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**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-K**

 

**x****      ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**for the fiscal year ended December 31, 2009.**

 

**OR**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For thetransition period from           to**

 

**Commission File Number  000-51901**

 

**SANTA LUCIA BANCORP**

(Name of small business issuer in itscharter)

 

| **State of California**                                         | ** ** | **35-2267934**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **7480 El Camino Real,  Atascadero,**     | ** ** | **California 93422** |
|-------------------------------------------|------------|----------------------|
| (Address of principal executive  offices) |       | (Zip Code)           |

 

Issuer’s telephone number ** (805) 466-7087**

 

Securities registered under Section 12(b) ofthe Exchange Act: **None**

 

Securities registered under Section 12(g) ofthe Exchange Act:

 

| **Title of each class**      | ** ** | **Name of each exchange on which  registered** |
|------------------------------|------------|------------------------------------------------|
| Common Stock (no par  value) |       | None                                           |

 

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

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o  No  x

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of Reg S-T (§232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles).  o  yes  o  no

 

Check if there is no disclosure of delinquentfilers in response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K  o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

 

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

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates as of June 30, 2009 (last day of the registrant’s mostrecently completed second fiscal quarter ) was $13,350,673.

 

Asof March 10, 2010, the Registrant had 1,964,035 shares of Common Stockoutstanding.

 

Theinformation required in Part III, Items 10 through 14 is incorporatedherein from the Registrant’s definitive proxy statement for the 2010 annualmeeting of shareholders previously filed pursuant to Regulation 14A and Part II,Items 6 -8 of the 2009 Annual Report to Shareholders filed as an exhibithereto.

 

 

 

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**TABLE OF CONTENTS**

 
| PART I   |   |                                                                                              |   |   |
|---------------|--------|---------------------------------------------------------------------------------------------------|--------|--------|
| ITEM 1.       |   | BUSINESS                                                                                          |   | 2      |
| ITEM 1A.      |   | RISK  FACTORS                                                                                     |   |   |
| ITEM 1B.      |   | UNRESOLVED STAFF  COMMENTS                                                                        |   |   |
| ITEM  2.      |   | PROPERTIES                                                                                        |   | 20     |
| ITEM 3.       |   | LEGAL PROCEEDINGS                                                                                 |   | 21     |
| ITEM 4.       |   | (REMOVED AND RESERVED)                                                                            |   |   |
| PART II  |   |                                                                                              |   | 21     |
| ITEM 5.       |   | MARKET FOR  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY  SECURITIES |   | 21     |
| ITEM 6.       |   | SELECTED FINANCIAL  DATA                                                                          |   |   |
| ITEM 7.       |   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS       |   | 23     |
| ITEM 7A.      |   | QUANITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                        |   |   |
| ITEM 8.       |   | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                      |   | 23     |
| ITEM 9.       |   | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE             |   | 23     |
| ITEM 9A       |   | CONTROLS AND  PROCEDURES                                                                          |   | 24     |
| ITEM 9B.      |   | OTHER INFORMATION                                                                                 |   | 24     |
| PART III |   |                                                                                              |   | 25     |
| ITEM 10.      |   | DIRECTORS,  EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE                                          |   | 25     |
| ITEM 11.      |   | EXECUTIVE  COMPENSATION                                                                           |   | 25     |
| ITEM 12.      |   | SECURITY OWNERSHIP  OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   |   | 25     |
| ITEM 13.      |   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                         |   | 25     |
| ITEM 14       |   | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                           |   | 25     |
| PART IV  |   |                                                                                              |   |   |
| ITEM 15.      |   | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES                                                          |   | 25     |
| SIGNATURES    |   | 32                                                                                                |
| EXHIBIT INDEX |   | 34                                                                                                |

 

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# **PART I**

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**Certain statements contained in this Annual Reporton Form 10-K (“Annual Report”), including, without limitation, statementscontaining the words “estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,”“could,” and words of similar import, constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These forward-looking statements relate to, among other things, ourcurrent expectations regarding future operating results, net interest margin,strength of the local economy, and allowance for credit losses.  Such forward looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements**. Such factors include,among others, the following: general economic and business conditions in thoseareas in which the Company operates, the ongoing financial crisis andrecession  in the United States,California and foreign financial markets, and bank regulatory and governmentresponse thereto, the increase in nonperforming loans and the decrease in realestate values collateralizing many of the Bank’s loans,  demographic changes, competition,fluctuations in interest rates, changes in business strategy or developmentalplans, changes in governmental regulations, credit quality, the availability ofcapital to fund the expansion of the Company’s business, and other factorsreferenced in the Company’s reports filed pursuant to the Exchange Act. Theseand other important factors are detailed in this report, including in “Item 1ARisk Factors.” Whenrelying on forward-looking statements to make decisions with respect to ourcompany, investors and others are cautioned to consider these and**other risks and uncertainties. The company disclaims any obligation to update any such factors or topublicly announce the results of any revisions to any of the forward-lookingstatements contained herein to reflect future events or developments.**

 

**ITEM 1.                  BUSINESS**

 

**General**

 

Santa Lucia Bancorp (the “Company”) is a California corporationorganized April 3, 2006 to act as the holding company for its wholly ownedsubsidiary Santa Lucia Bank (the “Bank”), collectively referred to herein as the“Company”.  At that time shareholders ofthe Bank became shareholders of the Company on a “unless otherwise noted, oneshare for one share” basis.

 

The Bank is a California banking corporation.  The Bank was organized as a national bankingassociation on December 19, 1984 and commenced operations on August 5,1985.  On May 30, 1997, the Bankconverted from a national bank to a California state chartered bank licensed bythe California Department of Financial Institutions (DFI”).  As a California state member bank, the Bankis subject to primary supervision, examination and regulation by the DFI andthe Board of Governors of the Federal Reserve System (“FRB”).  The Bank is also subject to certain otherfederal laws and regulations.  Thedeposits of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”)up to the applicable limits thereof.

 

At December 31, 2009, the Company had approximately $269.9 millionin assets, $198.1 million in net loans, $238.7 million in deposits, and $23.0million in stockholders’ equity.

 

On April 26, 2006, the Company formed Santa Lucia Bancorp (CA)Capital Trust (“Trust”).  Trust is astatutory business trust formed under the laws of Delaware used to facilitatethe issuance of the trust preferred securities. The Trust is a wholly owned, non-financial, non-consolidated subsidiaryof the Company.

 

Other than holding the shares of the Bank, the Company conducts nosignificant activities.

 

**Banking**

 

The Bank is headquartered in Atascadero, with branch offices in PasoRobles, Arroyo Grande and Santa Maria. The Bank conducts a commercial bankingbusiness in San Luis Obispo and northern Santa Barbara Counties, includingaccepting demand, savings and time deposits, and making commercial, realestate, SBA, agricultural, credit card, and consumer loans.  It also offers installment note collection,provides ATM and internet banking access, issues cashiers checks and moneyorders, sells travelers checks, and provides bank-by-mail, night depository,safe deposit boxes, and other customary banking services. The Bank does notoffer trust services or international banking services and does not plan to doso in the near future.

 

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The Bank’s operating policy since its inception has emphasized smallbusiness commercial banking. Most of the Bank’s customers are retail customers,and small to medium-sized businesses. The Bank takes real estate, listed andunlisted securities, savings and time deposits, automobiles, machinery,equipment and accounts receivable as collateral for loans. The areas in whichthe Bank has directed virtually all of its lending activities are (i) commercialloans, (ii) installment, (iii) construction loans, and (iv) otherreal estate loans or commercial loans secured by real estate. As of December 31,2009, these four categories accounted for approximately 20.6%, 0.9%, 23.8% and54.8%, respectively, of the Bank’s loan portfolio. See “Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Most of the Bank’s deposits are attracted by local promotionalactivities and advertising in the local media. A material portion of the Bank’sdeposits have not been obtained from a single person or a few persons, the lossof any one or more of which would have a materially adverse effect on thebusiness of the Bank. As of December 31, 2009, the Bank had approximately9,714 demand deposit accounts consisting of non-interest bearing (demand),interest-bearing demand and money market accounts with balances totaling$121,461,000, for an average balance per account of approximately $12,504;4,224 savings accounts with balances totaling $27,478,000, for an averagebalance per account of approximately $6,505; and 2,378 time certificate ofdeposit accounts with balances totaling $89,783,000, for an average balance peraccount of approximately $37,756.

 

The principal sources of the Bank’s revenues are (i) interest andfees on loans, (ii) interest on investments, (iii) service charges ondeposit accounts, fees on mortgage loans and other charges and fees, and (iv) miscellaneousincome. For the year ended December 31, 2009, these sources comprised 82%,10%, 7% and 1%, respectively, of the Bank’s total operating income.

 

The Bank has not engaged in any material research activities relatingto the development of new services or the improvement of existing bankservices. There has been no significant change in the types of services offeredby the Bank since its inception except as follows: The Bank previouslyintroduced a telephone banking service named “Telebanking” which permits thecustomer to obtain information and perform other services over the telephone; ainternet banking system named “EZLink,” which offers online banking andcomputer bill payment; home equity lines of credit; business equipment leasing;and home mortgage loans.  In addition,the Bank introduced its new health savings account in 2005. The Bank has nopresent plans to add any new line of business that will require the investmentof a material amount of total assets. Most of the Bank’s business originatesfrom San Luis Obispo and northern Santa Barbara Counties, and there is noemphasis on foreign sources and application of funds. The Bank’s business,based upon performance to date, does not appear to be seasonal.  Management of the Bank is unaware of anymaterial effect upon the Bank’s capital expenditures, earnings or competitiveposition as a result of federal, state or local environmental regulations.

 

The Bank holds no patents, licenses (other than licenses obtained frombank regulatory authorities), franchises or concessions.

 

**Employees**

 

As of December 31, 2009, the Bank had a total of 84 full-timeequivalent employees. The Bank believes that its employee relations aresatisfactory.  The Company has nosalaried employees.

 

**LocalEconomic Climate**

 

The economy in the Company’s service area is based primarily onagriculture, tourism, light industry, oil and retail trade.  Services supporting these industries havealso developed in the areas of medical, financial and educationalservices.  The population of San LuisObispo County and the City of Santa Maria (in northern Santa Barbara County)totaled approximately 270,000 and 86,000 respectively, according to economicdata provided by State of California census. Access to numerous recreational activities, including lakes, mountainsand beaches, provided a relatively stable tourist industry from many areasincluding the Los Angeles/Orange County basin, the San Francisco Bay area andthe San Joaquin Valley.  Principally dueto the diversity of the various industries in the Company’s service area, bothcounties have experienced a decline in tourism as travelers continue to attemptto conserve resources.

 

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According to the San Luis Obispo County Outlook Economic Forecast,copyrighted and published by The University of California (Santa Barbara), homesales volume during the first two quarters fell 3.3% in 2009, median homeprices in San Luis Obispo County decreased 33.0% between the second quarters of2007 and 2009, median price for existing single-family homes with half of thatdecline occurring since the second quarter of 2008. Single-family homes soldduring the first two quarters of 2009 increased by 1.2%. The declining pricesand weak sales continue to slow the pace of new home construction.  Sales of foreclosed real estate have affectedand will affect the market values in both counties.

 

2009 proved to be anotherchallenging year not only on the national level, but within the state ofCalifornia and more specifically our primary market area.  As theU.S. housing market continued to wane throughout 2009 and economic growth beganto significantly slow, the ability of borrowers to satisfy their obligations tothe financial sector began to languish.  These among other factorsplaced severe stress on the U.S. financial system, leading to a crisis ofconfidence, further downturn in economic growth and unprecedented volatility inthe U.S. equity and credit markets.  Our primary market area hashistorically enjoyed a more stable level of economic activity; however, webelieve these more macro level concerns have become more evident within ourmarket area.  Recent indications show the (preliminary data notseasonally adjusted) unemployment rate within California to be approximately12.1%.  This is up approximately 2.8% from the 9.3% reported at December 2008.  Withinour primary market area, recent indications show the unemployment rate withinSan Luis Obispo and Santa Barbara counties to be approximately 9.4% and 9.3%,respectively.  This represents increases of approximately 2.8% and3.0% from the 6.6% and 6.3% reported for San Luis Obispo and Santa Barbaracounties at December 2008.  During 2009 both Santa BarbaraCounty and San Luis Obispo County continued to experience record foreclosuresand delinquencies in both commercial and residential properties. The UCSBForecast Project reports that for North Santa Barbara County including SantaMaria for 2010 continued job losses, foreclosures, delinquencies and businessfailures will continue through 2010.

 

The Company believes that the local economies, in which it operates,Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continue to benegatively affected as the loss of jobs increases and businesses cash flowscontinue to decline causing the rise of delinquencies and foreclosures in theloan portfolio.

 

**Competition**

 

Thebanking and financial services business in California generally, and in theCompany’s service area specifically, is highly competitive. The increasingly competitiveenvironment is a result primarily of changes in regulation, changes intechnology and product delivery systems, and the accelerating pace ofconsolidation among financial services providers.

 

TheCompany’s business is concentrated in its service area, which encompassesprimarily San Luis Obispo and northern Santa Barbara Counties. In order tocompete with other financial institutions in its service area, the Companyrelies principally upon local advertising programs; direct personal contact byofficers, directors, employees, and shareholders; and specialized services suchas courier pick-up and delivery of non-cash banking items. The Companyemphasizes to its customers the advantages of dealing with a locally owned andcommunity oriented institution. The Company also seeks to provide specialservices and programs for individuals in its primary service area who areemployed in the agricultural, professional and business fields, such as loansfor equipment, furniture, tools of the trade or expansion of practices orbusinesses. Larger banks may have a competitive advantage because of higherlending limits and major advertising and marketing campaigns. They also performservices, such as trust services, international banking, discount brokerage andinsurance services that the Company is not authorized or prepared to offercurrently. The Company has made arrangements with its correspondent banks andwith others to provide such services for its customers.

 

Commercialbanks compete with savings and loan associations, credit unions, otherfinancial institutions, securities brokerage firms, and other entities forfunds. For instance, yields on corporate and government debt securities andother commercial paper affect the ability of commercial banks to attract andhold deposits. Commercial banks also compete for loans with savings and loanassociations, credit unions, consumer finance companies, mortgage companies,insurance companies, and other lending institutions.

 

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**Supervision and Regulation**

 

**General**

 

TheCompany and the Bank are extensively regulated under both federal and statelaw. Set forth below is a summary description of certain laws that relate tothe regulation of the Company and the Bank. The description does not purport tobe complete and is qualified in its entirety by reference to the applicablelaws and regulations.

 

However Congress and theexecutive branch are likely to consider significant new regulatory reforminitiatives in the near future, which could result in material changes to thecurrent oversight structure.

 

**The Company**

 

TheCompany is a bank holding company within the meaning of the Bank HoldingCompany Act of 1956, as amended (the “Bank Holding Company Act”), and isregistered as such with, and subject to the supervision of, the Federal ReserveBoard.  The Company is required to filewith the Federal Reserve Board quarterly and annual reports and such additionalinformation as the Federal Reserve Board may require pursuant to the BankHolding Company Act.  The Federal ReserveBoard may conduct examinations of bank holding companies and theirsubsidiaries.

 

TheCompany is required to obtain the approval of the Federal Reserve Board beforeit may acquire all or substantially all of the assets of any bank, or ownershipor control of the voting shares of any bank if, after giving effect to suchacquisition of shares, the Company would own or control more than 5% of anyclass of outstanding voting shares of such bank.  Prior approval of the Federal Reserve Boardis also required for the merger of consolidation of the Company and anotherbank holding company.

 

TheCompany is prohibited by the Bank Holding Company Act, except in certainstatutorily prescribed instances, from acquiring direct of indirect ownershipor control of more than 5% of the outstanding voting shares of any company thatis not a bank or bank holding company and from engaging, directly orindirectly, in activities other than those of banking, managing or controllingbanks or furnishing services to its subsidiaries.  However, the Company may, subject to theprior approval of the Federal Reserve Board, engage in any, or acquire shares ofcompanies engaged in, activities that are deemed by the Federal Reserve Boardto be so closely related to banking or managing or controlling banks as to be aproper incident thereto.  See discussionunder “Financial Modernization Act” below for additional information.

 

TheFederal Reserve Board may require that the Company terminate an activity orterminate control of or liquidate or divest subsidiaries or affiliates when theFederal Reserve Board determines that the activity or the control or thesubsidiary or affiliates constitutes a significant risk to the financialsafety, soundness or stability of any of its banking subsidiaries.  The Federal Reserve Board also has theauthority to regulate provisions of certain bank holding company debt,including authority to impose interest ceilings and reserve requirements onsuch debt.  Under certain circumstances,the Company must file written notice and obtain approval from the FederalReserve board prior to purchasing or redeeming its equity securities.

 

Under theFederal Reserve Board’s regulations, a bank holding company is required toserve as a source of financial and managerial strength to its subsidiary banksand may not conduct its operations in an unsafe and unsound manner.  In addition, it is the Federal Reserve Board’spolicy that in serving as a source of strength to its subsidiary banks, a bankholding company should stand ready to use available resources to provideadequate capital funds to its subsidiary banks during periods of financialstress or adversity and should maintain the financial flexibility andcapital-raising capacity to obtain additional resources for assisting itssubsidiary banks.  A bank holding company’sfailure to meet its obligations to serve as a source of strength to its subsidiarybanks will generally be considered by the Federal Reserve Board to be an unsafeand unsound banking practice or a violation of the Federal Reserve Board’sregulations or both.

 

TheCompany and the Bank are prohibited from engaging in certain tie-in arrangementsin connection with any extension of credit, sale or lease of property orfurnishing of services.  For example,with certain exceptions, neither the Company nor the Bank may condition anextension of credit to a customer on either (1) a requirement that thecustomer obtain additional services provided by us or (2) an agreement bythe customer to refrain from obtaining other services from a competitor.

 

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TheCompany is subject to the periodic reporting requirements of the SecuritiesExchange Act of 1934, as amended, and files reports and proxy statementspursuant to such Act with the Securities and Exchange Commission (the “SEC”).

 

For adiscussion of restrictions on the Company’s ability to pay dividends, see “Item5 Market for Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities,” below.

 

**The Bank**

 

TheBank is chartered under the laws of the State of California and its depositsare insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extentprovided by law. The Bank is subject to the supervision of, and is regularlyexamined by, the DFI and the FRB. Such supervision and regulation includecomprehensive reviews of all major aspects of the Bank’s business andcondition. Various requirements and restrictions under the laws of the UnitedStates and the State of California affect the operations of the Bank. Federaland California statutes relate to many aspects of the Bank’s operations,including reserves against deposits, interest rates payable on deposits, loans,investments, mergers and acquisitions, borrowings, dividends and locations ofbranch offices. Further, the Bank is required to maintain certain levels ofcapital.

 

If, asa result of an examination of a bank, the DFI or FRB should determine that thefinancial condition, capital resources, asset quality, earnings prospects,management, liquidity, or other aspects of the Bank’s operations areunsatisfactory or that the Bank or its management is violating or has violatedany law or regulation, various remedies are available to these regulatoryagencies. Such remedies include the power to enjoin “unsafe or unsound”practices, to require affirmative action to correct any conditions resultingfrom any violation or practice, to issue an administrative order that can bejudicially enforced, to direct an increase in capital, to restrict the growthof the Bank, to assess civil monetary penalties, to remove officers anddirectors, and ultimately to terminate the Bank’s deposit insurance, which fora California chartered bank would result in a revocation of the bank’s charter.

 

Thedeposits of the Bank are insured by the FDIC in the manner and to the extentprovided by law.  For this protection,the Bank pays a quarterly statutory assessment. The Bank is also subject to certain regulations of the Federal ReserveBoard and applicable provisions of California law, insofar as they do notconflict with or are not preempted by federal banking law.  Various other requirements and restrictionsunder the laws of the United States and the State of California affect theoperations of the Bank.  Federal andCalifornia statutes and regulations relate to many aspects of the Bank’soperations, including reserves against deposits, interest rates payable ondeposits, loans, investments, mergers and acquisitions, borrowings, dividends,locations of branch offices, capital requirements and disclosure obligations todepositors and borrowers.  Further, theBank is required to maintain certain levels of capital.

 

**CapitalStandards**

 

TheFRB and the FDIC have adopted risk-based minimum capital guidelines intended toprovide a measure of capital that reflects the degree of risk associated with abanking organization’s operations for both transactions reported on the balancesheet as assets and transactions, such as letters of credit and recoursearrangements, which are recorded as off balance sheet items. Under theseguidelines, nominal dollar amounts of assets and credit equivalent amounts ofoff balance sheet items are multiplied by one of several risk adjustmentpercentages, which range from 0% for assets with low credit risk, such ascertain U.S. Treasury securities, to 100% for assets with relatively highcredit risk, such as business loans.

 

Abanking organization’s risk-based capital ratios are obtained by dividing itsqualifying capital by its total risk adjusted assets. The regulators measure risk-adjustedassets, which includes off balance sheet items, against both total qualifyingcapital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) andTier 1 capital. Tier 1 capital consists primarily of common stock, retainedearnings, non-cumulative perpetual preferred stock (cumulative perpetualpreferred stock for bank holding companies) and minority interests in certainsubsidiaries, less most intangible assets. Tier 2 capital may consist of alimited amount of the allowance for possible loan and lease losses, cumulativepreferred stock, long term preferred stock, eligible term subordinated debt andcertain other instruments with some characteristics of equity.  The inclusion of elements of Tier 2 capitalis subject to certain other requirements and limitations of the federal bankingagencies. The federal banking agencies require a minimum ratio of qualifyingtotal capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1capital to risk-adjusted assets of 4%. In addition, the DFI has authority totake possession of the business and properties of a bank in the event that thetangible shareholders’ equity of the bank is less than the greater of (i) 4%of the bank’s total assets or (ii) $1,000,000.

 

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Inaddition to the risk-based guidelines, federal banking regulators requirebanking organizations to maintain a minimum amount of Tier 1 capital to totalassets, referred to as the leverage ratio. For a banking organization rated inthe highest of the five categories used by regulators to rate bankingorganizations, the minimum leverage ratio of Tier 1 capital to total assets is3%. For all banking organizations not rated in the highest category, theminimum leverage ratio must be at least 4%. In addition to these uniformrisk-based capital guidelines and leverage ratios that apply across theindustry, the regulators have the discretion to set individual minimum capitalrequirements for specific institutions at rates significantly above the minimumguidelines and ratios. Future changes in regulations or practices could furtherreduce the amount of capital recognized for purposes of capital adequacy. Sucha change could affect the ability of the Bank to grow and could restrict theamount of profits, if any, available for the payment of dividends. It is theBank’s policy to remain “well capitalized” status, and review alternatives forraising capital if necessary to keep such status.

 
| ** **              | ** ** | **Minimum**      | ** ** | **Minimum**                           | ** ** | **December 31, 2009** | ** ** |
|-------------------------|------------|------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **Capital**      | ** ** | **“Well Capitalized”** | ** ** | **Bank**                   | ** ** | **Company** | ** ** |
| ** **              | ** ** | **Requirements** | ** ** | **Bank**                              | ** ** | **Actual**                 | ** ** | **Actual** | ** ** |
| LEVERAGE RATIO          |       | 4.0              | %          | 5.0                                   | %          | 9.7                        | %          | 10.3 | % |
| TIER 1 RISK-BASED RATIO |       | 4.0              | %          | 6.0                                   | %          | 11.9                       | %          | 12.5 | % |
| TOTAL RISK-BASED RATIO  |       | 8.0              | %          | 10.0                                  | %          | 13.2                       | %          | 13.9 | % |

 

Underapplicable regulatory guidelines, the Bank was considered “Well Capitalized” atDecember 31, 2009.

 

SantaLucia Bancorp issued $5,155,000 in junior subordinated debt securities (the “debtsecurities”) to the Santa Lucia Bancorp (CA) Capital Trust, a statutory trustcreated under the laws of the State of Delaware.  These debt securities are subordinated toeffectively all borrowings of the Company and are due and payable on July 7,2036.  These debt securities may beredeemed for 105% of the principal balance through July 7, 2011 and thenat par thereafter.  Interest is payablequarterly beginning July 7, 2006 at 1.48% over the quarterly adjustable3-month LIBOR.  Of this $5.2 million, theCompany contributed $3.0 million to the Bank and retained $2.2 million at theCompany level.  The securities do notentitle the holders to voting rights in the Company but will contain certainrestrictive covenants, including restrictions on the payment of dividends tothe holders of the Company’s common stock in the event that interest paymentson the trust preferred securities are postponed.  The capital contribution received by the Bankfrom the trust preferred issuance is designated as Tier 1 capital for regulatorypurposes.

 

Underapplicable regulatory guidelines, the Company’s trust preferred securitiesissued by our subsidiary capital trust qualify as Tier 1 capital up to amaximum limit of 25% of Tier 1 capital. Any additional portion of the trust preferred securities would qualifyas Tier II capital.  As of December 31,2009 the subsidiary trust had $5.2 million in trust preferred securitiesoutstanding, all of which qualifies as Tier 1 capital.

 

Inaddition, the DFI has authority to take possession of the business andproperties of a bank in the event that the tangible shareholders’ equity of thebank is less than the greater of (i) 4% of the bank’s total assets or (ii) $1,000,000.

 

Duringthe third quarter of 2003, the Bank undertook and completed a private placementof subordinated debentures (“notes”) to augment is Tier II capital.  The total principal amount of the notesissued was $2,000,000.  The notes weresold pursuant to an applicable exemption from registration under the SecuritiesAct of 1933 to certain accredited investors, including some of the Company’sdirectors and executive officers.  Thenotes include quarterly payment of interest at prime plus 1.5% and quarterlyprincipal installments of approximately $166,666 commencing on September 30,2008 until paid in full on June 30, 2011. As of December 31, 2009 theoutstanding balance was $999,932.

 

**Participation in the CapitalPurchase Program of the Troubled Asset Relief Program.**

 

On October 3, 2008,President Bush signed into law the Emergency Economic Stabilization Act of 2008(“EESA”) enacted by the U.S. Congress in response to the financial crisesaffecting the banking system and financial markets and gong concern threats toinvestment banks and other financial institutions.  On October 14, 2008, the U.S. Departmentof Treasury (“U.S. Treasury”) announced the Troubled Asset Relief ProgramCapital Purchase Program (“TARP”).  Thisprogram made $250 billion of capital available to U.S. financial institutionsfrom the initial $350 billion authorized by the EESA in the form of preferredstock investments by the U.S. Treasury 

 

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in qualifying U.S.controlled banks, savings associations and certain bank and savings and loanholding companies under the following general terms:

 

·                  The preferred stock issued to the U.S. Treasury would pay 5% dividendsfor the first five years, and then 9% dividends thereafter;

·                  In connection with the purchase of preferred stock, the U.S. Treasurywill receive warrants entitling the U.S. Treasury to buy the participatinginstitution’s common stock equivalent in value to 15% of the preferred stock;

·                  The preferred stock may not be redeemed for a period of three years,except with proceeds from high-quality private capital;

·                  The consent of the U.S. Treasury will be required to increase commondividends per share or any share repurchases, with limited exceptions, duringthe first three years, unless the preferred stock has been redeemed ortransferred to third parties; and

·                  Participating companies must adopt the U.S. Treasury’s standard forexecutive compensation and corporate governance for the period during which theU.S. Treasury holds the equity issued under the TARP.  At the close of Company’s TARP transaction,these executive compensation restrictions included the that the Company, amongother things, must:

·                  Ensure that the incentive compensation programs for its seniorexecutive officers do not encourage unnecessary and excessive risks thatthreaten the value of the Company

·                  Implement a required clawback of any bonus or incentive compensationpaid to the Company’s senior executive officers based on statements ofearnings, gains, or other criteria that are later proven to be materiallyinaccurate;

·                  Not make any “golden parachute payment” (as defined in the InternalRevenue Code) to any of The Company’s senior executive officers; and

·                  Agree not to deduct for tax purposes executive compensation in excessof $500,000 in any one fiscal year for each of the Company’s senior executiveofficers.

 

December 19,2008, the Company entered into a Purchase Agreement with the United StatesDepartment of the Treasury (the “Treasury”), pursuant to which the Companyagreed to issue and sell 4,000 shares of the Company’s Preferred Stock as FixedRate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock)and a Warrant to purchase 38,107 shares of the Company’s Common Stock (adjustedfor the 2% stock dividend) for an aggregate purchase price of $4,000,000 incash. In connection with this transaction the Company incurred $50,000 incosts.

 

ThePreferred Stock will qualify as Tier 1 capital and will pay cumulativedividends quarterly at a rate of 5% per annum for the first five years and 9%per annum thereafter. The Preferred Stock may be redeemed by the Company afterthree years. Prior to the end of the three years, the Preferred Stock may beredeemed only with proceeds from the sale of qualifying equity securities ofthe Company.

 

TheWarrant has a 10-year term and is immediately exercisable upon its issuance,with an exercise price, subject to anti-dilution adjustments, equal to $15.745per share, adjusted for the 2% stock dividend.

 

**The American Recovery andReinvestment Act of 2009**

 

On February 17,2009, President Obama signed into law The American Recovery and ReinvestmentAct of 2009 (the “Stimulus Bill”), more commonly known as the economic stimulusor economic recovery package.  TheStimulus Bill includes a wide variety of programs intended to stimulate theeconomy and provide for extensive infrastructure, energy, health and educationneeds.  In addition, the Stimulus Billimposes certain new executive compensation and corporate expenditure limits onall current and future TARP recipients, including the Company, that are inaddition to those previously announced by the U.S. Treasury, until theinstitution has repaid the U.S. Treasury, which is now permitted under theStimulus Bill without penalty and without the need to raise new capital,subject to the U.S. Treasury’s consultation with the recipient’s appropriateregulatory agency.

 

Inaddition, ARRA directs the Treasury to review previously-paid bonuses,retention awards and other compensation paid to senior executive officers andcertain other highly-compensated employees of each TARP recipient to determinewhether any such payments were excessive, inconsistent with the purposes ofARRA or the TARP, or otherwise contrary to the public interest. If the Treasurydetermines that any such payments have been 

 

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madeby a TARP recipient, the Treasury will seek to negotiate with the TARPrecipient and the subject employee for appropriate reimbursements to the U. S.Government (not the TARP recipient)  withrespect to any such compensation or bonuses. ARRA also permits the Treasury,subject to consultation with he appropriate federal banking agency, to allow aTARP recipient to repay any assistance previously provided to such TARPrecipient under the TARP, without regard to whether the TARP recipient hasreplaced such funds from any source, and without regard to any waiting period.Any TARP recipient that repays its TARP assistance pursuant to this provisionwould no longer be subject to the executive compensation provision under ARRA.

 

**HomeownerAffordability and Stability Plan**

 

OnFebruary 18, 2009, the Treasury announced the Homeowner Affordability andStability Plan (“HASP”), which proposes to provide refinancing for certainhomeowners, to support low mortgage rates by strengthening confidence in FannieMae and Freddie Mac, and to establish a Homeowner Stability Initiative to reachat-risk homeowners. Among other things, the Homeowner Stability Initiativewould offer monetary incentive to mortgage servicers and mortgage holders forcertain modifications of at-risk loans, and would establish an insurance funddesigned to reduce foreclosures.

 

**PromptCorrective Action and Other Enforcement Mechanisms**

 

Federal banking agencies possess broad powers to takecorrective and other supervisory action to resolve the problems of insureddepository institutions, including but not limited to those institutions thatfall below one or more prescribed minimum capital ratios described above. Aninstitution that, based upon its capital levels, is classified as wellcapitalized, adequately capitalized, or undercapitalized may be treated asthough it were in the next lower capital category if the appropriate federalbanking agency, after notice and opportunity for hearing, determines that anunsafe or unsound condition or an unsafe or unsound practice warrants suchtreatment. At each successive lower capital category, an insured depositoryinstitution is subject to more restrictions. The federal banking agencies,however, may not treat a significantly undercapitalized institution ascritically undercapitalized unless its capital ratio actually warrants suchtreatment.

 

In addition to measurestaken under the prompt corrective action provisions, commercial bankingorganizations may be subject to potential enforcement actions by the federalregulators for unsafe or unsound practices in conducting their businesses orfor violations of any law, rule, regulation, or any condition imposed inwriting by the agency or any written agreement with the agency.  Enforcement actions may include:

 

·                  the imposition of a conservator or the issuance of acease-and-desist order that can be judicially enforced;

·                  the termination of insurance of deposits (in the caseof a depository institution);

·                  the imposition of civil money penalties;

·                  the issuance of directives to increase capital;

·                  the issuance of formal and informal agreements;

·                  the issuance of removal and prohibition orders againstinstitution-affiliated parties; and

·                  the enforcement of such actions through injunctions orrestraining orders based upon a judicial determination that the agency would beharmed if such equitable relief was not granted.

 

Banks are also subject tocertain Federal Reserve Board restrictions on extensions of credit to executiveofficers, directors, principal shareholders or any related interests of suchpersons (i.e., insiders). Extensions of credit (1) must be made onsubstantially the same terms and pursuant to the same credit underwritingprocedures as those for comparable transactions with persons who are neitherinsiders nor employees, and (2) must not involve more than the normal riskof repayment or present other unfavorable features. Banks are also subject tocertain lending limits and restrictions on overdrafts to insiders. A violationof these restrictions may result in regulatory sanctions on the bank or itsinsiders.

 

Additionally,a holding company’s inability to serve as a source of strength to itssubsidiary banking organizations could serve as an additional basis for aregulatory action against the holding company

 

**Safety andSoundness Standards**

 

TheFederal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposescertain specific restrictions on transactions and requires federal bankingregulators to adopt overall safety and soundness standards for

 

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depositoryinstitutions related to internal control, loan underwriting and documentationand asset growth.  Among other things,FDICIA limits the interest rates paid on deposits by undercapitalizedinstitutions, restricts the use of brokered deposits, limits the aggregateextensions of credit by a depository institution to an executive officer,director, principal shareholder or related interest, and reduces deposit insurancecoverage for deposits offered by undercapitalized institutions for deposits bycertain employee benefits accounts. The federal banking agencies may require aninstitution to submit to an acceptable compliance plan as well as have theflexibility to pursue other more appropriate or effective courses of actiongiven the specific circumstances and severity of an institution’s noncompliancewith one or more standards.

 

**Premiums forDeposit Insurance**

 

Ourdeposits are insured by the FDIC to the maximum amount permitted by law whichis currently $250,000 per depositor through December 31, 2013. On January 1,2014, the standard insurance amount will return to $100,000 per depositor forall account categories except for IRAs and other certain retirement accountswhich will remain at $250,000 per depositor. On October 14, 2008, the FDICannounced the Temporary Transaction Account Guarantee Program to strengthenconfidence in the banking system. The rule, as amended, also allows fulldeposit insurance coverage for non-interest bearing accounts regardless of thedollar amount until June 30, 2010 at the participating FDIC-insuredinstitutions’ option. We have elected to participate in the program by paying a10 basis point surcharge on our non-interest bearing transaction accounts over$250,000 through December 31, 2009, and a 15 basis point surcharge throughJune 30, 2010. Effective April 1, 2009, the FDIC adopted a final rule revisingits risk-based insurance assessment system and effectively increasing the overallassessment rate. The new base assessment rate for banks in the best riskcategory range from twelve to sixteen cents annually for every $100 of domesticdeposits held. In addition, the FDIC also imposed a special assessment of fivebasis points on all insured institutions’ total assets minus Tier 1 capital at June 30,2009 in order to replenish the Deposit Insurance Fund.

 

**On November 12,2009, the FDIC finalized a Deposit Insurance Fund restoration plan thatrequired banks to prepay, on December 30, 2009, their estimated quarterlyrisk-based assessments for the fourth quarter of 2009 and for all of 2010,2011, and 2012. Under the plan, banks are assessed through 2010 according tothe risk-based premium schedule adopted in April 2009 However, beginning January 1,2011, the based rate increases by three basis points per year.**

 

**Sarbanes-Oxley Act of 2002**

 

On July 30,2002, the Sarbanes-Oxley Act of 2002 (“SOX”), was signed into law to addresscorporate and accounting fraud. SOX establishes a new accounting oversightboard that will enforce auditing standards and restricts the scope of servicesthat accounting firms may provide to their public company audit clients. Amongother things, SOX also (i) requires chief executive officers and chieffinancial officers to certify to the accuracy of periodic reports filed withthe SEC; (ii) imposes new disclosure requirements regarding internalcontrols, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures;(iii) accelerates the time frame for reporting of insider transactions andperiodic disclosures by public companies; and (iv) requires companies todisclose whether or not they have adopted a code of ethics for senior financialofficers and whether the audit committee includes at least one “audit committeefinancial expert.”

 

UnderSOX, the SEC is required to regularly and systematically review corporatefilings, based on certain enumerated factors. To deter wrongdoing, SOX: (i) subjectsbonuses issued to top executives to disgorgement if a restatement of a company’sfinancial statements was due to corporate misconduct; (ii) prohibits anofficer or director from misleading or coercing an auditor; (iii) prohibitsinsider trades during pension fund “blackout periods”; (iv) imposes newcriminal penalties for fraud and other wrongful acts; and (v) extends theperiod during which certain securities fraud lawsuits can be brought against acompany or its officers.

 

As apublic reporting company, the Company is subject to the requirements of SOX andrelated rules and regulations issued by the SEC and applied to the Companyby the FRB.  The Company’s common stockis not listed on any national exchange such as the NYSE or NASDAQ.  As such, the Company is not required tocomply with the additional SOX requirements adopted by such exchanges.  The Company anticipated additional expensesto comply with SOX in 2009 however, the requirement for compliance was delayedanother year.

 

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**FinancialServices Modernization Legislation**

 

On November 12,1999, the Gramm-Leach-Bliley Act of 1999 (the “Financial Services ModernizationAct”) was signed into law. The Financial Services Modernization Act is intendedto modernize the banking industry by removing barriers to affiliation amongbanks, insurance companies, the securities industry and other financial serviceproviders. It provides financial organizations with the flexibility of structuringsuch affiliations through a holding company structure or through a financialsubsidiary of a bank, subject to certain limitations. The Financial ServicesModernization Act establishes a new type of bank holding company, known as afinancial holding company, which may engage in an expanded list of activitiesthat are “financial in nature,” which include securities and insurancebrokerage, securities underwriting, insurance underwriting and merchantbanking.

 

TheFinancial Services Modernization Act also sets forth a system of functionalregulation that makes the Federal Reserve Board the “umbrella supervisor” forholding companies, while providing for the supervision of the holding company’ssubsidiaries by other federal and state agencies. In addition, the Company issubject to other provisions of the Financial Services Modernization Act,including those relating to CRA, privacy and safe-guarding confidentialcustomer information, regardless of whether the Company elects to become afinancial holding company or to conduct activities through a financialsubsidiary of the Company. The Company does not, however, currently intend tofile notice with the Federal Reserve Board to become a financial holdingcompany or to engage in expanded financial activities through a financialsubsidiary of the Company.

 

TheCompany does not believe that the Financial Services Modernization Act willhave a material adverse effect on its operations in the near-term. However, tothe extent that it permits banks, securities firms, and insurance companies toaffiliate, the financial services industry may experience further consolidation.The Financial Services Modernization Act is intended to grant to communitybanks certain powers as a matter of right that larger institutions have accumulatedon an ad hoc basis. Nevertheless, this act may have the result of increasingthe amount of competition that the Company faces from larger institutions andother types of companies offering financial products, many of which may havesubstantially more financial resources than the Company.

 

**CommunityReinvestment Act**

 

TheBank is subject to certain fair lending requirements and reporting obligationsinvolving home mortgage lending operations and Community Reinvestment Act (“CRA”)activities.  The CRA generally requiresthe federal banking agencies to evaluate the record of a financial institutionin meeting the credit needs of their local communities, including low andmoderate income neighborhoods.  Inaddition to substantial penalties and corrective measures that may be requiredfor a violation of certain fair lending laws, the federal banking agencies maytake compliance with such laws and CRA into account when regulating andsupervising other activities.  A bank’scompliance with its CRA obligations is based on a performance-based evaluationsystem which based CRA ratings on an institution’s lending service andinvestment performance, resulting in a rating by the appropriate bankregulatory agency of “outstanding”, “satisfactory”, “needs to improve” or “substantialnoncompliance.”  At its last examinationby the FRB, the Bank received a CRA rating of “Satisfactory.”

 

**USA Patriot Act of 2001**

 

On October 26, 2001, President Bush signed the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept andObstruct Terrorism, or the Patriot Act, of 2001. Among other things, thePatriot Act (i) prohibits banks from providing correspondent accountsdirectly to foreign shell banks; (ii) imposes due diligence requirementson banks opening or holding accounts for foreign financial institutions orwealthy foreign individuals (iii) requires financial institutions toestablish an anti-money-laundering compliance program, and (iv) eliminatescivil liability for persons who file suspicious activity reports. The PatriotAct also increases governmental powers to investigate terrorism, includingexpanded government access to account records and makes rules to implementthe Patriot Act.  On March 9, 2006,the President signed the USA Patriot improvement and Reauthorization Act, whichextended and modified the original act. While we believe the Patriot Act may, to some degree, affect ourrecordkeeping and reporting expenses, we do not believe that it will have amaterial adverse effect on our business and operations.

 

**Transactions between Affiliates**

 

Transactionsbetween The Company and its “affiliates” are quantitatively and qualitativelyrestricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B toinsured nonmember banks in the same manner and to the same extent as if theywere members of the Federal Reserve System. The FRB issued Regulation W on October 31, 2002, whichcomprehensively implements sections 23A and 23B of the Federal Reserve Act.  Sections 23A and 23B and Regulation Wrestrict loans by a depository institution to its affiliates, asset 

 

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purchasesby a depository institution from its affiliates, and other transactions betweena depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations ofsections 23A and 23B.  Regulation W hadan effective date of April 1, 2003.

 

**Privacy**

 

Federalbanking rules limit the ability of banks and other financial institutionsto disclose non-public information about consumers to non-affiliated thirdparties.  Pursuant to these rules,financial institutions must provide:

 

·                  initial notices to customers about their privacypolicies, describing the conditions under which they may disclose non-publicinformation to non-affiliated third parties and affiliates;

·                  annual notices of their privacy policies to currentcustomers; and

·                  a reasonable method for customers to “opt out” ofdisclosures to non-affiliated third parties.

 

Theseprivacy provisions affect how consumer information is transmitted throughdiversified financial companies and conveyed to outside vendors.  We have implemented our privacy policies inaccordance with the law.

 

Inrecent years, a number of states have implemented their own versions of privacylaws.  For example, in 2003, Californiaadopted standards that are more restrictive than federal law, allowing bankcustomers the opportunity to bar financial companies from sharing informationwith their affiliates.

 

**Predatory Lending**

 

Theterm “predatory lending”, much like the terms “safety and soundness” and “unfairand deceptive practices”, is far-reaching and covers a potentially broad rangeof behavior.  As such, it does not lenditself to a concise or a comprehensive definition.  But typically predatory lending involves atleast one, and perhaps all three, of the following elements:

 

·                  making unaffordable loans based on the assets of the borrower ratherthan on the borrower’s ability to repay an obligation or asset-based lending;

·                  inducing a borrower to refinance a loan repeatedly in order to chargehigh points and fees each time the loan is refinanced or loan flipping; and

·                  engaging in fraud or deception to conceal the true nature of the loanobligation from an unsuspecting or unsophisticated borrower.

 

Federal ReserveBoard regulations aimed at curbing such lending significantly widened the poolof high-cost home-secured loans covered by the home Ownership and EquityProtection Act of 1994, a federal law that requires extra disclosures andconsumer protections to borrowers.  Thefollowing triggers coverage under the home ownership and Equity Protection Actof 1994:

 

·                  interest rates for first lien mortgage loans in excess of 8 percentagepoints above comparable Treasury securities,

·                  subordinate lien loans of 10 percentage points above Treasurysecurities, and

·                  fees such as optional insurance and similar debt protection costs paidin connection with the credit transaction when combined with points and fees ifdeemed excessive.

 

Inaddition, the regulation bars loan flipping by the same lender of loan servicerwithin a year.  Lenders also will bepresumed to have violated the law; which says loans shouldn’t be made to peopleunable to repay them; unless they document that the borrower has the ability torepay.  Lenders that violate the rules facecancellation of loans and penalties equal to the finance charges paid.  The Company does not expect these rules andpotential state action in this area to have a material impact on our financialcondition or results of operations.

 

**BankSecrecy Act and Anti Money Laundering Legislation**

 

In1970, Congress passed the Currency and Foreign Transactions Reporting Act,otherwise known as the Bank Secrecy Act (the “BSA”), which establishedrequirements for recordkeeping and reporting by banks and other financialinstitutions.  The BSA was designed tohelp identify the source, volume and movement of currency and other monetaryinstruments into and out of the United States in order to help detect andprevent money laundering 

 

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connected with drug trafficking, terrorism and other criminalactivities.  The primary tool used toimplement BSA requirements is the filing of Suspicious Activity Reports.  Today, the BSA requires that all bankinginstitutions develop and provide for the continued administration of a programreasonable designed to assure and monitor compliance with certain recordkeepingand reporting requirements regarding both to domestic and internationalcurrency transactions.  These programsmust, at a minimum, provide for a system of internal controls to assure ongoingcompliance, provide for independent testing of such systems and compliance,designate individuals responsible for such compliance and provide appropriatepersonnel training.

 

**Commercial Real Estate Lending**

 

Federalbanking regulators recently issued final guidance regarding commercial realestate lending to address a concern that rising commercial real estate lendingconcentrations may expose institutions to unanticipated earnings and capitalvolatility in the event of adverse changes in the general commercial realestate market.  This guidance suggeststhat institutions that are potentially exposed to significant commercial realestate concentration risk will be subject to increased regulatoryscrutiny.  Institutions that haveexperienced rapid growth in commercial real estate lending, have notableexposure to specific types of commercial real estate lending, or areapproaching or exceed certain supervisory criteria that measure an institution’scommercial real estate portfolio against its capital levels, may be subject tosuch increased regulatory scrutiny.  Ourcommercial real estate portfolio may be viewed as falling within one or more ofthe foregoing categories, and accordingly we may become subject to increasedregulatory scrutiny because of our commercial real estate portfolio.  If it is determined by our regulator that wehave an undue concentration in commercial real estate lending, we may berequired to maintain increased levels of capital and/or be required to reduceour concentration in commercial real estate loans.

 

**Future Legislation and Regulatory Initiatives**

 

Various other legislative and regulatory initiatives, includingproposals to overhaul the banking regulatory system are from time to timeintroduced in Congress and state legislatures, as well as regulatory agencies.Currently, the Congress is actively considering significant changes to themanner of regulating financial institutions including combining one or more ofthe FRB, FDIC, Comptroller of the Currency and the Office of Thrift Supervisionand creating a new consumer protection agency for financial products. Thecurrent legislation being considered and other future legislation regardingfinancial institutions may change banking statutes and the operatingenvironment of Bancorp and the Bank in substantial and unpredictable ways, andcould increase or decrease the cost of doing business, limit or expandpermissible activities or affect the competitive balance depending upon whetherany of this potential legislation will be enacted, and if enacted, the effectthat it or any implementing regulations, would have on the financial conditionor results of operations of the Bancorp or the Bank. The nature and extent offuture legislative and regulatory changes affecting financial institutions isunpredictable at this time. We cannot determine the ultimate effect that suchpotential legislation, if enacted, would have upon our financial condition ofoperations.

 

**Where You Can Find More Information**

 

Underthe Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and currentreports must be filed with the SEC.  TheCompany electronically files the following reports with the SEC:  Form 10-K (Annual Report), Form ARS(Annual Report to Shareholders), Form 10-Q (Quarterly Report), Form 8-K(Current Report), insider ownership reports and Form DEF 14A (ProxyStatement).  The Company may fileadditional forms.  The SEC maintains anInternet site, www.sec.gov. in which all forms filed electronically may beaccessed.  Additionally, all forms filedwith the SEC and additional shareholder information is available free of chargeusing the Link on the Company’s website: www.santaluciabank.com.  TheCompany makes these reports available to the website as soon as reasonablepracticable after filing them with the SEC. None of the information on or hyperlinked from the Company’s website isincorporated into this Annual Report on Form 10-K.

 

**ITEM 1A.               RISKFACTORS**

 

**FACTORS THAT MAY AFFECT FUTURE RESULTS OFOPERATIONS**

 

Aninvestment in our common stock is subject to risks inherent to our business.The material risks and uncertainties that management believes may affect ourbusiness are described below. Before making an investment decision, you shouldcarefully consider the risks and uncertainties described below together withall of the other information included or incorporated by reference in thisAnnual Report. The risks and uncertainties described below are not the onlyones facing our business. Additional risks and uncertainties that management isnot aware of or focused on or that management currently deems immaterial mayalso impair our business operations. This Annual

 

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Report is qualified in its entirety by these factors.

 

If any of the following risks actually occur, our financial conditionand results of operations could be materially and adversely affected.  If this were to happen, the value of ourcommon stock could decline significantly, and you could lose all or part ofyour investment.

 

**Risks Associated with our Business.**

 

**Recession and changes in domesticand foreign financial markets may have a material negative impact on ourresults of operations and financial condition.**

 

Economic indices continueto show that since the fourth quarter of 2007, the United States economy hasbeen in a recession. This has been reflected in significant business failuresand job losses, including bankruptcies of three U.S. automobile manufacturingcompanies county and state budget cuts causing furloughing and is expected tocontinue in 2010.

 

In addition, in the pastyear, the domestic and foreign financial markets, securities trading marketsand economies generally have experienced significant turmoil including, withoutlimitation, government takeovers of troubled institutions, government brokeredmergers of such firms to avoid bankruptcy or failures, bankruptcies ofsecurities trading firms and insurance companies, failures of financialinstitutions and securities brokerage firms, declines in real property values,and wide fluctuations in energy prices, all of which have contributed toreduced availability of credit for businesses and consumers, elevatedforeclosures on residential and commercial properties, falling home prices,reduced liquidity and a lack of stability across the entire financialsector.  These recent events and the corresponding uncertainty anddecline in financial markets are likely to continue for the foreseeablefuture.  The full extent of the repercussions to our nation’s economyin general and our business in particular there from are not fully known atthis time.  Such events may have a negative effect on (i) ourability to service our existing customers and attract new customers, (ii) theability of our borrowers to operate their business as successfully as in thepast, (iii) the financial security and net worth of our customers, and (iv) theability of our customers to repay their loans with us in accordance with theterms thereof.

 

We do not believe thesedifficult conditions are likely to improve in the near future.  Aworsening of these conditions would likely exacerbate the adverse effects ofthese difficult market and economic conditions on us, our customers and theother financial institutions in our market.

 

**Current levels of market volatility areunprecedented, which may limit our ability to access capital and negativelyaffect our results of operations and financial condition.**

 

The capital and creditmarkets have been experiencing volatility and disruption for more than a year.In recent months, the volatility and disruption has reached unprecedentedlevels.  In some cases, the markets have produced downward pressureon stock prices and credit availability for certain issuers without regard tothose issuers’ underlying financial strength. If current levels of marketdisruption and volatility continue or worsen, there can be no assurance that wewill not experience an adverse effect, which may be material, on our ability toaccess capital and on our business, financial condition and results ofoperations.

 

**The current changing economicenvironment poses significant challenges for us.**

 

We are operating in achallenging and uncertain economic environment, including generally uncertainnational and local conditions.  Financialinstitutions continue to be affected by the softening of the real estate marketand constrained financial markets.  Whilewe have very limited direct exposure to the residential real estate market andwhile we have no sub-prime residential loans or securities backed by such loanson our books, we are nevertheless affected by these events.  Continued declines in real estate values,home sales volumes and financial stress on borrowers as a result of theuncertain economic environment, including job losses, interest rate resets onadjustable rate mortgage loans and other factors could have adverse effects onour borrowers which would adversely affect our financial condition and resultsof operations.  This deterioration ineconomic conditions coupled with a possible national economic recession coulddrive losses beyond that which is provided for in our allowance for loan lossesand result in the following other consequences:

 

·                  Loan delinquencies, problem assets and foreclosures may increase;

·                  Demand for our products and services may decline;

 

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·                  Low cost or non-interest bearing deposits may decrease; and

·                  Collateral for our loans, especially real estate, may decline in value,in turn reducing customers’ borrowing power, and reducing the value of assetsand collateral associate with our existing loans.

 

**A significant portion of our loan portfolio issecured by real estate and a further downturn in the local economy and realestate market could affect our business.**

 

At December 31,2009, real estate served as the principal source of collateral with respect toapproximately 79% of our loan portfolio. A decline in current economicconditions could have an adverse effect on the demand for new loans even ifrates continue to decline.  It is alsounderstood that the ability of borrowers to repay outstanding loans, the valueof real estate and other collateral securing loans and the value of real estateowned by the Company, could affect the Company’s financial condition and resultsof operations in general and the market value of the Company’s commonstock.  Acts of nature, includingearthquakes and floods, which may cause uninsured damage and other loss ofvalue to real estate that secures these loans, may also negatively impact theCompany’s financial condition.

 

Acts of nature, includingearthquakes, floods and fires, which may cause uninsured damage and other lossof value to real estate that secures these loans, may also negatively impactour financial condition.

 

**We also have a high concentration in commercialreal estate or CRE loans, which generally present increased levels of risk toour results of operation and financial condition.**

 

CREloans generally involve a higher degree of credit risk than residentialmortgage lending due, among other things, to the large amounts loaned toindividual borrowers.  Losses incurred onloans to a small number of borrowers could have a material adverse impact onour income and financial condition. Unlike residential mortgage loans, commercial real estate loansgenerally depend on the cash flow from the property to service the debt.  Cash flow may be significantly affected bygeneral economic conditions.

 

Withinthe makeup of our CRE, approximately 30% of our commercial term loans are grantedfor owner use, which is repaid from the cash flow of the owner’s business.  This coupled with the diversification ofbusiness types, location, conservative underwriting and loss history furthermitigates the risk in our CRE portfolio. The Company targets commercial term loans for owners use as it supportsthe local business economy.  The Companyfeels that owner occupied properties do not carry the same risk as commercialstrip centers and other income properties with higher vacancy factors that relyon third parties for repayment.

 

Inaddition, federal banking regulators have issued final guidance regardingcommercial real estate lending.  Thisguidance suggests that institutions that are potentially exposed to significantcommercial real estate concentration risk will be subject to increasedregulatory scrutiny.  Institutions thathave experienced rapid growth in commercial real estate lending, have notableexposure to specific types of commercial real estate lending, or areapproaching or exceed certain supervisory criteria that measure an institution’scommercial real estate portfolio against its capital levels, may be subject tosuch increased regulatory scrutiny.  Ourcommercial real estate portfolio may be viewed as falling within one or more ofthe foregoing categories, and accordingly we may become subject to increasedregulatory scrutiny because of our commercial real estate portfolio.  If it is determined by our regulator that wehave an undue concentration in commercial real estate lending, we may berequired to maintain increased levels of capital and/or be required to reduceour concentration in commercial real estate loans.

 

**Recentlyenacted legislation and other measures undertaken by the Treasury, the FRB andother governmental agencies may not help stabilize the U.S. financial system orimprove the housing market, which in turn may have a material negative impacton our results of operations and financial condition..**

 

On October 3, 2008,President Bush signed into law the Emergency Economic Stabilization Act of 2008(the “EESA”), which, among other measures, authorized the Treasury Secretary toestablish the Troubled Asset Relief Program (“TARP”). EESA gives broadauthority to Treasury to purchase, manage, modify, sell and insure the troubledmortgage related assets that triggered the current economic crisis as well asother “troubled assets.” EESA includes additional provisions directed atbolstering the economy, including:

 

·                  Authority for the FRB to pay interest ondepository institution balances;

 

·                  Mortgage loss mitigation and homeowner protection; 

 

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·                  Temporary increase in FDIC insurance coverage from $100,000 to $250,000through December 31, 2009; and

 

·                  Authority to the SEC to suspend mark-to-market accounting requirementsfor any issuer or class of category of transactions.

 

Pursuant to the TARP, theTreasury has the authority to, among other things, purchase up to $700 billionof mortgages, mortgage-backed securities and certain other financialinstruments from financial institutions for the purpose of stabilizing andproviding liquidity to the U.S. financial markets. Under the TARP, theTreasury has created a capital purchase program, pursuant to which it isproviding access to capital to financial institutions through a standardizedprogram to acquire preferred stock (accompanied by warrants) from eligiblefinancial institutions that will serve as Tier 1 capital.

 

EESA also contains anumber of significant employee benefit and executive compensation provisions,some of which apply to employee benefit plans generally, and others whichimpose on financial institutions that participate in the TARP programrestrictions on executive compensation.

 

EESA followed, and hasbeen followed by, numerous actions by the Federal Reserve, Congress, Treasury,the SEC and others to address the liquidity and credit crisis that has followedthe sub-prime meltdown that commenced in 2007. These measures includehomeowner relief that encourage loan restructuring and modification; theestablishment of significant liquidity and credit facilities for financialinstitutions and investment banks; the lowering of the federal funds rate;emergency action against short selling practices; a temporary guaranty programfor money market funds; the establishment of a commercial paper fundingfacility to provide back-stop liquidity to commercial paper issuers;coordinated international efforts to address illiquidity and other weaknessesin the banking sector.

 

On October 14, 2008,the FDIC announced the establishment of a temporary liquidity guarantee programto provide insurance for all non-interest bearing transaction accounts andguarantees of certain newly issued senior unsecured debt issued byfinancial institutions (such as the Bank) and bank holding companies (such asthe Company). Under the program, newly issued senior unsecured debt issuedon or before June 30, 2009 will be insured in the event the issuinginstitution subsequently fails, or its holding company files forbankruptcy. The debt includes all newly issued unsecured senior debt(e.g., promissory notes, commercial paper and inter-bank funding). Theaggregate coverage for an institution may not exceed 125% of its debtoutstanding on December 31, 2008 that was scheduled to mature before June 30,2009. The guarantee will extend to June 30, 2012 even if the maturityof the debt is after that date.

 

On February 17,2009, President Obama signed into law The American Recovery and ReinvestmentAct of 2009 (the “Stimulus Bill”), more commonly known as the economic stimulusor economic recovery package.  The StimulusBill includes a wide variety of programs intended to stimulate the economy andprovide for extensive infrastructure, energy, health and education needs.  In addition, the Stimulus Bill imposescertain new executive compensation and corporate expenditure limits on allcurrent and future TARP recipients that are in addition to those previouslyannounced by the Treasury.

 

The actual impact thatEESA, the Stimulus Bill and such related measures undertaken to alleviate thecredit crisis will have generally on the financial markets, including theextreme levels of volatility and limited credit availability currently beingexperienced, is unknown. The failure of such measures to help stabilizethe financial markets and a continuation or worsening of current financialmarket conditions could materially and adversely affect our business, financialcondition, results of operations, access to credit or the trading price of ourcommon stock.

 

**Deposit insurance assessmentswill increase substantially, which will adversely affect profits.**

 

FDIC deposit insuranceexpense for the year ended December 31, 2009 was $468,830.00. Depositinsurance assessments will increased in 2009 due to the strains on the FDICdeposit insurance fund resulting from the cost of recent bank failures and anincrease in the number of banks likely to fail over the next few years. On December 16, 2008, the FDIC issued a final rule increasing thatassessment range for the first quarter of 2009 and levied a special assessmenton all Banks during the first six months of 2009. During the last two quartersof 2009 the FDIC further levied a prepayment assessment on banks to be paid in December 2009for the periods of January 2010 to December of 2012.

 

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**Our real estate lending also exposes us to the riskof environmental liabilities.**

 

In the course of our business, we may foreclose andtake title to real estate, and could be subject to environmental liabilitieswith respect to these properties.  We maybe held liable to a governmental entity or to third persons for propertydamage, personal injury, investigation and clean-up costs incurred by theseparties in connection with environmental contamination, or may be required toinvestigate or clean up hazardous or toxic substances, or chemical releases ata property.  The costs associated withinvestigation or remediation activities could be substantial.  In addition, as the owner or former owner ofa contaminated site, we may be subject to common law claims by third partiesbased on damages and costs resulting from environmental contamination emanatingfrom the property.  If we ever becomesubject to significant environmental liabilities, our business, financialcondition, liquidity and results of operations could be materially andadversely affected.

 

**Our business is subject tointerest rate risk and changes in interest rates may adversely affect ourperformance and financial condition.**

 

Our earnings are impacted by changing interest rates.Changes in interest rates impact the demand for new loans, the credit profileof our borrowers, the rates received on loans and securities and rates paid ondeposits and borrowings. The difference between the rates received on loans andsecurities and the rates paid on deposits and borrowings is known as interestrate spread. Given our current volume and mix of interest-bearing liabilitiesand interest-earning assets, we would expect our interest rate spread toincrease if interest rates rise and, conversely, to decline if interest ratesfall. Increasing levels of competition in the banking and financial servicesbusiness may decrease our net interest margin by forcing us to offer lower lendinginterest rates and pay higher deposit interest rates. Although we believe ourcurrent level of interest rate sensitivity is reasonable, significantfluctuations in interest rates and increasing competition may have an adverseeffect on our business, financial condition and results of operations.

 

A sustained decrease inmarket interest rates could adversely affect our earnings.  When interest rates decline, borrowers tendto refinance higher-rate, fixed-rate loans at lower rates, prepaying their existingloans.  Under those circumstances, wewould not be able to reinvest those prepayments in assets earning interestrates as high as the rates on the prepaid loans.  In addition, our commercial real estate andcommercial loans, which carry interest rates that, in general, adjust inaccordance with changes in the prime rate, will adjust to lower rates.  We are also significantly affected by thelevel of loan demand available in our market. The inability to make sufficientloans directly affects the interest income we earn. Lower loan demand willgenerally result in lower interest income realized as we place funds in loweryielding investments.

 

**Economicconditions in the Central Coast of California area could adversely affect ouroperations and/or cause us to sustain losses.**

 

Ourretail and commercial banking operations are concentrated primarily in San LuisObispo and northern Santa Barbara Counties. As a result of this geographic concentration, our results of operationsdepend largely upon economic conditions in this area.  A significant source of risk arises from thepossibility that losses will be sustained if a significant number of ourborrowers, guarantors and related parties fail to perform in accordance with theterms of their loans. This risk increases when the economy is weak. We haveadopted underwriting and credit monitoring procedures and credit policies,including the establishment and review of the allowance for credit losses, thatmanagement believes are appropriate to minimize this risk by assessing thelikelihood of nonperformance, tracking loan performance and diversifying ourcredit portfolio. These policies and procedures, however, may not preventunexpected losses that could adversely affect our results of operations ingeneral and the market value of our stock.

 

**We facestrong competition from financial service companies and other companies thatoffer banking services that could hurt our business.**

 

Thefinancial services business in our market areas is highly competitive. It isbecoming increasingly competitive due to changes in regulation, technologicaladvances, and the accelerating pace of consolidation among financial servicesproviders. We face competition both in attracting quality assets and depositsand in making loans. We compete for loans principally through the interestrates and loan fees we charge and the efficiency and quality of services weprovide. Increasing levels of competition in the banking and financial servicesbusiness may reduce our market share, decrease loan demand, cause the prices wecharge for our services to fall, or decrease our net interest margin, which isour net interest income divided by our average earning assets, by forcing us tooffer lower lending 

 

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interest rates and pay higher deposit interest rates.  Therefore, our results may differ in futureperiods depending upon the nature or level of competition.

 

Technologyand other changes are allowing parties to complete financial transactions thathistorically have involved banks through alternative methods. For example,consumers can now maintain funds that would have historically been held as bankdeposits in brokerage accounts or mutual funds. Consumers can also completetransactions such as paying bills and/or transferring funds directly withoutthe assistance of banks. The process of eliminating banks as intermediaries,known as “disintermediation,” could result in the loss of fee income, as wellas the loss of customer deposits and the related income generated from thosedeposits. The loss of these revenue streams and the lower cost deposits as asource of funds could have an adverse effect on our financial condition andresults of operations.

 

**Failure to successfully executeour strategy could adversely affect our performance.**

 

Ourfinancial performance and profitability depends on our ability to execute ourcorporate growth strategy.  Continuedgrowth, however, may present operating and other problems that could adverselyaffect our business, financial condition and results of operations.  Factors that may adversely affect our abilityto attain our long-term financial performance goals include those stated elsewherein this section, as well as:

 

·                  inability to control non-interest expense, including, but not limitedto, rising employee and healthcare costs;

·                  inability to increase non-interest income; and

·                  continuing ability to expand, through de novo branching and/oracquisitions of other banks.

 

**We may not be able to attract and retain skilledpeople, which could adversely affect our performance and our ability to competeeffectively**.

 

Our success depends, in large part, on our ability toattract and retain key people. Competition for the best people in most of ouractivities can be intense and we may not be able to hire people or to retainthem. The unexpected loss of services of one or more of our key personnel couldhave an adverse impact on our business because of their skills, knowledge of ourmarket, years of industry experience and the difficulty of promptly findingqualified replacement personnel.

 

**Ourinternal operations are subject to a number of risks that could adverselyaffect our financial condition and results of operations.**

 

We are subject tocertain operations risks, including, but not limited to, data processing systemfailures and errors, customer or employee fraud and catastrophic failuresresulting from terrorist acts or natural disasters. We maintain a system ofinternal controls to mitigate against such occurrences and maintain insurancecoverage for such risks that are insurable, but should such an event occur thatis not prevented or detected by our internal controls, uninsured or in excessof applicable insurance limits, it could have a significant adverse impact onour business, financial condition or results of operations.

 

*InformationSystems*.  We rely heavily on communications andinformation systems to conduct our business. Any failure, interruption orbreach in security of these systems could result in failures or disruptions inour customer relationship management, general ledger, deposit, loan and othersystems. While we have policies and procedures designed to prevent or limit theeffect of the failure, interruption or security breach of our informationsystems, there can be no assurance that any such failures, interruptions orsecurity breaches will not occur or, if they do occur, that they will beadequately addressed. The occurrence of any failures, interruptions or securitybreaches of our information systems could damage our reputation, result in aloss of customer business, subject us to additional regulatory scrutiny, orexpose us to civil litigation and possible financial liability, any of whichcould have a material adverse effect on our financial condition and results ofoperations.

 

*TechnologicalAdvances*. Thefinancial services industry is continually undergoing rapid technologicalchange with frequent introductions of new technology-driven products and services.The effective use of technology increases efficiency and enables financialinstitutions to better serve customers and to reduce costs. Our future successdepends, in part, upon our ability to address the needs of our customers byusing technology to provide products and services that will satisfy customerdemands, as well as to create additional efficiencies in our operations.

 

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*NaturalDisasters, Acts Of War Or Terrorism and Other External Events*. Natural disasters, acts of war or terrorism and other adverse externalevents could have a significant impact on our ability to conduct business. Suchevents could affect the stability of our deposit base, impair the ability ofborrowers to repay outstanding loans, impair the value of collateral securingloans, cause significant property damage, result in loss of revenue and/orcause us to incur additional expenses. For example, the Central Coast region ofCalifornia is subject to earthquakes and fires. Operations in our market could be disrupted by both the evacuation oflarge portions of the population as well as damage and or lack of access to ourbanking and operation facilities. While we have not experienced such anoccurrence to date, other severe weather or natural disasters, acts of war orterrorism or other adverse external events may occur in the future. Althoughmanagement has established disaster recovery policies and procedures, theoccurrence of any such event could have an adverse effect on our business,which, in turn, could have an adverse effect on our financial condition andresults of operations.

 

**We dependon cash dividends from our subsidiary bank to meet our cash obligations.**

 

As a holdingcompany, dividends from our subsidiary bank provide a substantial portion ofour cash flow used to service our obligations, including cash dividends.  See “Item 5 — Market for Common Equity andRelated Stockholder Matters.”  Variousstatutory provisions restrict the amount of dividends our subsidiary bank canpay to us without regulatory approval.

 

**Risks Associated with our Industry.**

 

**We are subject to government regulationthat could limit or restrict our activities, which in turn could adverselyimpact our operations.**

 

The financial servicesindustry is regulated extensively. Federal and State regulation is designedprimarily to protect the deposit insurance funds and consumers, and not tobenefit our shareholders. These regulations can sometimes impose significantlimitations on our operations.

 

Further, federal monetarypolicy, particularly as implemented through the Federal Reserve System,significantly affects economic conditions for us.

 

**New legislative and regulatory proposals may affect ouroperations and growth.**

 

Proposals to change the laws and regulations governing the operations andtaxation of, and federal insurance premiums paid by, banks and other financialinstitutions and companies that control such institutions are frequently raisedin the U.S. Congress, state legislatures and before bank regulatoryauthorities. The likelihood of any major changes in the future and the impactsuch changes might have on us or our subsidiaries are impossible to determine.Similarly, proposals to change the accounting treatment applicable to banks andother depository institutions are frequently raised by the SEC, the federalbanking agencies, the IRS and other appropriate authorities. The likelihood andimpact of any additional future changes in law or regulation and the impactsuch changes might have on us or our subsidiaries are impossible to determineat this time.

 

**RisksAssociated with our Stock.**

 

**Ouroutstanding preferred stock impacts net income available to our commonstockholders and earnings per common share and the warrant issued to the U.S.Treasury as well as other potential issuances of equity securities may bedilutive to holders of our common stock.**

 

Thedividends declared and the accretion on our outstanding preferred stock willreduce the net income available to common stockholders and our earnings percommon share.  Our outstanding preferredstock will also receive preferential treatment in the event of our liquidation,dissolution or winding-up.  Additionally,the ownership interest of the existing holders of our common stock will bediluted to the extent the warrant issued to the U.S. Treasury is exercised.  Although the U.S. Treasury has agreed not tovote any of the shares of common stock it receives upon exercise of thewarrant, a transferee of any portion of the warrant or of any shares of commonstock acquired upon exercise of the warrant is not bound by this restriction.  In addition, to the extent options topurchase common stock under our employee and director stock option plans areexercised, holders of our common stock will incur additional dilution.  Further, if we sell additional equity orconvertible debt securities, such sales could result in increased dilution toour shareholders.

 

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**Ourstock trades less frequently than others.**

 

Although our common stock is quoted on the over-the-counter market, thetrading volume in our common stock is less than that of other larger financialservices companies.  A public tradingmarket having the desired characteristics of depth, liquidity and orderlinessdepends on the presence in the marketplace of willing buyers and sellers of ourcommon stock at any given time.  Thispresence depends on the individual decisions of investors and general economicand market conditions over which we have no control.  Given the lower trading volume of our commonstock, significant sales of our common stock, or the expectation of thesesales, could cause out stock price to fall.

 

**Ourstock price is affected by a variety of factors.**

 

Stock price volatility may make it more difficult for you to resell yourcommon stock when you want and at prices you find attractive.  Our stock price can fluctuate significantlyin response to a variety of factors discussed in this section, including amongother things:

 

·      Actual or anticipatedvariations in quarterly results of operations

·      Shareholders Financialhardships

·      Recommendations by securitiesanalysts

·      Operating and stock priceperformance of other companies that investors deem comparable to our company

·      News reports relating totrends, concerns and other issues in the financial services industry

·      Perceptions in themarketplace regarding our company and/or its competitors

 

**Our common stock is not an insureddeposit**.

 

Our common stock is not a bank deposit and,therefore, is not insured against loss by the FDIC, any other deposit insurancefund or by any other public or private entity. Investment in our common stockis inherently risky for the reasons described in this “Risk Factors” sectionand elsewhere in this report and is subject to the same market forces thataffect the price of common stock in any company. As a result, if you acquireour common stock, you may lose some or all of your investment

 

**Our articles of incorporation and by-laws, as wellas certain banking laws, may have an anti-takeover effect****.**

 

Provisions of our articles of incorporation, bylaws and federal bankinglaws, including regulatory approval requirements, could make it more difficultfor a third party to acquire us, even if doing so would be perceived to bebeneficial to our shareholders. The combination of these provisions may hindera non-negotiated merger or other business combination, which, in turn, couldadversely affect the market price of our common stock.

 

**ITEM1B. Unresolved Staff Comments**

 

TheCompany has no unresolved comments received from staff at the SEC.

 

**ITEM 2.****                 ****PROPERTIES**

 

The Company conducts itsbanking operations from four offices. The Company owns the land and building of its office located at 7480 ElCamino Real, in Atascadero, California. The building is a two-story building ofapproximately 16,500 square feet.

 

The Company owns the landand building of its office located at 1240 Spring Street, Paso Robles,California. The Bank occupies approximately 7,200 square feet on the groundfloor of the building and 2,800 square feet in the basement is used for recordsstorage and as a staff room.

 

The Company owns the landand building of its office located at 1530 East Grand Avenue in ArroyoGrande.  The building is a two-storybuilding of approximately 10,200 square feet.

 

The Company owns the landand a two-story building of approximately 10,000 square feet which houses itsoffice located at 1825 South Broadway, Santa Maria, California.

 

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The Company believes thatall of its properties are well maintained and are suitable for their respectivepresent needs and operations.

 

**ITEM 3.****                 ****LEGALPROCEEDINGS**

 

The Company is, from time to time, subject to variouspending and threatened legal actions which arise out of the normal course ofits business. The Company is not a party to any pending legal or administrativeproceedings (other than ordinary routine litigation incidental to the Company’sbusiness) and no such proceedings are known to be contemplated.

 

There are no materialproceedings adverse to the Company to which any director, officer, affiliate ofthe Company or 5% shareholder of the Company, or any associate of any suchdirector, officer, affiliate or 5% shareholder of the Company is a party, andnone of the above persons has a material interest adverse to the Company.

 

There are no materialproceedings adverse to the Company to which any Director, Officer or affiliateof the Company is a party.

 

**ITEM 4.****                 ****(REMOVEDAND RESERVED)**

 

# **PART II**

 

**ITEM 5.****                 ****MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

**MarketInformation**

 

The Company’s Common Stock is not listed on any exchange or market.However, Morgan Stanley, Howe Barnes Hoefer & Arnett, Inc.,Edward Jones, Wedbush Morgan Securities, UBS Financial Services, Inc., andMcAdams Wright and Ragen each actively make a market****inthe Company’s Common Stock. Certain information concerning the Common Stock isquoted on the OTC Bulletin Board under the symbol “SLBA.OB”

 

The information in thefollowing table indicates the high and low bid prices of the Company’s CommonStock for each quarterly period during the last two years based uponinformation provided by certain of the firms mentioned above who serve as theCompany’s market makers. These prices do not include retail mark-ups,mark-downs or commission.

 
| ** **         | ** **        | **Bid Prices** | ** ** |
|--------------------|-------------------|----------------|------------|
| **Quarter  Ended** | ** **        | **Low**        | ** ** | **High** | ** ** |
|               |              |           |       |   |   |
| 2009               |              |           |       |   |   |   |
|               | December 31  |           | $          | 10.10 |   | $ | 11.89 |   |
|               | September 30 |           | 11.55      |   | 15.00 |   |
|               | June 30      |           | 10.50      |   | 13.00 |   |
|               | March 31     |           | 8.20       |   | 14.75 |   |
| 2008               |              |           |       |   |   |   |
|               | December 31  |           | $          | 13.50 |   | $ | 19.00 |   |
|               | September 30 |           | 14.25      |   | 21.50 |   |
|               | June 30      |           | 20.00      |   | 24.25 |   |
|               | March 31     |           | 23.25      |   | 25.00 |   |

 

The foregoing table is based on data reported by themarket makers named above. Does not include information on shares traded directlyby shareholders or through other dealers.

 

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**Holders**

 

The Company has twoclasses of stock outstanding — Common and Series A Preferred. As of March 4,2010 there were approximately 367 record holders of the Company’s Common Stock.

 

**Dividends**

 

The following table sets forth the per share amount and month ofpayment for all cash dividends paid since January 1, 2008:

 
| **Month Paid**      | ** ** | **Amount Per Share** | ** ** |
|---------------------|------------|----------------------|------------|
| March 2008     |       | $                    | 0.25       |   |
| September 2008 |       | $                    | 0.25       |   |
| March 2009     |       | $                    | 0.25       |   |

 

The Company has paid a cash dividend for the past 20 years and issued a2% stock dividend in October 2009.

 

The Company is alegal entity separate and distinct from the Bank.  The Company’s shareholders are entitled toreceive dividends when declared by its Board of Directors, out of funds legallyavailable therefore, subject to the restrictions set forth in the CaliforniaGeneral Corporation Law (the Corporation law). The Corporation Law provides that a corporation may make a distributionto its shareholders if the corporation’s retained earnings equal at least theamount of the proposed distribution.  TheCorporation Law also provides that, in the event that sufficient retainedearnings are not available for the proposed distribution, a corporation may,nevertheless, make a distribution to its shareholders if it meets twoconditions, which generally states are as follows: (i) the corporation’sassets equal 1-1/4 times its liabilities, and (ii) the corporation’scurrent assets equal at least its current liabilities or, if the average of thecorporation’s earnings before taxes on income and before interest expenses forthe two preceding fiscal years was less than the average of the corporation’sinterest expenses for such fiscal years, then the corporation’s interestexpenses for such fiscal years, then the corporation’s current assets mustequal at least 1-1/4 times its current liabilities. As a regulated bank holdingcompany, the Reserve Board’s restrictions may also limit the Company’s abilityto pay cash dividends. Generally, a bank holding company must consult with theReserve Board prior to payment of a proposed cash dividend, if the company didnot have sufficient earnings in the prior four quarters at least equal to theproposed dividend and other holding company obligations.

 

The ability of the Company to pay a cash dividend depends largely onthe Bank’s ability to pay a cash dividend to the Company.  The payment of cash dividends by the Bank issubject to restrictions set forth in the California Financial Code (theFinancial Code).  The Financial Codeprovides that a bank may not make a cash distribution to its shareholders inexcess of the lesser of (a) the bank’s retained earnings; or (b) thebank’s net income for its last three fiscal years, less the amount of anydistributions made by the bank or by an majority-owned subsidiary of the bankto the shareholders of the bank during such period.  However, a bank may, with the approval of theDFI, make a distribution to its shareholders in an amount not exceeding thegreater of (x) its retained earnings; (y) its net income for its lastfiscal year; or (z) its net income for its current fiscal year.  In the event that the DFI determines that theshareholders’ equity of the bank is inadequate or that the making of adistribution by the bank would be unsafe or unsound, the DFI may order the bankto refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment ofsuch dividends, the bank would be included in one of the “undercapitalized”categories for capital adequacy purposes pursuant to federal law (See, “Item 1 —Prompt Corrective Action and Other Enforcement Mechanisms.”) Additionally,while the Federal Reserve Board has no general restriction with respect to thepayment of cash dividends by an adequately capitalized bank to its parentholding company, the Federal Reserve Board might, under certain circumstances,place restrictions on the ability of a particular bank to pay dividends basedupon peer group averages and the performance and maturity of the particularbank, or object to management fees to be paid by a subsidiary bank to itsholding company on the basis that such fees cannot be supported by the value ofthe services rendered or are not the result of an arm’s length transaction.

 

The Company’s juniorsubordinated debt agreements contain provisions which prohibit the paying ofdividends if it defers payment of interest on outstanding trust preferredsecurities (See “Item I. Business — Supervision and Regulation — CapitalStandards”)

 

The Company’s participation in the TARP Capital Purchase Programincludes restrictions on the amount of dividends that can be paid to commonshareholders. The Company can not pay a dividend greater than the prior 

 

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dividend declaredunless prior approval from the United States Treasury is granted. Additionally,the Company will be prohibited from continuing to pay dividends on its commonstock unless the Company has fully paid all required dividends on the preferredstock issued to the Treasury.  The Company fully expects to be ableto pay all required dividends on the preferred stock, but if for any reason theCompany is unable to do so in the future, then the Company would be precludedfrom paying dividends on its common stock. Based on a number of factors, including but not limited to the Company’srecent financial performance, the economic climate, and the restrictionsdescribed above, the Company has suspended its practice of paying cashdividends. The Company will periodically review this suspension.

 

**ITEM 6**.                  **SELECTED FINANCIAL DATA**

 

**Theinformation required by Item 6 of Form 10-K is incorporated by Referencefrom the section entitled “Management’s Discussion and Analysis and Results ofOperations” in the Company’s 2009 Annual Report to Shareholders,**included as an exhibit to this AnnualReport.

 

**ITEM 7.****                                                    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

** **

**Theinformation required by Item 7 of Form 10-K is incorporated by referencefrom the section entitled “Management’s Discussion and Analysis and Results ofOperations” in the Company’s 2009 Annual Report to Shareholders,**included as an exhibit to this AnnualReport.

 

**ITEM 7A. - QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUTMARKET RISK**

 

Market risk is the risk of loss in a financialinstrument arising from adverse changes in market prices, interest rates,foreign currency exchange rates, commodity prices and equity prices. TheCompany’s market risk arises primarily from interest rate risk inherent in itslending and deposit taking activities. Management uses various asset/liabilitystrategies to manage the re-pricing characteristics of the Company’s earningassets and funding liabilities to ensure that exposure to interest ratefluctuations is within its guidelines of acceptable risk-taking. Hedgingstrategies, including the terms and pricing of loans and deposits, and managingthe deployment of the Company’s securities are used to reduce mismatches ininterest rate re-pricing opportunities of portfolio assets and their fundingsources.

 

Interest rate risk is addressed by our AssetLiability Management Committee (“ALCO”) which is comprised of senior managementofficers of the bank. The ALCO monitors interest rate risk by analyzing thepotential impact on the net equity value and net interest income from potentialchanges in interest rates, and considers the impact of alternative strategiesor changes in balance sheet structure. The ALCO manages the Company’s balancesheet in part to maintain, within acceptable ranges, the potential impact onnet equity value and net interest income despite fluctuations in marketinterest rates.

 

Exposure to interest rate risk is reviewed on atleast a quarterly basis by the ALCO and the Board of Directors. Interest raterisk exposure is measured using interest rate sensitivity analysis to determinethe change in net portfolio value in the event of hypothetical changes ininterest rates. If potential changes to net equity value and net interestincome resulting from hypothetical interest rate changes are not within thelimits established by the Board of Directors, management may adjust the assetand liability mix to bring interest rate risk within approved limits.

 

**ITEM 8.****                 ****FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA**

** **

The financial statementsand the notes thereto required by Item 8 of Form 10-K are incorporated byreference from the Company’s 2009 Annual Report to Shareholders, included as anexhibit to this Annual Report.

 

**ITEM 9.****                                                   ****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None

 

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**ITEM 9A .****             ****CONTROLSAND PROCEDURES**

** **

**Evaluationof Disclosure Controls and Procedures**

 

TheCompany’s management carried out an evaluation, under the supervision and withthe participation of the Company’s President and Chief Executive Officer andthe Company’s Executive Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of December 31, 2009, pursuant to Exchange Act Rule 13a-15.Based upon that evaluation, the Company’s President and Chief Executive Officeralong with the Company’s Executive Vice President and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures as of December 31,2009 are effective in timely alerting them to material information relating tothe Company (including its consolidated subsidiaries) required to be includedin the Company’s periodic filings under the Exchange Act.

 

**Internal Control Over FinancialReporting**

 

(**a)Management’s Annual Report on Internal Control OverFinancial Reporting*.***

 

The management of the Company is responsible forestablishing and maintaining adequate internal control over financialreporting. The Company’s internal control over financial reporting is a processdesigned under the supervision of the Company’s Chief Executive Officer andChief Financial Officer to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Company’sfinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

 

As of December 31, 2009, management assessedthe effectiveness of the Company’s internal control over financial reportingbased on the criteria for effective internal control over financial reportingestablished in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”) and SEC guidance onconducting such assessments. Based on the assessment, management determinedthat the Company maintained effective internal control over financial reportingas of December 31, 2009, based on those criteria.

 

The Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, does not expect that itsdisclosure controls and procedures, or its internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefit of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

 
| /s/ John C. Hansen            |   |                          | /s/ James M. Cowan |   |
|-------------------------------|--------|-------------------------------|--------------------|--------|
| John C. Hansen                |   | James M. Cowan                |
| Chief Executive Officer       |   | Chief Financial Officer       |
| (Principal Executive Officer) |   | (Principal Financial Officer) |

 

(**b)****          ****Changes in Internal Control OverFinancial Reporting.**

 

Nochanges in the Company’s internal control over financial reporting have come tomanagement’s attention that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

**ITEM 9B.****              ****OTHERINFORMATION**

** **

None.

 

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# **PART III**

 

**ITEM 10.****              ****DIRECTORS,EXECUTIVE OFFICERS AND COPORATE GOVERNANCE**

** **

The Company has adopted a Code of Business Conduct and Ethics thatapplies to all employees and directors of the Company, and complies with theSEC’s requirements for a code of ethics applicable to senior executiveofficers.  A copy of the Code of BusinessConduct and Ethics was attached to the Form 10-K filed on March 30,2009, for the year ended December 31, 2008.

 

During 2007, the Board established a Corporate Governance CommitteeCharter and Corporate Governance Guidelines. A copy of the Corporate GovernanceCommittee Charter and Guidelines was attached as “Exhibit A” to the ProxyStatement filed with the SEC on February 15, 2008.

 

The remainder of the information required by Item 10 of Form 10-Kis incorporated by reference from the information contained in the Company’sProxy Statement for the 2010 Annual Meeting of Shareholders which has beenfiled pursuant to Regulation 14A.

 

**ITEM 11.****              ****EXECUTIVECOMPENSATION**

** **

The information required by Item 11 of Form 10-K is incorporatedby reference from the information contained in the Company’s Proxy Statementfor the 2010 Annual Meeting of Shareholders which has been filed pursuant toRegulation 14A.

 

**ITEM 12.****              ****SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

** **

The information required by Item 12 of Form 10-K is incorporatedby reference from the information contained in the Company’s Proxy Statementfor the 2010 Annual Meeting of Shareholders which has been filed pursuant toRegulation 14A.

 

**ITEM 13.****              ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

** **

The information required by Item 13 of Form 10-K is incorporatedby reference from the information contained in the Company’s Proxy Statementfor the 2010 Annual Meeting of Shareholders which has been filed pursuant toRegulation 14A.

 

**ITEM 14****               ****PRINCIPALACCOUNTANT FEES AND SERVICES**

** **

**T**he informationrequired by Item 14 of Form 10K is incorporated by reference from theinformation contained in the Company’s Proxy Statement for the 2010 AnnualMeeting of Shareholders which has been filed pursuant to Regulation 14A.

** **

**PART IV**

** **

**ITEM 15.****              ****EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

** **

(a)           The following exhibits arefiled as part of the Form 10-K, and this list includes the Exhibit Index:

 

**Index toExhibits**

 
| **Exhibit****Number** | ** ** | **Exhibit**                                           | ** ** | **Sequentially****Numbered Pages** |
|-----------------------|------------|-------------------------------------------------------|------------|------------------------------------|
|                  |       |                                                  |       |                               |
| 3.1                   |       | Articles of  Incorporation of the Bancorp, as amended |       | 13/                                |
|                  |       |                                                  |       |                               |
| 3.2                   |       | Bylaws of the Bancorp,  as amended                    |       | 13/                                |

 

25

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Table ofContents

 
| 3.3    |   | Certificate of  Amendment to Bylaws of Santa Lucia Bank, dated January 16, 2002                                      |   | 7/     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                      |   |   |
| 3.4    |   | Amendment to Bylaws of  Santa Lucia Bank, dated January 21, 2009                                                     |   | 17/    |
|   |   |                                                                                                                      |   |   |
| 10.4   |   | Santa Lucia Bank’s  Employee Stock Ownership Plan                                                                    |   | 1/     |
|   |   |                                                                                                                      |   |   |
| 10.5   |   | Plan Administrator’s  Guide for the Bank’s Employee Stock Ownership Plan                                        |   | 1/     |
|   |   |                                                                                                                      |   |   |
| 10.6   |   | Santa Lucia Bank’s Profit  Sharing Plan                                                                              |   | 1/     |
|   |   |                                                                                                                      |   |   |
| 10.9   |   | Salary Continuation  agreement by and between Santa Lucia Bank and Stanley R. Cherry, dated  February 1, 1997        |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.10  |   | Salary Continuation  agreement by and between Santa Lucia Bank and Larry H. Putnam, dated February 1,  1997          |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.11  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Khatchik Achadjian, dated  February 1, 1997              |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.12  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Dino Boneso, dated February 1, 1997                      |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.13  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Jerry W. DeCou, III, dated  February 1, 1997        |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.14  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Douglas C. Filipponi, dated  February 1, 1997            |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.15  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Jean Hawkins, dated February 1, 1997                     |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.16  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Paul G. Moerman, dated February 1,  1997                 |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.17  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and Norman J. Norton, Jr., dated  February 1, 1997      |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.18  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and William S. Osibin, dated February 1,  1997               |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.19  |   | Deferred Fee Agreement  by and Between Santa Lucia Bank and D. Jack Stinchfield, dated  February 1, 1997             |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.20  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Khatchik Achadjian, dated  February 1, 1997       |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.21  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Dino A. Boneso, dated  February 1, 1997           |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.22  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Jerry W. DeCou, III, dated  February 1, 1997 |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.23  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Douglas C. Filipponi, dated  February 1, 1997     |   | 2/     |
|   |   |                                                                                                                      |   |   |
| 10.24  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Jean Hawkins, dated  February 1, 1997             |   | 2/     |

 

26

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| 10.25  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Paul G. Moerman, dated  February 1, 1997                            |   | 2/     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                        |   |   |
| 10.26  |   | Director Retirement  Agreement by and between Santa Lucia Bank and Willard S. Osibin, dated  February 1, 1997                          |   | 2/     |
|   |   |                                                                                                                                        |   |   |
| 10.27  |   | Director Retirement  Agreement by and between Santa Lucia Bank and D. Jack Stinchfield, dated  February 1, 1997                        |   | 2/     |
|   |   |                                                                                                                                        |   |   |
| 10.28  |   | Agreement for Data  Processing Services between Santa Lucia Bank and Fiserv Savings and Community  Bank Group, dated February 21, 1997 |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.29  |   | Equipment Sales  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.30  |   | Equipment Sales  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.31  |   | Equipment Sales  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.32  |   | Software License  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                   |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.33  |   | Product License  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.34  |   | Product License  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.35  |   | Product License  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997                    |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.36  |   | Services Agreement  between Santa Lucia Bank and Information Technology, Inc., dated  February 14, 1997                           |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.37  |   | Remote Access Support  Agreement between Santa Lucia Bank and Information Technology, Inc.,  dated February 14, 1997              |   | 3/     |
|   |   |                                                                                                                                        |   |   |
| 10.38  |   | Salary Continuation  Agreement by and between Santa Lucia Bank and John C. Hansen, dated  August 1, 1998                               |   | 4/     |
|   |   |                                                                                                                                        |   |   |
| 10.39  |   | Employment Agreement by  and between Santa Lucia Bank and Stanley R. Cherry, dated August 1, 1998                                      |   | 4/     |
|   |   |                                                                                                                                        |   |   |
| 10.40  |   | Employment Agreement by  and between Santa Lucia Bank and Larry H. Putnam, dated August 1, 1998                                        |   | 4/     |
|   |   |                                                                                                                                        |   |   |
| 10.41  |   | Employment Agreement by  and between Santa Lucia Bank and John C. Hansen dated August 1, 1998                                          |   | 4/     |
|   |   |                                                                                                                                        |   |   |
| 10.42  |   | Santa Lucia Bank 2000  Stock Option Plan and form of stock option agreement                                                                 |   | 5/     |
|   |   |                                                                                                                                        |   |   |
| 10.44  |   | Amendment to Salary  Continuation Agreement of Stanley R. Cherry, Dated April 15, 1998                                                 |   | 6/     |
|   |   |                                                                                                                                        |   |   |
| 10.45  |   | Amendment to Salary  Continuation Agreement of Larry H. Putnam, dated April 15, 1998                                                   |   | 6/     |
|   |   |                                                                                                                                        |   |   |
| 10.46  |   | Amendment to Salary  Continuation Agreement of                                                                                              |   | 6/     |

 

27

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|   |   | Stanley R. Cherry,  dated May 10, 2000                                                                                     |   |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                            |   |   |
| 10.47  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Khatchik H. Achadjian                                         |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.48  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Dino Boneso, dated  January 10, 2001                     |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.49  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Jerry W. DeCou, III, dated  January 10, 2001        |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.50  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Douglas C. Filipponi, dated  January 10, 2001            |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.51  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Jean Hawkins, dated  January 10, 2001                    |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.52  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with Paul G. Moerman, dated  January 10, 2001                 |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.53  |   | Amendment to Santa  Lucia Bank Director Retirement Agreement with D. Jack Stinchfield, dated  January 10, 2001             |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.54  |   | Amendment to Salary  Continuation agreement with Stanley R. Cherry, dated January 10, 2001                                 |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.55  |   | Amendment to Salary  Continuation agreement with Larry H. Putnam, dated January 10, 2001                                   |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.56  |   | Amendment to Salary  Continuation agreement with John C. Hansen, dated January 10, 2001                                    |   | 6/     |
|   |   |                                                                                                                            |   |   |
| 10.57  |   | 401(K) Profit  Sharing Plan adopted effective July 1, 2001                                                            |   | 7/     |
|   |   |                                                                                                                            |   |   |
| 10.59  |   | Form of Note  Purchase Agreement                                                                                           |   | 9/     |
|   |   |                                                                                                                            |   |   |
| 10.60  |   | Subordinated Note                                                                                                               |   | 9/     |
|   |   |                                                                                                                            |   |   |
| 10.62  |   | Amendment to Employment  Agreement by and between Santa Lucia Bank and John Hansen dated  November 11, 2004                |   | 11/    |
|   |   |                                                                                                                            |   |   |
| 10.63  |   | Employment Agreement by  and between Santa Lucia Bank and Jim Cowan dated November 11, 2004                                |   | 11/    |
|   |   |                                                                                                                            |   |   |
| 10.65  |   | Santa Lucia Bancorp  2006 Equity Based Compensation Plan                                                                        |   | 12/    |
|   |   |                                                                                                                            |   |   |
| 10.66  |   | Amended and Restated  Employment Agreement by and between Santa Lucia Bank and Larry H. Putnam  dated December 15, 2006    |   | 13/    |
|   |   |                                                                                                                            |   |   |
| 10.67  |   | Amended and Restated  Employment Agreement by and between Santa Lucia Bank and John C. Hansen dated  December 15, 2006     |   | 13/    |
|   |   |                                                                                                                            |   |   |
| 10.68  |   | Amended and Restated  Employment Agreement by and between Santa Lucia Bank and James M. Cowan dated  December 15, 2006     |   | 13/    |
|   |   |                                                                                                                            |   |   |
| 10.70  |   | Amendment to the Salary  Continuation Agreement by and between Santa Lucia Bank and Larry H. Putnam  dated April 12, 2007. |   | 14/    |
|   |   |                                                                                                                            |   |   |
| 10.71  |   | Amendment to the Salary  Continuation Agreement by and between Santa Lucia Bank and John C. Hansen  dated April 12, 2007.  |   | 14/    |

 

28

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| 10.72  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar Plan  Agreement by and between Santa Lucia Bank and Larry H. Putnam dated March 19,  2008.      |   | 15/    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                           |   |   |
| 10.73  |   | First Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and John C. Hansen dated  March 19, 2008.        |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.74  |   | First Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and James Cowan dated  March 19, 2008            |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.75  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar Plan  Agreement by and between Santa Lucia Bank and Jerry W. DeCou dated March 19,  2008.       |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.76  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and Douglas C. Filipponi dated  March 19, 2008. |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.77  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and Khatchik Achadjian dated March 19,  2008.   |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.78  |   | Third Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and Stanley R. Cherry dated March 19,  2008.     |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.79  |   | First Amendment****to the Life Insurance Endorsement Method Split Dollar  Plan Agreement by and between Santa Lucia Bank and Jean Hawkins dated March 19,  2008.          |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.80  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar Plan  Agreement by and between Santa Lucia Bank and Paul G. Moerman datedMarch 19, 2008.        |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.81  |   | Second Amendment****to the Life Insurance Endorsement Method Split Dollar Plan  Agreement by and between Santa Lucia Bank and D. Jack Stinchfield dated March 19,  2008.  |   | 15/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.82  |   | Agreement made by and  between Santa Lucia Bank and Jerry W. DeCou, III dated October 15, 2008                                                                       |   | 16/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.83  |   | Agreement made by and  between Santa Lucia Bank and Douglas C. Filipponi dated October 15, 2008                                                                           |   | 16/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.84  |   | Agreement made by and  between Santa Lucia Bank and Khatchik Achadjian dated October 15, 2008                                                                             |   | 16/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.85  |   | Agreement made by and  between Santa Lucia Bank and Stanley R. Cherry dated October 15, 2008                                                                              |   | 16/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.86  |   | Agreement made by and  between Santa Lucia Bank and Jean Hawkins dated October 15, 2008                                                                                   |   | 16/    |
|   |   |                                                                                                                                                                           |   |   |
| 10.87  |   | Agreement made by and  between Santa Lucia Bank and Paul G. Moerman dated October 15, 2008                                                                                |   | 16/    |

 

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| 10.88  |   | Agreement made by and  between Santa Lucia Bank and D. Jack Stinchfield dated October 15, 2008                                                                |   | 16/    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                               |   |   |
| 10.89  |   | First Amendment to  Amend and Restated Employment Agreement made by and between Santa Lucia Bank  and Larry H. Putnam dated October 15, 2008                  |   | 16/    |
|   |   |                                                                                                                                                               |   |   |
| 10.90  |   | First Amendment to  Amend and Restated Employment Agreement made by and between Santa Lucia Bank  and John C. Hansen dated October 15, 2008                   |   | 16/    |
|   |   |                                                                                                                                                               |   |   |
| 10.91  |   | First Amendment to  Amend and Restated Employment Agreement made by and between Santa Lucia Bank  and James Cowan dated October 15, 2008                      |   | 16/    |
|   |   |                                                                                                                                                               |   |   |
| 10.92  |   | Salary Continuation  Agreement by and between Santa Lucia Bank and Larry H. Putnam dated  December 17, 2008                                                   |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.93  |   | First Amended and  Restated Salary Continuation Agreement by and between Santa Lucia Bank and  Larry H. Putnam dated December 17, 2008                        |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.94  |   | Salary Continuation  Agreement by and between Santa Lucia Bank and John C. Hansen dated  December 17, 2008                                                    |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.95  |   | First Amended and  Restated Salary Continuation Agreement by and between Santa Lucia Bank and  John C. Hansen dated December 17, 2008                         |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.96  |   | First Amended and  Restated Salary Continuation Agreement by and between Santa Lucia Bank and  James M. Cowan dated December 17, 2008                         |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.97  |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and Jerry W.  DeCou III dated December 17, 2008                            |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.98  |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and Douglas  C. Filipponi dated December 17, 2008                          |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.99  |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and Khatchik  H. Achadjian dated December 17, 2008                         |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.100 |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and Jean  Hawkins dated December 17, 2008                                  |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.101 |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and Paul G.  Moerman dated December 17, 2008                               |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.102 |   | First Amended and  Restated Deferred Fee Agreement by and between Santa Lucia Bank and D. Jack  Stinchfield dated December 17, 2008                           |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.103 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement by and between Santa  Lucia Bank and Jerry W. DeCou III dated December 17, 2008    |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.104 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement by and between Santa  Lucia Bank and Douglas C. Filipponi dated December 17, 2008  |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.105 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement by and between Santa  Lucia Bank and Khatchik H. Achadjian dated December 17, 2008 |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.106 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement by and between Santa  Lucia Bank and Jean Hawkins dated December 17, 2008          |   | 17/    |
|   |   |                                                                                                                                                               |   |   |
| 10.107 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement                                                                                         |   | 17/    |

 

30

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|   |   | by and between Santa  Lucia Bank and Paul G. Moerman dated December 17, 2008                                                                                |   |   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                             |   |   |
| 10.108 |   | First Amended and  Restated Santa Lucia Bank Director Retirement Agreement by and between Santa  Lucia Bank and D. Jack Stinchfield dated December 17, 2008 |   | 17/    |
|   |   |                                                                                                                                                             |   |   |
| 13.1   |   | Annual Report to  Shareholders                                                                                                                                   |   |   |
|   |   |                                                                                                                                                             |   |   |
| 14.1   |   | Code of Business  Conduct and Ethics                                                                                                                             |   | 17/    |
|   |   |                                                                                                                                                             |   |   |
| 23.1   |   | Consent of independent  accountants from Vavrinek, Trine, Day & Co., LLP                                                                                |   |   |
|   |   |                                                                                                                                                             |   |   |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 15d-14                                                                                           |   |   |
|   |   |                                                                                                                                                             |   |   |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 15d-14                                                                                           |   |   |
|   |   |                                                                                                                                                             |   |   |
| 32.1   |   | Certification pursuant  to Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18  of the United States Code                                   |   |   |
|   |   |                                                                                                                                                             |   |   |
| 99.1   |   | Troubled Asset Relief  Program Certification of Chief Executive Officer                                                                                          |   |   |
|   |   |                                                                                                                                                             |   |   |
| 99.2   |   | Troubled Asset Relief  Program Certification of Chief Financial Office                                                                                           |   |   |

 

----

1/             Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 1995

 

2/             Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 1996

 

3/             Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 1997

 

4/             Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 1998

 

5/             Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 1999

 

6/                                      Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 2000

 

7/                                      Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 2001

 

8/                                      Incorporated by reference from the Bank’sForm 10-K for the year ended December 31, 2002

 

9/                                      Incorporated by reference from the Bank’sForm 10-Q for the period ended September 30, 2003

 

10/                                Incorporated by reference from the Bank’sForm 10-K for the period ended December 31, 2003

 

11/                                Incorporated by reference from the Bank’sForm 10-K for the period ended December 31, 2004

 

12/                                Filed as part of Registrants RegistrationStatement on Form S-8 (File #333-137997) (Filed on 10/13/06)

 

13/                                Incorporated by reference from the Bank’sForm 10-K for the period ended December 31, 2006

 

14/                                Incorporated by reference from the Bank’sForm 10-Q for the period ended March 31, 2007

 

15/                                Incorporated by reference from the Bank’sForm 10-Q for the period ended March 31, 2008

 

16/                                Incorporated by reference from the Bank’sForm 10-Q for the period ended September 30, 2008

 

17/                                Incorporated by reference from the Bank’sForm 10-K for the period ended December 31, 2008

 

31

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# **SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | **SANTA  LUCIA BANCORP**                              |   |
|--------|-------------------------------------------------------|--------|
|   |                                                  |   |
|   |                                                  |   |
| By:    | /s/ John C.  Hansen                                   |   |
|   | JOHN C. HANSEN                                        |   |
|   | President and  Chief Executive Officer                |   |
|   | (Principal  Executive Officer)                        |   |
|   | Dated:   March 26,  2010          |   |
|   |                                                  |   |
|   |                                                  |   |
| By:    | /s/ James M.  Cowan                                   |   |
|   | JAMES M. COWAN                                        |   |
|   | Executive Vice  President and Chief Financial Officer |   |
|   | (Principal  Financial and Accounting Officer)         |   |
|   | Dated:   March 26,  2010          |   |

 

32

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In accordance with the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
|                       |   |                       |   | Dated:              |
|----------------------------|--------|----------------------------|--------|---------------------|
|                       |   |                       |   |                |
| /s/ John C. Hansen         |   | President and              |   | March 26, 2010 |
| JOHN C. HANSEN             |   | Chief Executive Officer    |   |                |
|                       |   |                       |   |                |
| /s/ Jerry W. DeCou         |   | Chairman of the            |   | March 26, 2010 |
| JERRY W. DECOU III         |   | Board of Directors         |   |                |
|                       |   |                       |   |                |
| /s/ Douglas C.  Filipponi  |   | Vice Chairman              |   | March 26, 2010 |
| DOUGLAS C. FILIPPONI       |   | of the Board of  Directors |   |                |
|                       |   |                       |   |                |
| /s/ Khatchik H.  Achadjian |   | Director                   |   | March 26, 2010 |
| KHATCHIK H. ACHADJIAN      |   |                       |   |                |
|                       |   |                       |   |                |
| /s/ Stanley R. Cherry      |   | Director                   |   | March 26, 2010 |
| STANLEY R.  CHERRY         |   |                       |   |                |
|                       |   |                       |   |                |
| /s/ Jean Hawkins           |   | Director                   |   | March 26, 2010 |
| JEAN HAWKINS               |   |                       |   |                |
|                       |   |                       |   |                |
| /s/ Paul G. Moerman        |   | Director                   |   | March 26, 2010 |
| PAUL G. MOERMAN            |   |                       |   |                |
|                       |   |                       |   |                |
| /s/ Larry H. Putnam        |   | Director                   |   | March 26, 2010 |
| LARRY H. PUTNAM            |   |                       |   |                |
|                       |   |                       |   |                |
| /s/ D. Jack Stinchfield    |   | Director                   |   | March 26, 2010 |
| D. JACK STINCHFIELD        |   |                       |   |                |

 

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Table of Contents

 

# **EXHIBIT INDEX**

# ** **

| **Exhibit********Sequential********Number** | ** ** | **Description**                                                                                                                |
|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|
|                                        |       |                                                                                                                           |
| 13.1                                        |       | Annual Report to  Shareholders                                                                                                 |
|                                        |       |                                                                                                                           |
| 23.1                                        |       | Consent of independent  accountants from Vavrinek, Trine, Day & Co., LLP                                              |
|                                        |       |                                                                                                                           |
| 31.1                                        |       | Certification of Chief  Executive Officer pursuant to Rule 15d-14                                                         |
|                                        |       |                                                                                                                           |
| 31.2                                        |       | Certification of Chief  Financial Officer pursuant to Rule 15d-14                                                         |
|                                        |       |                                                                                                                           |
| 32.1                                        |       | Certification pursuant  to Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18  of the United States Code |
|                                        |       |                                                                                                                           |
| 99.1                                        |       | Troubled Asset Relief  Program Certification of Chief Executive Officer                                                        |
|                                        |       |                                                                                                                           |
| 99.2                                        |       | Troubled Asset Relief  Program Certification of Chief Financial Office                                                         |

 

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