit Obligation                                                                      |  | $ 7,220,000     
|Accumulated Benefit Obligation                                                                    |  | 6,371,000       
|Plan Assets at Fair Value                                                                         |  | -               
|                                                                                                 
|                                                                                                 
|The projected benefit obligation was determined using the following weighted-average assumptions: |  |                 
|                                                                                                 
|                                                                                                  |  |                 
|                                                                                                  |  |                 
|                                                                                                  |  | Pension Plans   
|                                                                                                  |  |                 
|                                                                                                  |  | 2006            
|                                                                                                  |  |                 
|Discount Rate                                                                                     |  | 6.25%           
|Expected Return on Plan Assets                                                                    |  | N/A             
|Salary Scale                                                                                      |  | 5.00%           

The following table sets forth the effects of net periodic benefit cost for the fiscal year beginning January 1, 2007:

|                                                    |  |               |  | Pension Benefits  |  |          |  |       
|--------------------------------------------------- |  | ------------- |  | ----------------- |  | -------- |  | ------
|                                                    |  |              
|                                                    |  | Pension Plans |  | Health Care Plans
|                                                    |  |               |  |                  
|                                                    |  |               |  | 2007              |  |          |  | 2007  
|                                                    |  |               |  |                  
|Service Cost                                        |  | $ 384,000     |  | $ -              
|                                                   
|Interest Cost                                       |  |               |  |                   |  |          |  |       
|Projected Benefit Obligation at Beginning of Period |  | $ 7,220,000   |  | $ 528,000         |  |         
|Expected Distributions (Time Weighted)              |  | (92,000)      |  |                   |  | (10,000) |  |       
|                                                    |  |               |  |                   |  |          |  |       
|Average Expected Projected Benefit Obligation       |  | $ 7,128,000   |  | $ 518,000         |  |         
|Discount Rate                                       |  | 6.25%         |  |                   |  | 6.25%    |  |       
|Interest Cost                                       |  |               |  | 446,000           |  |          |  | 33,000
|                                                   
|Amortization of Prior Service Costs                 |  |               |  | 248,000           |  |          |  | 63,000
|                                                   
|Amortization of Net Obligation at Transition        |  |               |  | -                 |  |          |  | -     
|                                                   
|Amortization of Unrecognized (Gains)/Losses         |  |               |  |                   |  |          |  |       
|Unrecognized (Gains)/Losses at 1/1/07               |  | $ 1,117,000   |  |                   |  |          |  |       
|Less: 10% of Projected Benefit Obligation           |  | (722,000)     |  |                   |  |          |  |       
|                                                    |  |               |  |                   |  |          |  |       
|Amount to be Amortized                              |  | $ 395,000     |  |                   |  |          |  |       
|Average Future Service (Years)                      |  | 4.62          |  |                   |  |          |  |       
|Amortized Cost                                      |  |               |  | 85,000            |  |          |  | -     
|                                                    |  |               |  |                   |  |          |  |       
|                                                   
|Net Periodic Pension Cost                           |  | $ 1,163,000   |  | $ 96,000         
|                                                    |  |               |  |                  

79

---

The following table sets forth the estimated future benefits to be paid over the next 10 years under the defined benefit plan:

|For the years ending December 31 |  |          
|-------------------------------- |  | ---------
|                                 |  |          
|2007                             |  | $ 235,000
|2008                             |  | 316,000  
|2009                             |  | 323,000  
|2010                             |  | 338,000  
|2011                             |  | 428,000  
|2012-2016                        |  | 3,216,000



|NOTE 19 -REGULATORY MATTERS
|---------------------------

The Company is subject to various regulatory capital requirements administered by the federal and state banking agencies. 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 the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 Capital to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2006, that the Company meets all capital adequacy requirements to which it is subject.

As of June 30, 2006, the most recent notification from the FDIC categorized the Company as well-capitalized under the regulatory framework for prompt corrective action (there are no
conditions or events since that notification that management believes have changed the Company's category). To be categorized as well-capitalized, the Company must maintain minimum ratios as set forth in the table below. The following table also
sets forth the Company's actual capital ratios:

|                                       |  |        |  |        |  | For Capital       |  | To Be Categorized 
|-------------------------------------- |  | ------ |  | ------ |  | ----------------- |  | ------------------
|                                       |  | 2006   |  | 2005   |  | Adequacy Purposes |  | "Well Capitalized"
|                                       |  |        |  |        |  |                   |  |                   
|Tier 1 leverage ratio                  |  | 8.24%  |  | 6.44%  |  | 4%                |  | 5%                
|Tier 1 capital to risk-weighted assets |  | 9.16%  |  | 8.03%  |  | 4%                |  | 6%                
|Total risk-based capital ratio         |  | 11.37% |  | 10.51% |  | 8%                |  | 10%               



|Subordinated Note
|-----------------

On April 5, 2004, the Company issued a $6,000,000 floating-rate subordinated note in a private placement. The subordinated note, which was issued pursuant to a purchase agreement
dated April 5, 2004 by and between the Company and NBC Capital Markets Group, Inc., matures in 2019. The Company may redeem the subordinated note, at par, on or after April 23, 2009, subject to compliance with California and federal banking
regulations. The subordinated note resets quarterly and bears interest at a rate equal to the three-month LIBOR index plus a margin of 2.70% . The subordinated note is a capital security that qualifies as Tier 2 capital pursuant to capital adequacy
guidelines.



|Trust Preferred Securities
|--------------------------

On September 1, 2006, San Joaquin Bancorp and San Joaquin Bancorp Trust #1, a Delaware statutory trust, entered into a Purchase Agreement with TWE, Ltd. for the sale of $10
million of floating rate trust preferred securities issued by the Trust and guaranteed by the Company.

80

---

On September 1, 2006, the Trust issued $10 million of trust preferred securities to TWE, ltd. and $310,000 of common securities to the Company under an Amended and Restated
Declaration of Trust, dated as of September 1, 2006. The trust preferred securities are guaranteed by the Company on a subordinated basis pursuant to a Guarantee Agreement, dated as of September 1, 2006.

The trust preferred securities have a floating annual rate, reset quarterly, equal to the three-month LIBOR plus 1.60% .  The trust preferred securities are non-redeemable through
September 30, 2011. Each of the trust preferred securities represents an undivided interest in the assets of the Trust.

The Company owns all of the Trust's common securities. The Trust's only assets are the junior subordinated notes issued by the Company on substantially the same payment terms as the
trust preferred securities. The Company's junior subordinated notes were issued pursuant to an Indenture, dated as of September 1, 2006.

The Federal Reserve Bank of San Francisco has advised the Company that the trust preferred securities are eligible as Tier 1 capital.

NOTE 20 -SAN JOAQUIN BANCORP (Parent Company Only)

San Joaquin Bancorp was formed in 2006 therefore, no prior year information is being presented.

|Balance Sheet                                  |  |                  
|---------------------------------------------- |  | -----------------
|                                              
|                                               |  | December 31, 2006
|                                               |  |                  
|ASSETS                                         |  |                  
|Cash and balances due from banks               |  | 164,000          
|                                               |  |                  
|Total Cash & Cash Equivalents                  |  | 164,000          
|                                              
|Investment in Subsidiaries                     |  | 56,009,000       
|Interest receivable and other assets           |  | 7,000            
|                                               |  |                  
|TOTAL ASSETS                                   |  | 56,180,000       
|                                               |  |                  
|                                              
|                                              
|LIABILITIES AND SHAREHOLDERS' EQUITY           |  |                  
|Liabilities                                    |  |                  
|Long-term debt                                 |  | 10,310,000       
|Accrued interest payable and other liabilities |  | 4,000            
|                                               |  |                  
|Total Liabilities                              |  | 10,314,000       
|                                              
|Shareholders' Equity                           |  |                  
|Common stock                                   |  | 10,368,000       
|Additional paid-in capital - stock options     |  | 145,000          
|Retained earnings                              |  | 36,986,000       
|Accumulated other comprehensive income         |  | (1,633,000)      
|                                               |  |                  
|Total Equity Capital                           |  | 45,866,000       
|                                               |  |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     |  | 56,180,000       
|                                               |  |                  

81

---

|San Joaquin Bancorp (Parent Company Only) Continued                   |  |                  
|--------------------------------------------------------------------- |  | -----------------
|                                                                     
|Income Statement                                                      |  |                  
|                                                                     
|                                                                      |  | December 31, 2006
|                                                                      |  |                  
|INCOME                                                                |  |                  
|Dividends from subsidiaries                                           |  | 7,000            
|                                                                      |  |                  
|Total Income                                                          |  | 7,000            
|                                                                     
|EXPENSE                                                               |  |                  
|Interest on long-term debt                                            |  | 244,000          
|Professional expense                                                  |  | 124,000          
|Other noninterest expense                                             |  | 11,000           
|                                                                      |  |                  
|Total Expense                                                         |  | 379,000          
|                                                                      |  |                  
|                                                                     
|Income (loss) Before Taxes                                            |  | (372,000)        
|Applicable income taxes (benefit)                                     |  | (130,000)        
|                                                                      |  |                  
|                                                                     
|Net Income (loss) before equity in undistributed income of subsidiary |  | (242,000)        
|                                                                     
|Equity in SJB Earnings                                                |  | 8,716,000        
|                                                                      |  |                  
|                                                                     
|NET INCOME                                                            |  | 8,474,000        
|                                                                      |  |                  
|                                                                     
|                                                                     
|                                                                     
|Statement of Cash Flows                                               |  |                  
|                                                                     
|                                                                      |  | December 31, 2006
|                                                                      |  |                  
|Cash Flows From Operating Activities:                                 |  |                  
|Net Income                                                            |  | 8,474,000        
|Adjustments to reconcile net income                                   |  |                  
|to net cash provided by operating activities:                         |  |                  
|Equity in undistributed earnings of subsidiaries                      |  | (8,716,000)      
|Net change in other assets                                            |  | (7,000)          
|Net change in other liabilities                                       |  | 4,000            
|                                                                      |  |                  
|Total adjustments                                                     |  | (8,719,000)      
|                                                                      |  |                  
|Net Cash Provided by Operating Activities                             |  | (245,000)        
|                                                                     
|Cash Flows From Investing Activities:                                 |  |                  
|Payments for investments in and advances to subsidiaries              |  | (10,010,000)     
|                                                                      |  |                  
|Net Cash Applied to Investing Activities                              |  | (10,010,000)     
|                                                                     
|Cash Flows From Financing Activities:                                 |  |                  
|Proceeds from advances from subsidiaries                              |  | 10,310,000       
|Proceeds from issuance of common stock                                |  | 109,000          
|                                                                      |  |                  
|Net Cash Provided by Financing Activities                             |  | 10,419,000       
|                                                                      |  |                  
|                                                                     
|Net Increase in Cash and Cash Equivalents                             |  | 164,000          
|Cash and cash equivalents, at beginning of period                     |  | -                
|                                                                      |  |                  
|                                                                     
|Cash and Cash Equivalents, at End of Period                           |  | 164,000          
|                                                                      |  |                  

82

---

NOTE 21 -SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

|                                              |  |          |  | 2006     |  |          |  |         
|--------------------------------------------- |  | -------- |  | -------- |  | -------- |  | --------
|(dollars in thousands, except per share data) |  | 4th      |  | 3rd      |  |          |  | 2nd     
|                                              |  |          |  |          |  |          |  |         
|Total Interest Income                         |  | $ 12,562 |  | $ 12,190 |  | $ 11,340 |  | $ 10,436
|Total Interest Expense                        |  | 5,437    |  | 4,927    |  |          |  | 4,027   
|                                              |  |          |  |          |  |          |  |         
|Net Interest Income                           |  | 7,125    |  | 7,263    |  |          |  | 7,313   
|Provision for loan losses                     |  | 600      |  | 600      |  |          |  | 300     
|                                              |  |          |  |          |  |          |  |         
|Net Interest Income After                     |  |          |  |          |  |          |  |         
|Loan Loss Provision                           |  | 6,525    |  | 6,663    |  |          |  | 7,013   
|                                              |  |          |  |          |  |          |  |         
|Total Noninterest Income                      |  | 841      |  | 725      |  |          |  | 853     
|Total Noninterest Expense                     |  | 4,013    |  | 3,841    |  |          |  | 3,748   
|                                              |  |          |  |          |  |          |  |         
|Income Before Taxes                           |  | 3,353    |  | 3,547    |  |          |  | 4,118   
|Income Taxes                                  |  | 1,589    |  | 1,625    |  |          |  | 1,536   
|                                              |  |          |  |          |  |          |  |         
|NET INCOME                                    |  | $ 1,764  |  | $ 1,922  |  | $ 2,582  |  | $ 2,206 
|                                              |  |          |  |          |  |          |  |         
|Basic Earnings per Share                      |  | $ 0.51   |  | $ 0.55   |  | $ 0.74   |  | $ 0.64  
|                                              |  |          |  |          |  |          |  |         
|Diluted Earnings per Share                    |  | $ 0.48   |  | $ 0.52   |  | $ 0.69   |  | $ 0.60  
|                                              |  |          |  |          |  |          |  |         
|                                             
|                                              |  |          |  | 2005     |  |          |  |         
|                                              |  | 4th      |  | 3rd      |  |          |  | 2nd     
|                                              |  |          |  |          |  |          |  |         
|Total Interest Income                         |  | $ 9,431  |  | $ 8,488  |  | $ 7,508  |  | $ 6,842 
|Total Interest Expense                        |  | 3,023    |  | 2,555    |  |          |  | 1,979   
|                                              |  |          |  |          |  |          |  |         
|Net Interest Income                           |  | 6,408    |  | 5,933    |  |          |  | 5,529   
|Provision for loan losses                     |  | 300      |  | 300      |  |          |  | 300     
|                                              |  |          |  |          |  |          |  |         
|Net Interest Income After                     |  |          |  |          |  |          |  |         
|Loan Loss Provision                           |  | 6,108    |  | 5,633    |  |          |  | 5,229   
|                                              |  |          |  |          |  |          |  |         
|Total Noninterest Income                      |  | 664      |  | 680      |  |          |  | 692     
|Total Noninterest Expense                     |  | 3,597    |  | 3,324    |  |          |  | 3,156   
|                                              |  |          |  |          |  |          |  |         
|Income Before Taxes                           |  | 3,175    |  | 2,989    |  |          |  | 2,765   
|Income Taxes                                  |  | 1,339    |  | 1,298    |  |          |  | 1,069   
|                                              |  |          |  |          |  |          |  |         
|NET INCOME                                    |  | $ 1,836  |  | $ 1,691  |  | $ 1,696  |  | $ 1,401 
|                                              |  |          |  |          |  |          |  |         
|Basic Earnings per Share                      |  | $ 0.55   |  | $ 0.49   |  | $ 0.49   |  | $ 0.41  
|                                              |  |          |  |          |  |          |  |         
|Diluted Earnings per Share                    |  | $ 0.50   |  | $ 0.46   |  | $ 0.46   |  | $ 0.39  
|                                              |  |          |  |          |  |          |  |         

83

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



|None.
|-----



|ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures
|--------------------------------------------------------------------------------

The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rules 13(a)15(e) as of the end of the period covered by this report have concluded that the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company
and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this annual report was being prepared.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

The Corporation does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls
or procedures 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 control
procedure 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, controls 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 procedure, misstatements due to error or fraud may occur and
not be detected.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a
process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for
external reporting purposes in accordance with accounting principles generally accepted in the United States of America. A companys internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance
of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of the companys assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the companys financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

84

---

As of December 31, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the Companys internal control over financial reporting pursuant to Rule 13a-15(c), as adopted by the SEC under the Exchange Act. In evaluating the effectiveness of the
Companys internal control over financial reporting, management used the framework established in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

Based on this evaluation, management concluded that as of December 31, 2006, the Companys internal control over financial reporting was effective.

Managements assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, has been audited by Brown Armstrong
Accountancy Corporation, an independent registered public accounting firm as stated in their report included in Item 8.



|March 15, 2007
|--------------



|Changes in Internal Controls Over Financial Reporting
|-----------------------------------------------------

There was no change in our internal control over financial reporting during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.



|ITEM 9B. OTHER INFORMATION
|--------------------------



|None.
|-----

85

---



|PART III
|--------

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will appear in the Companys Proxy Statement for the 2007 Annual Meeting of Shareholders (the 2007 Proxy Statement) under the
captions Board of Directors, Executive Officers, Section 16 Compliance and Audit Committee, and is incorporated by reference.

The Company has adopted a Code of Ethics that applies to the Companys executive officer, principal financial officer, principal accounting officer and controller, and persons
performing similar functions. This Code of Ethics is filed as Exhibit 14.1 to this report.



|ITEM 11. EXECUTIVE COMPENSATION
|-------------------------------

The information required by this item will appear in the 2007 Proxy Statement under the caption Executive Compensation, and is incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will appear in the 2007 Proxy Statement under the caption Stock Ownership, and is incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will appear in the 2007 Proxy Statement under the caption Transactions with Directors and Management, and is incorporated by
reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item will appear in the 2007 Proxy Statement under the caption Audit Fees, and is incorporated by reference.

86

---

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

|(a) | The following documents are filed as part of this Annual Report on Form 10-K:
|--- | -----------------------------------------------------------------------------
|   
|    | (1)                                                                          
|   
|    | (2)                                                                          
|   
|    | (3)                                                                          
|   
|(b) | Exhibits                                                                     
|   

|Exhibit |                       
|------- | ----------------------
|Number  | Description of Exhibit

|2.1 | Agreement and Plan of Reorganization dated May 9, 2006.                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|   
|3.1 | Articles of Incorporation of the Registrant. (Incorporated by reference from exhibit 3.1 filed with Form 8-K 12(g)3 filed on August 4, 2006).
|   
|3.2 | Bylaws of the Registrant (Incorporated by reference from exhibit 3.2 filed with Form 8-K 12(g)3 filed on August 4, 2006).                    
|   

3.2(a)    First Amendment of the Bylaws of the Registrant dated November 21, 2006.

|4.1                                           | Specimen Common Stock Certificate of the Registrant. (Incorporated by reference from exhibit 4.1 filed with Form 8-K 12(g)3 filed on August 4, 2006).                                                                                                                              
|--------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                             
|4.2                                           | Indenture, dated as of September 1, 2006, between San Joaquin Bancorp and Wilmington Trust Company, as Trustee (Incorporated by reference from exhibit 10.1 filed with Form 8- K filed on September 6, 2006)                                                                       
|                                             
|4.3                                           | Instruments defining the rights of Security Holders, Including Indentures. Pursuant to Securities and Exchange Commission Reg. §229.601(b)(4)(iii)(A), the Registrant agrees to furnish a copy of the following instruments to the Securities and Exchange Commission upon request:
|                                             
|                                              | (i) Purchase Agreement by and between Registrant and NBC Capital Markets Group, Inc., dated April 5, 2004;                                                                                                                                                                         
|                                             
|                                              | (ii) Indenture by and between Registrant and Wilmington Trust Company, as trustee, dated April 5, 2004;                                                                                                                                                                            
|                                             
|                                              | (iii) First supplemental indenture dated July 28, 2006 to the indenture dated as of April 5, 2004, between San Joaquin Bank and Wilmington Trust Company, as trustee; and                                                                                                          
|                                             
|                                              | (iv) Form of $6,000,000 Floating Rate Subordinated Note due 2019 dated April 5, 2004.                                                                                                                                                                                              
|                                             
|                                             
|10.1*  San Joaquin Bancorp Stock Option Plan.



| | 
| | 

87

---

|Exhibit                                                               |  |                                                                                              
|--------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------
|Number                                                                |  | Description of Exhibit                                                                       
|                                                                      |  |                                                                                              
|                                                                     
|10.2*                                                                 |  | San Joaquin Bancorp 1999 Stock Incentive Plan.                                               
|                                                                     
|10.3*                                                                 |  | First amendment to the San Joaquin Bancorp 1999 Stock Incentive Plan.                        
|                                                                     
|10.4*                                                                 |  | Form of Incentive Stock Option Agreement pursuant to San Joaquin Bancorp 1999 Stock          
|                                                                      |  | Incentive Plan. (Incorporated by reference from Exhibit 10.1 filed with Registrants Form 8-K
|                                                                      |  | filed on March 12, 2007).                                                                    
|                                                                     
|10.5*                                                                 |  | Form of Non-qualified Stock Option Agreement pursuant to San Joaquin Bancorp 1999 Stock      
|                                                                      |  | Incentive Plan. (Incorporated by reference from exhibit 99.10 filed with Form 8-K 12(g)3     
|                                                                      |  | filed on August 4, 2006).                                                                    
|                                                                     
|10.6*                                                                 |  | Amended and Restated Executive Salary Continuation Agreement dated June 18, 2004             
|                                                                      |  | between San Joaquin Bank and Bruce Maclin (Incorporated by reference from exhibit 99.11      
|                                                                      |  | filed with Form 8-K 12(g)3 filed on August 4, 2006).                                         
|                                                                     
|10.6(a)*                                                              |  | First Amendment to Amended and Restated Executive Salary Continuation Agreement dated        
|                                                                      |  | December 19, 2006 between San Joaquin Bancorp and Bruce Maclin.                              
|                                                                     
|10.7*                                                                 |  | Amended and Restated Executive Salary Continuation Agreement dated June 18, 2004             
|                                                                      |  | between San Joaquin Bank and Bart Hill (Incorporated by reference from exhibit 99.12 filed   
|                                                                      |  | with Form 8-K 12(g)3 filed on August 4, 2006).                                               
|                                                                     
|10.7(a)*                                                              |  | First Amendment to Amended and Restated Executive Salary Continuation Agreement dated        
|                                                                      |  | December 19, 2006 between San Joaquin Bancorp and Bart Hill.                                 
|                                                                     
|10.8*                                                                 |  | Amended and Restated Executive Salary Continuation Agreement dated June 13, 2003             
|                                                                      |  | between San Joaquin Bank and Stephen Annis (Incorporated by reference from exhibit 99.13     
|                                                                      |  | filed with Form 8-K 12(g)3 filed on August 4, 2006).                                         
|                                                                     
|10.8(a)*                                                              |  | First Amendment to Amended and Restated Executive Salary Continuation Agreement dated        
|                                                                      |  | December 19, 2006 between San Joaquin Bancorp and Stephen Annis.                             
|                                                                     
|10.8(b)*                                                              |  | Second Amendment to Amended and Restated Executive Salary Continuation Agreement             
|dated January 25, 2007 between San Joaquin Bancorp and Stephen Annis.
|                                                                     
|10.9*                                                                 |  | Amended and Restated Executive Salary Continuation Agreement dated June 11, 2003             
|                                                                      |  | between San Joaquin Bank and John W. Ivy (Incorporated by reference from exhibit 99.14       
|                                                                      |  | filed with Form 8-K 12(g)3 filed on August 4, 2006).                                         
|                                                                     
|10.9(a)*                                                              |  | First Amendment to Amended and Restated Executive Salary Continuation Agreement dated        
|                                                                      |  | December 19, 2006 between San Joaquin Bancorp and John Ivy.                                  
|                                                                     
|10.9(b)*                                                              |  | Second Amendment to Amended and Restated Executive Salary Continuation Agreement             
|                                                                      |  | dated January 25, 2007 between San Joaquin Bancorp and John Ivy.                             
|                                                                     
|10.10*                                                                |  | Change in Control Agreement dated January 28, 1999 between San Joaquin Bank and Bruce        
|                                                                      |  | Maclin (Incorporated by reference from exhibit 99.15 filed with Form 8-K 12(g)3 filed on     
|                                                                      |  | August 4, 2006).                                                                             
|                                                                     
|10.10(a)*                                                             |  | First Amendment to Change in Control Agreement dated June 7, 2001 between San Joaquin        
|                                                                      |  | Bank and Bruce Maclin (Incorporated by reference from exhibit 99.16 filed with Form 8-       
|                                                                      |  | K12G3 filed on August 4, 2006).                                                              

88

---

|Exhibit   |  |                                                                                             
|--------- |  | --------------------------------------------------------------------------------------------
|Number    |  | Description of Exhibit                                                                      
|          |  |                                                                                             
|         
|10.10(b)* |  | Second Amendment to Change in Control Agreement dated April 30, 2003 between San            
|          |  | Joaquin Bank and Bruce Maclin (Incorporated by reference from exhibit 99.17 filed with      
|          |  | Form 8-K 12(g)3 filed on August 4, 2006).                                                   
|         
|10.11*    |  | Change in Control Agreement dated January 28, 1999 between San Joaquin Bank and Bart        
|          |  | Hill (Incorporated by reference from exhibit 99.18 filed with Form 8-K 12(g)3 filed on      
|          |  | August 4, 2006).                                                                            
|         
|10.11(a)* |  | First Amendment to Change in Control Agreement dated June 7, 2001 between San Joaquin       
|          |  | Bank and Bart Hill (Incorporated by reference from exhibit 99.19 filed with Form 8-K 12(g)3 
|          |  | filed on August 4, 2006).                                                                   
|         
|10.11(b)* |  | Second Amendment to Change in Control Agreement dated April 30, 2003 between San            
|          |  | Joaquin Bank and Bart Hill (Incorporated by reference from exhibit 99.20 filed with Form 8- 
|          |  | K12G3 filed on August 4, 2006).                                                             
|         
|10.12*    |  | Change in Control Agreement dated June 7, 2001 between San Joaquin Bank and Stephen         
|          |  | Annis (Incorporated by reference from exhibit 99. 12 filed with Form 8-K 12(g)3 filed on    
|          |  | August 4, 2006).                                                                            
|         
|10.12(a)* |  | First Amendment to Change in Control Agreement dated April 30, 2003 between San Joaquin     
|          |  | Bank and Stephen Annis (Incorporated by reference from exhibit 99.22 filed with Form 8-     
|          |  | K12G3 filed on August 4, 2006)                                                              
|         
|10.13*    |  | Change in Control Agreement dated June 7, 2001 between San Joaquin Bank and John W. Ivy     
|          |  | (Incorporated by reference from exhibit 99.23 filed with Form 8-K 12(g)3 filed on August 4, 
|          |  | 2006).                                                                                      
|         
|10.13(a)* |  | First Amendment to Change in Control Agreement dated April 30, 2003 between San Joaquin     
|          |  | Bank and John W. Ivy (Incorporated by reference from exhibit 99.24 filed with Form 8-       
|          |  | K 12(g)3 filed on August 4, 2006).                                                          
|         
|10.14*    |  | Statement relating to the payment of club dues for Executive Officers. (Incorporated by     
|          |  | reference from exhibit 99.29 filed with Form 8-K 12(g)3 filed on August 4, 2006).           
|         
|10.15*    |  | Statement relating to the travel and entertainment allowance for Bruce Maclin and Bart Hill.

|10.16 | Agreement dated October 22, 2005 between San Joaquin Bank and Continental Stock Transfer and Trust Company regarding the appointment of Continental Stock Transfer and Trust Company as
the Bank's transfer agent. (Incorporated by reference from exhibit 99.27 filed with Form 8-K 12(g)3 filed on August 4, 2006).
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|10.17 | Guarantee Agreement, dated as of September 1, 2006, between San Joaquin Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee (Incorporated by reference from
exhibit 10.2 filed with Form 8-K filed on September 6, 2006).                                                                      
|     
|10.18 | Amended and Restated Declaration of Trust of San Joaquin Bancorp Trust #1, dated as of September 1, 2006. (Incorporated by reference from exhibit 10.3 filed with Form 8-K filed on
September 6, 2006)                                                                                                               
|     
|10.19 | Purchase Agreement dated December 21, 2006 between San Joaquin Bancorp and The David R. Wilson Revocable Trust Dated January 26, 1994 (Incorporated by reference from exhibit 10.1
filed with Form 8-K filed on March 12, 2006)                                                                                      
|     

89

---

|Exhibit |                       
|------- | ----------------------
|Number  | Description of Exhibit

|11.1 | Statement re computation of per share earnings (Incorporated by reference from Note 1 and Note 15 to the consolidated financial statements).                                         
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|12.1 | Statements re computation of ratios (Incorporated by reference from Item 8).                                                                                                         
|    
|14.1 | Code of Ethics                                                                                                                                                                       
|    
|21.1 | List of Registrants Subsidiaries.                                                                                                                                                   
|    
|23.1 | Consent of Brown Armstrong Accountancy Corporation with respect to financial statements of the Registrant.                                                                           
|    
|24.1 | Power of Attorney (included on signature page).                                                                                                                                      
|    
|31.1 | Certification of Chief Executive Officer pursuant to Rule 13a  14(a) (17CFR 240.13a-14(a)) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|    
|31.2 | Certification of Chief Financial Officer pursuant to Rule 13a  14(a) (17CFR 240.13a-14(a)) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|    
|32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.                                                                                           
|    

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



| | * Management contract, compensatory plan, or arrangement
| | --------------------------------------------------------

The Company will furnish to shareholders a copy of any exhibit listed above, but not contained herein, upon written request to:



| | San Joaquin BancorpCorporate Secretary1000 Truxtun AvenueBakersfield, California 93301.
| | ---------------------------------------------------------------------------------------



|(c) See Item 15(a)(2) above.
|----------------------------

90

---



|SIGNATURES
|----------

Pursuant to the requirements of sections 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|March 15, 2007
|--------------



|SAN JOAQUIN BANCORPBy: /S/ BRUCE MACLINChief Executive Officer
|--------------------------------------------------------------



|POWER OF ATTORNEY
|-----------------

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bruce Maclin, Bart Hill, and Stephen Annis and each of them as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated:



|SIGNATURE
|---------

TITLE
     
     DATE/S/ BRUCE MACLINBruce Maclin
     
     Chairman of the Board and Chief Executive
     
     March 15, 2007Officer (Principal Executive Officer)/S/ BART HILLBart Hill
     
     President and Director
     
     March 15, 2007/S/ STEPHEN M. ANNISStephen M. Annis
     
     Chief Financial Officer and ChiefAccounting Officer (Principal financial and
     
     March 15, 2007accounting officer)/S/ DONALD S. ANDREWSDonald S. Andrews
     
     Director
     
     March 15, 2007/S/ MELVIN D. ATKINSONMelvin D. Atkinson
     
     Director
     
     March 15, 2007/S/ LOUIS J. BARBICHLouis J. Barbich
     
     Director
     
     March 15, 2007/S/ ELVIN G. BERCHTOLDElvin G. Berchtold
     
     Director
     
     March 15, 2007/S/ ROGERS BRANDONRogers Brandon
     
     Director
     
     March 15, 2007/S/ JERRY CHICCAJerry Chicca
     
     Director
     
     March 15, 2007/S/ ROBERT B. MONTGOMERYRobert B. Montgomery
     
     Director
     
     March 15, 2007/S/ VIRGINIA F. MOORHOUSEVirginia F. Moorhouse
     
     Director
     
     March 15, 2007


91

---