** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**

 

| **x**      | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31,  2007.**                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                   |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                   |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 For the transition period  from           to** |

 

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) of the Exchange  Act: None |       |
|                                                                           |       |                                  |
| Securities registered under Section 12(g) of the Exchange  Act:      |       |
|                                                                           |       |                                  |
|                                                                                |            |                                       |  |  |

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

 

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x   No o

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained in this form, and no disclosure will becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB o.

 

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

 

Registrant’s revenues for the year ended December 31, 2007 were$18,789,927.

 

The aggregate market value of the voting common stock held bynon-affiliates of the Registrant at March 1, 2008 was approximately$29,486,326.

 

As of March 1, 2008, the Registrant had 1,924,863 shares of CommonStock outstanding.

 

The information required in Part III, Items 9 through 12 and 14 isincorporated herein from the Registrant’s definitive proxy statement for the2008 annual meeting of shareholders previously filed pursuant to Regulation 14Aand Part II, Items 6 and 7 of the 2007 Annual Report to Shareholders filedas an exhibit hereto.

 

Transitional Small Business Disclosure Format (check one)   Yes o  No x

 

 

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**TABLE OF CONTENTS**

 
| PART I        |                                                                                                                                        |   |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ITEM 1.       | DESCRIPTION OF  BUSINESS                                                                                                                    |   |
| ITEM 2.       | DESCRIPTION OF  PROPERTY                                                                                                                    |   |
| ITEM 3.       | LEGAL PROCEEDINGS                                                                                                                           |   |
| ITEM 4.       | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                        |   |
| PART II       |                                                                                                                                        |   |
| ITEM 5.       | MARKET FOR  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                                                   |   |
| ITEM 6.       | MANAGEMENT’S DISCUSSION  AND ANALYSIS OR PLAN OF OPERATION.                                                                            |   |
| ITEM 7.       | FINANCIAL STATEMENTS                                                                                                                        |   |
| ITEM 8.       | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                       |   |
| ITEM 8A(T).   | CONTROLS AND  PROCEDURES                                                                                                                    |   |
| ITEM 8B.      | OTHER INFORMATION                                                                                                                           |   |
| PART III      |                                                                                                                                        |   |
| ITEM 9.       | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, AND CORPORATE GOVERNANCE;  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |   |
| ITEM 10.      | EXECUTIVE  COMPENSATION                                                                                                                     |   |
| ITEM 11.      | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                                            |   |
| ITEM 12.      | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                                                   |   |
| ITEM 13.      | EXHIBITS                                                                                                                                    |   |
| ITEM 14.      | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                                     |   |
| SIGNATURES    |                                                                                                                                        |   |
| EXHIBIT INDEX |                                                                                                                                        |   |

 

 

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# **PART I**

 

CERTAIN STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB(“ANNUAL REPORT”), INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THEWORDS “BELIEVES”, “ANTICIPATES”, “INTENDS”, “EXPECTS”, “ESTIMATES”, “MAY”, “COULD”AND WORDS OF SIMILAR IMPACT, CONSTITUTE “FORWARD-LOOKING STATEMENTS” WITHIN THEMEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21EOF THE SECURITIES AND EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTSINVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSETHE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLYDIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED ORIMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS,THE FOLLOWING:  GENERAL ECONOMIC ANDBUSINESS CONDITIONS IN THOSE AREAS IN WHICH THE COMPANY OPERATES, THE RECENTDISRUPTIONS IN THE U. S. CREDIT MARKETS, DEMOGRAPHIC CHANGES, COMPETITION,FLUCTUATIONS IN INTEREST RATES, CHANGES IN BUSINESS STRATEGY OR DEVELOPMENTPLANS, CHANGES IN GOVERNMENTAL REGULATION, CREDIT QUALITY, THE AVAILABILITY OFCAPITAL TO FUND THE EXPANSION OF THE COMPANY’S BUSINESS, ECONOMIC, POLITICALAND GLOBAL CHANGES ARISING FROM THE WAR ON TERRORISM, AND OTHER FACTORSREFERENCED IN THIS REPORT, INCLUDING IN “ITEM 1. DESCRIPTION OFBUSINESS-FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS”. WHENRELYING ON FORWARD-LOOKING STATEMENTS TO MAKE DECISIONS WITH RESPECT TO OURCOMPANY, INVESTORS AND OTHERS ARE CAUTIONED TO CONSIDER THESE AND OTHER RISKSAND UNCERTAINTIES.  THE COMPANY DISCLAIMSANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULTSOF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TOREFLECT FUTURE EVENTS OR DEVELOPMENTS.

 

 

## **ITEM 1. **DESCRIPTION OF BUSINESS

 

**G****eneral**

 

Santa Lucia Bancorp (the “Company”) is aCalifornia corporation organized April 3, 2006 to act as the holdingcompany for its wholly owned subsidiary Santa Lucia Bank (the “Bank”),collectively referred to herein as the “Company”.  At that time shareholders of the Bank becameshareholders of the Company on a “unless otherwise noted, one share for oneshare” basis.

 

The Bank is a California bankingcorporation.  The Bank was organized as anational banking association on December 19, 1984 and commenced operationson August 5, 1985.  On May 30,1997, the Bank converted from a national bank to a California state charteredbank licensed by the 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, 2007, the Company hadapproximately $248.6 million in assets, $166.6 million in net loans, $212.7million in deposits, and $21.2 million in stockholders’ equity.

 

On April 26, 2006, the Company formedSanta Lucia Bancorp (CA) Capital Trust (“Trust”).  Trust is a statutory business trust formedunder the laws of Delaware used to facilitate 

 

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the issuance of the trust preferred securities.  The Trust is a wholly owned, non-financial,non-consolidated subsidiary of the Company.

 

Other than holding the shares of the Bank,the Company conducts no significant activities.

 

**Banking**

 

The Bank is headquartered in Atascadero, withbranch offices in Paso Robles, Arroyo Grande and Santa Maria. The Bank conductsa commercial banking business in San Luis Obispo and northern Santa BarbaraCounties, including accepting demand, savings and time deposits, and makingcommercial, real estate, SBA, agricultural, credit card, and consumerloans.  It also offers installment notecollection, provides ATM and internet banking access, issues cashiers checksand money orders, sells travelers checks, and provides bank-by-mail, nightdepository, safe deposit boxes, and other customary banking services. The Bankdoes not offer trust services or international banking services and does notplan to do so in the near future.

 

The Bank’s operating policy since its inceptionhas emphasized small business commercial banking. Most of the Bank’s customersare retail customers, and small to medium-sized businesses. The Bank takes realestate, listed and unlisted securities, savings and time deposits, automobiles,machinery, equipment and accounts receivable as collateral for loans. The areasin which the 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 31,2007, these four categories accounted for approximately 23%, 1%, 28% and 48%,respectively, of the Bank’s loan portfolio. See “Item 6 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Most of the Bank’s deposits are attracted bylocal promotional activities and advertising in the local media. A materialportion of the Bank’s deposits have not been obtained from a single person or afew persons, the loss of any one or more of which would have a materiallyadverse effect on the business of the Bank. As of December 31, 2007, theBank had approximately 9,411 demand deposit accounts consisting of non-interestbearing (demand), interest-bearing demand and money market accounts withbalances totaling $117,741,000, for an average balance per account ofapproximately $12,511; 4,050 savings accounts with balances totaling$26,228,000, for an average balance per account of approximately $6,557; and1,479 time certificate of deposit accounts with balances totaling $71,844,000,for an average balance per account of approximately $32,647.

 

The principal sources of the Bank’s revenuesare (i) interest and fees on loans, (ii) interest on investments, (iii) servicecharges on deposit accounts, fees on mortgage loans and other charges and fees,and (iv) miscellaneous income. For the year ended December 31, 2007,these sources comprised 80%, 14%, 3% and 3%, respectively, of the Bank’s totaloperating 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

 

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system named “EZLink,” whichoffers online banking and computer bill payment; home equity lines of credit;business equipment leasing; and home mortgage loans.  In addition, the Bank introduced its newhealth savings account in 2005. The Bank has no present plans to add any new lineof business that will require the investment of a material amount of totalassets. Most of the Bank’s business originates from San Luis Obispo andnorthern Santa Barbara Counties, and there is no emphasis on foreign sourcesand 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 any material effect upon the Bank’scapital expenditures, earnings or competitive position as a result of federal,state or local environmental regulations.

 

The Bank holds no patents, licenses (otherthan licenses obtained from bank regulatory authorities), franchises orconcessions.

 

**Employees**

 

                As of December 31,2007, the Bank had a total of 86 full-time equivalent employees. The Bank believesthat its employee relations are satisfactory. The Company has no salaried employees.

 

**Local Economic Climate**

 

                The economy in theCompany’s service area is based primarily on agriculture, tourism, lightindustry, oil and retail trade.  Servicessupporting these industries have also developed in the areas of medical,financial and educational services.  Thepopulation of San Luis Obispo County and the City of Santa Maria (in northernSanta Barbara County) totaled approximately 265,000 and 85,000 respectively,according to economic data provided by local county and title companysources.  The moderate climate allows ayear round growing season for numerous vegetable and fruits.  Vineyards and cattle ranches also contributelargely to the local economy.  TheCentral Coast’s leading agricultural industry is the production of high qualitywine grapes and production of premium quality wines.  Although on average the climate in ourmarkets is generally very mild, we did experience a significant freeze in early2007.  This did not have a significantimpact on our business.  Vineyards inproduction have grown significantly over the past several years throughout theCompany’s service area.  Access tonumerous recreational activities, including lakes, mountains and beaches,provide a relatively stable tourist industry from many areas including the LosAngeles/Orange County basin, the San Francisco Bay area and the San JoaquinValley.  Principally due to the diversityof the various industries in the Company’s service area, the area, while notimmune from economic fluctuations, does tend to enjoy a more stable level ofeconomic activity than many other areas of California.

 

According to the San Luis Obispo CountyOutlook Economic Forecast, copyrighted and published by The Regents of theUniversity of California (Santa Barbara), home sales volume declined 11% in2007, median home prices in San Luis Obispo County decreased 3% through November 2007,and California’s median home prices are up 1.2% through the same period. Thedeclining prices and sales has slowed the pace of new home construction andincreased the inventory of new homes. High oil prices are a concern ofconsumers however, they are high because of demand and not because of supplyinterruptions. It is not believed they will strangle 

 

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growth. More likely, they will stimulate the development of newsupplies and alternative energy sources.

 

The UC Santa Barbara Economic Forecast Project recognizes the stressesimposed on the economy by the real estate markets and the Mortgage BackedSecurities liquidity crisis. So, their forecast is for slowing growth throughthe second quarter of 2008, to about a 1.6 percent annual growth rate. Then,they expect a fairly rapid acceleration to almost the growth rates they saw inthe first two quarters of 2007, as the Current FED policies really start havingan impact in 2008.

 

California has many idiosyncratic issues. The State’s budget is finallycoming to the forefront as a political issue after simmering for years now.Costs of doing business in California continue to be high. New regulations, andthe State’s Attorney General’s interpretation of them, will slow growth.

 

Still, they expect that California’s economy will outperform that ofthe United States. That growth will be driven by a dynamic tech sectorsupported by ample venture capital and the World’s best higher educationalsystem. The State will also benefit from increased globalization. Its locationon the Pacific Rim, its fine harbors, and the very size of its economy insuresthat California will enjoy more than its share of international activity.

 

The Company believes that the local economies, inwhich it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Mariacontinue to remain relatively stable. However, competition for depositscontinues to be very strong both from traditional sources as well asalternative investments such as mutual funds, money market accounts and thestock market. The Bank’s decline in the loan portfolio reflects the slow downin the demand for construction lending and real estate related markets. During2007 the prime lending rate decreased 100 basis points placing additionalpressure on the Company’s margins.

 

**Competition**

 

The banking and financialservices business in California generally, and in the Company’s service areaspecifically, is highly competitive. The increasingly competitive environmentis a result primarily of changes in regulation, changes in technology andproduct delivery systems, and the accelerating pace of consolidation amongfinancial services providers.

 

The Company’s business isconcentrated in its service area, which encompasses primarily San Luis Obispoand northern Santa Barbara Counties. In order to compete with other financialinstitutions in its service area, the Company relies principally upon localadvertising programs; direct personal contact by officers, directors,employees, and shareholders; and specialized services such as courier pick-upand delivery of non-cash banking items. The Company emphasizes to its customersthe advantages of dealing with a locally owned and community orientedinstitution. The Company also seeks to provide special services and programsfor individuals in its primary service area who are employed in theagricultural, professional and business fields, such as loans for equipment,furniture, tools of the trade or expansion of practices or businesses. Largerbanks may have a competitive advantage because of higher lending limits andmajor advertising and marketing campaigns. They also perform services, such astrust services, international banking, discount brokerage and insuranceservices, that the Company is not authorized or prepared to offer currently.The Company has made arrangements with its correspondent banks and with othersto provide such services for its customers.

 

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Commercial banks competewith savings and loan associations, credit unions, other financialinstitutions, securities brokerage firms, and other entities for funds. Forinstance, yields on corporate and government debt securities and othercommercial paper affect the ability of commercial banks to attract and holddeposits. Commercial banks also compete for loans with savings and loanassociations, credit unions, consumer finance companies, mortgage companies,insurance companies, and other lending institutions.

 

**Effect of Government Policies andRecent Legislation**

 

Banking is a businesslargely dependent on rate differentials. In general, the difference between theinterest rate paid by the Company on its deposits and its other borrowings andthe interest rate received by the Company on loans extended to its customersand securities held in the Company’s portfolio comprise the major portion ofthe Company’s earnings. These rates are highly sensitive to many factors thatare beyond the control of the Company. Accordingly, the earnings and growth ofthe Company are subject to the influence of domestic and foreign economicconditions, including inflation, recession and unemployment.

 

The commercial bankingbusiness is not only affected by general economic conditions but is alsoinfluenced by the monetary and fiscal policies of the federal government andthe policies of regulatory agencies, particularly the FRB. The FRB implementsnational monetary policies (with objectives such as curbing inflation andcombating recession) by its open-market operations in United States Governmentsecurities, by adjusting the required level of reserves for financialinstitutions subject to its reserve requirements and by varying the discountrates applicable to borrowings by depository institutions. The actions of theFRB in these areas influence the growth of bank loans, investments and depositsand also affect interest rates charged on loans and paid on deposits. Thenature and impact on the Company of any future changes in monetary policiescannot be predicted. During 2007 the primelending rate decreased 100 basis points placing additional pressure on theCompany’s margins. During the first month of 2008, the prime lendingrate decreased 125 basis points placing added pressure on our margins.

 

From time to time,legislation is enacted which has the effect of increasing the cost of doingbusiness, limiting or expanding permissible activities or affecting thecompetitive balance between banks and other financial institutions. Proposalsto change the laws and regulations governing the operations and taxation ofbanks, bank holding companies and other financial institutions are frequentlymade in Congress, in the California legislature and before various bankregulatory and other professional agencies. See “Description ofBusiness-Supervision and Regulation.”

 

**Supervisionand Regulation**

 

**General**

 

The Company and the Bankare extensively regulated under both federal and state law. Set forth below isa summary description of certain laws that relate to the regulation of theCompany 

 

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and the Bank. Thedescription does not purport to be complete and is qualified in its entirety byreference to the applicable laws and regulations.

 

**The Company**

 

**               **The Company is a bank holding companywithin the meaning of the Bank Holding Company Act of 1956, as amended (the “BankHolding Company Act”), and is registered as such with, and subject to thesupervision of, the Federal Reserve Board. The Company is required to file with the Federal Reserve Board quarterlyand annual reports and such additional information as the Federal Reserve Boardmay require pursuant to the Bank Holding Company Act.  The Federal Reserve Board may conductexaminations of bank holding companies and their subsidiaries.

 

                The Company is required to obtain the approval of theFederal Reserve Board before it may acquire all or substantially all of theassets of any bank, or ownership or control of the voting shares of any bankif, after giving effect to such acquisition of shares, the Company would own orcontrol more than 5% of any class of outstanding voting shares of suchbank.  Prior approval of the FederalReserve Board is also required for the merger of consolidation of the Companyand another bank holding company.

 

                The Company is prohibited by the Bank Holding CompanyAct, except in certain statutorily prescribed instances, from acquiring directof indirect ownership or control of more than 5% of the outstanding votingshares of any company that is not a bank or bank holding company and fromengaging, directly or indirectly, in activities other than those of banking,managing or controlling banks or furnishing services to its subsidiaries.  However, the Company may, subject to theprior approval of the Federal Reserve Board, engage in any, or acquire sharesof companies engaged in, activities that are deemed by the Federal ReserveBoard to be so closely related to banking or managing or controlling banks asto be a proper incident thereto.  Seediscussion under “Financial Modernization Act” below for additionalinformation.

 

                The Federal Reserve Board may require that theCompany terminate an activity or terminate control of or liquidate or divestsubsidiaries or affiliates when the Federal Reserve Board determines that theactivity or the control or the subsidiary or affiliates constitutes asignificant risk to the financial safety, soundness or stability of any of itsbanking subsidiaries.  The FederalReserve Board also has the authority to regulate provisions of certain bankholding company debt, including authority to impose interest ceilings andreserve requirements on such debt.  Undercertain circumstances, the Company must file written notice and obtain approvalfrom the Federal Reserve board prior to purchasing or redeeming its equity securities.

 

                Under the Federal Reserve Board’s regulations, a bankholding company is required to serve as a source of financial and managerialstrength to its subsidiary banks and may not conduct its operations in anunsafe and unsound manner.  In addition,it is the Federal Reserve Board’s policy that in serving as a source ofstrength to its subsidiary banks, a bank holding company should stand ready touse available resources to provide adequate capital funds to its subsidiarybanks during periods of financial stress or adversity and should maintain thefinancial flexibility and capital-raising capacity to obtain additionalresources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as asource of strength to its subsidiary banks will generally be considered by theFederal Reserve Board to be an unsafe and unsound banking practice or aviolation of the Federal Reserve Board’s regulations or both.

 

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                The Company and the Bank are prohibited from engagingin certain tie-in arrangements in connection with any extension of credit, saleor lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bankmay condition an extension of credit to a customer on either (1) arequirement that the customer obtain additional services provided by us or (2) anagreement by the customer to refrain from obtaining other services from acompetitor.

 

                The Company is subject to the periodic reportingrequirements of the Securities Exchange Act of 1934, as amended, and filesreports and proxy statements pursuant to such Act with the Securities andExchange Commission (the “SEC”).

 

**The Bank**

 

The Bank is charteredunder the laws of the State of California and its deposits are insured by theFDIC to the extent provided by law. The Bank is subject to the supervision of,and is regularly examined by, the DFI and the FRB. Such supervision andregulation include comprehensive reviews of all major aspects of the Bank’sbusiness and condition. Various requirements and restrictions under the laws ofthe United States and the State of California affect the operations of theBank. Federal and California statutes relate to many aspects of the Bank’soperations, including reserves against deposits, interest rates payable ondeposits, loans, investments, mergers and acquisitions, borrowings, dividendsand locations of branch offices. Further, the Bank is required to maintaincertain levels of capital.

 

If, as a result of anexamination of a bank, the DFI or FRB should determine that the financialcondition, capital resources, asset quality, earnings prospects, management,liquidity, or other aspects of the Bank’s operations are unsatisfactory or thatthe Bank or its management is violating or has violated any law or regulation,various remedies are available to these regulatory agencies. Such remediesinclude the power to enjoin “unsafe or unsound” practices, to requireaffirmative action to correct any conditions resulting from any violation orpractice, to issue an administrative order that can be judicially enforced, todirect an increase in capital, to restrict the growth of the Bank, to assesscivil monetary penalties, to remove officers and directors, and ultimately toterminate the Bank’s deposit insurance, which for a California chartered bankwould result in a revocation of the bank’s charter.

 

                The deposits of the Bank areinsured by the FDIC in the manner and to the extent provided by law.  For this protection, the Bank pays a semiannualstatutory assessment.  The Bank is alsosubject to certain regulations of the Federal Reserve Board and applicableprovisions of California law, insofar as they do not conflict with or are notpreempted by federal banking law. Various other requirements and restrictions under the laws of the UnitedStates and the State of California affect the operations of the Bank.  Federal and California statutes andregulations relate to many aspects of the Bank’s operations, including reservesagainst deposits, interest rates payable on deposits, loans, investments,mergers and acquisitions, borrowings, dividends, locations of branch offices,capital requirements and disclosure obligations to depositors andborrowers.  Further, the Bank is requiredto maintain certain levels of capital.

 

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**Capital Standards**

 

The FRB and the FDIC haveadopted risk-based minimum capital guidelines intended to provide a measure ofcapital that reflects the degree of risk associated with a banking organization’soperations for both transactions reported on the balance sheet as assets andtransactions, such as letters of credit and recourse arrangements, which arerecorded as off balance sheet items. Under these guidelines, nominal dollaramounts of assets and credit equivalent amounts of off balance sheet items aremultiplied by one of several risk adjustment percentages, which range from 0%for assets with low credit risk, such as certain U.S. Treasury securities, to100% for assets with relatively high credit risk, such as business loans.

 

A banking organization’srisk-based capital ratios are obtained by dividing its qualifying capital byits total risk adjusted assets. The regulators measure risk-adjusted assets,which includes off balance sheet items, against both total qualifying capital(the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1capital. Tier 1 capital consists primarily of common stock, retained earnings,non-cumulative perpetual preferred stock (cumulative perpetual preferred stockfor bank holding companies) and minority interests in certain subsidiaries,less most intangible assets. Tier 2 capital may consist of a limited amount ofthe allowance for possible loan and lease losses, cumulative preferred stock,long term preferred stock, eligible term subordinated debt and certain otherinstruments 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%.

 

                Santa Lucia Bancorp issued $5,155,000 in juniorsubordinated debt securities (the “debt securities”) to the Santa Lucia Bancorp(CA) Capital Trust, a statutory trust created under the laws of the State ofDelaware.  These debt securities aresubordinated to effectively all borrowings of the Company and are due andpayable on July 7, 2036.  These debtsecurities may be redeemed for 105% of the principal balance through July 7,2011 and then at par thereafter. Interest is payable quarterly beginning July 7, 2006 at 1.48% overthe quarterly adjustable 3-month LIBOR. Of this $5.2 million, the Company contributed $3.0 million to the Bankand retained $2.2 million at the Company level. The securities do not entitle the holders to voting rights in theCompany but will contain certain restrictive covenants, including restrictionson the payment of dividends to the holders of the Company’s common stock in theevent that interest payments on the trust preferred securities arepostponed.  The capital contributionreceived by the Bank from the trust preferred issuance is designated as Tier 1capital for regulatory purposes.

 

                During the third quarter of 2003, the Bank undertookand completed a private placement of subordinated debentures (“notes”) toaugment is tier 2 capital.  The totalprincipal amount of the notes issued was $2,000,000.  The notes were sold pursuant to an applicableexemption from registration under the Securities Act of 1933 to certainaccredited investors, including some of the Company’s directors and executiveofficers.  The notes include quarterlypayment of interest at prime plus 1.5% and quarterly principal installments ofapproximately $166,666 commencing on September 30, 2008 until paid in fullon June 30, 2011.

 

In addition to therisk-based guidelines, federal banking regulators require banking organizationsto maintain a minimum amount of Tier 1 capital to total assets, referred to asthe leverage ratio. For a banking organization rated in the highest of the fivecategories used by regulators to rate banking organizations, the minimumleverage ratio of Tier 1 capital to total assets is 3%. For all bankingorganizations not rated in the highest category, the minimum leverage ratio 

 

 

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must be at least 4%. Inaddition to these uniform risk-based capital guidelines and leverage ratiosthat apply across the industry, the regulators have the discretion to setindividual minimum capital requirements for specific institutions at ratessignificantly above the minimum guidelines and ratios. Future changes inregulations or practices could further reduce the amount of capital recognizedfor purposes of capital adequacy. Such a change could affect the ability of theBank to grow and could restrict the amount of profits, if any, available forthe payment of dividends. It is the Bank’s policy to remain “well capitalized”status, and review alternatives for raising capital if necessary to keep suchstatus.

 

December 31, 2007

 
| ** **              | ** ** | **Minimum**      | ** ** | **Minimum**                      | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------|------------|------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **              | ** ** | **Capital**      | ** ** | **“Well Capitalized”** | ** ** | **Bank**   | ** ** | **Company** | ** ** |
| ** **              | ** ** | **Requirements** | ** ** | **Bank**                         | ** ** | **Actual** | ** ** | **Actual**  | ** ** |
| LEVERAGE RATIO          |       | 4.0              | %          | 5.0                              | %          | 9.9        | %          | 10.5        | %          |
| TIER 1 RISK-BASED RATIO |       | 4.0              | %          | 6.0                              | %          | 12.3       | %          | 13.2        | %          |
| TOTAL RISK-BASED RATIO  |       | 8.0              | %          | 10.0                             | %          | 13.8       | %          | 14.6        | %          |

 

Under applicableregulatory guidelines, the Bank was considered “Well Capitalized” at December 31,2007.

 

Under applicableregulatory guidelines, the Company’s trust preferred securities issued by oursubsidiary capital trust qualify as Tier 1 capital up to a maximum limit of 25%of Tier 1 capital.  Any additionalportion of the trust preferred securities would qualify as Tier IIcapital.  As of December 31, 2007 thesubsidiary trust had $5.2 million in trust preferred securities outstanding,all of which qualifies as Tier 1 capital.

 

In addition, the DFI hasauthority to take possession of the business and properties of a bank in theevent that the tangible shareholders’ equity of the bank is less than thegreater of (i) 4% of the bank’s total assets or (ii) $1,000,000.

 

**Prompt Corrective Action andOther Enforcement Mechanisms**

 

Federal banking agencies possess broad powers to take corrective andother supervisory action to resolve the problems of insured depositoryinstitutions, including but not limited to those institutions that fall belowone or more prescribed minimum capital ratios described above. An institutionthat, based upon its capital levels, is classified as well capitalized,adequately capitalized, or undercapitalized may be treated as though it were inthe next lower capital category if the appropriate federal banking agency,after notice and opportunity for hearing, determines that an unsafe or unsoundcondition or an unsafe or unsound practice warrants such treatment. At eachsuccessive lower capital category, an insured depository institution is subjectto more restrictions. The federal banking agencies, however, may not treat asignificantly undercapitalized institution as critically undercapitalizedunless its capital ratio actually warrants such treatment.

 

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,

 

 

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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 theissuance of a cease-and-desist order that can be judicially enforced;

·                  the termination of insurance of deposits (inthe case of a depository institution);

·                  the imposition of civil money penalties;

·                  the issuance of directives to increase capital;

·                  the issuance of formal and informalagreements;

·                  the issuance of removal and prohibitionorders against institution-affiliated parties; and

·                  the enforcement of such actions through injunctionsor restraining orders based upon a judicial determination that the agency wouldbe harmed 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 underwriting proceduresas those for comparable transactions with persons who are neither insiders noremployees, and (2) must not involve more than the normal risk of repaymentor present other unfavorable features. Banks are also subject to certainlending limits and restrictions on overdrafts to insiders. A violation of theserestrictions may result in regulatory sanctions on the bank or its insiders.

 

Additionally, a holdingcompany’s inability to serve as a source of strength to its subsidiary bankingorganizations could serve as an additional basis for a regulatory actionagainst the holding company

 

**Safety and Soundness Standards**

 

The Federal DepositInsurance Corporation Improvement Act (“FDICIA”) imposes certain specificrestrictions on transactions and requires federal banking regulators to adoptoverall safety and soundness standards for depository institutions related tointernal control, loan underwriting and documentation and asset growth.  Among other things, FDICIA limits the interestrates paid on deposits by undercapitalized institutions, restricts the use ofbrokered deposits, limits the aggregate extensions of credit by a depositoryinstitution to an executive officer, director, principal shareholder or relatedinterest, and reduces deposit insurance coverage for deposits offered byundercapitalized institutions for deposits by certain employee benefits accounts.The federal banking agencies may require an institution to submit to anacceptable compliance plan as well as have the flexibility to pursue other moreappropriate or effective courses of action given the specific circumstances andseverity of an institution’s noncompliance with one or more standards.

 

**Premiums for Deposit Insurance**

 

The Bank’s deposits are currently insured to a maximum of $100,000 perdepositor by the FDIC except for certain retirement accounts which are insuredup to $250,000. The Bank is required to pay deposit insurance premiums. Thepremium amount is based upon a risk 

 

 

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classification system established by the FDIC. Banks with higher levelsof capital and a low degree of supervisory concern are assessed lower premiumsthan banks with lower levels of capital or a higher degree of supervisoryconcern.  Effective January 1, 2007the FDIC adopted a new rule for the insurance assessment on deposits.Under the new rule the charge for annual insurance deposit assessmentswill range from a minimum of 5 basis points to a maximum of 43 basis points per$100 of insured deposits depending upon the risk assessment category into whichthe institution falls. Insured institutions are not all allowed to disclosetheir risk assessment classification and no assurance can be given as to whatthe future level of premiums will be.

 

Under the Federal DepositInsurance Reform Act of 2005, the Bank received a one-time initial assessmentcredit to recognize its past contributions to the insurance fund. The Bank’sone-time assessment credit was $91,591.61.  This credit can be used to offset assessments until exhausted.  The Bank’s assessment credit will be fullyused by June 2008.

 

In addition to theassessment for deposit insurance, institutions are required to make payments onbonds issued in the late 1980’s by the Financing Corporation to recapitalize a predecessordeposit insurance fund.  This payment isestablished quarterly and during the year ending December 31, 2007averaged 1.14 basis points of assessable deposits.

 

The FDIC has authority toincrease insurance assessments.  Asignificant increase in insurance premiums could have an adverse effect on theoperating expenses and results of operations of the Company.   Management cannot predict what insuranceassessment rates will be in the future.

 

TheFDIC is authorized to terminate a depository institution’s deposit insuranceupon a finding by the FDIC that the institution’s financial condition is unsafeor unsound or that the institution has engaged in unsafe or unsound practicesor has violated any applicable rule, regulation, order or condition enacted orimposed by the institution’s regulatory agency.

 

**Sarbanes-Oxley Act of 2002**

 

OnJuly 30, 2002, the Sarbanes-Oxley Act of 2002 (“SOX”), was signed into lawto address corporate and accounting fraud. SOX establishes a new accountingoversight board that will enforce auditing standards and restricts the scope ofservices that accounting firms may provide to their public company auditclients. Among other things, SOX also (i) requires chief executiveofficers and chief financial officers to certify to the accuracy of periodicreports filed with the SEC; (ii) imposes new disclosure requirementsregarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) acceleratesthe time frame for reporting of insider transactions and periodic disclosuresby public companies; and (iv) requires companies to disclose whether ornot they have adopted a code of ethics for senior financial officers andwhether the audit committee includes at least one “audit committee financialexpert.”

 

Under SOX, the SEC isrequired to regularly and systematically review corporate filings, based oncertain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonusesissued to top executives to disgorgement if a restatement of a company’s financialstatements was due to corporate misconduct; (ii) prohibits an officer ordirector from misleading or coercing an auditor; (iii) prohibits insidertrades during pension fund “blackout periods”; (iv) imposes new criminal 

 

 

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penalties for fraud andother wrongful acts; and (v) extends the period during which certainsecurities fraud lawsuits can be brought against a company or its officers.

 

As a public reportingcompany, the Company is subject to the requirements of SOX and related rules andregulations issued by the SEC and applied to the Company by the FRB.  The Company’s common stock is not listed onany 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 has, and will this year, incuradditional operating expense as a result of certain of the requirements of SOX,but does not expect that the anticipated expense of approximately $75,000 forsuch compliance costs will have a material impact on its business overall.

 

**Financial Services ModernizationLegislation**

 

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the “FinancialServices Modernization Act”) was signed into law. The Financial ServicesModernization Act is intended to modernize the banking industry by removingbarriers to affiliation among banks, insurance companies, the securitiesindustry and other financial service providers. It provides financialorganizations with the flexibility of structuring such affiliations through aholding company structure or through a financial subsidiary of a bank, subjectto certain limitations. The Financial Services Modernization Act establishes anew type of bank holding company, known as a financial holding company, whichmay engage in an expanded list of activities that are “financial in nature,”which include securities and insurance brokerage, securities underwriting,insurance underwriting and merchant banking.

 

The Financial Services Modernization Act also sets forth a system offunctional regulation that makes the Federal Reserve Board the “umbrellasupervisor” for holding companies, while providing for the supervision of theholding company’s subsidiaries 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.

 

The Company does not believe that the Financial Services ModernizationAct will have a material adverse effect on its operations in the near-term. However,to the extent that it permits banks, securities firms, and insurance companiesto affiliate, 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 face from larger institutions andother types of companies offering financial products, many of which may havesubstantially more financial resources than the Company.

 

 

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**Community Reinvestment Act**

 

                The Bank is subject to certain fair lendingrequirements and reporting obligations involving home mortgage lendingoperations and Community Reinvestment Act (“CRA”) activities.  The CRA generally requires the federalbanking agencies to evaluate the record of a financial institution in meetingthe credit needs of their local communities, including low and moderate incomeneighborhoods.  In addition tosubstantial penalties and corrective measures that may be required for aviolation of certain fair lending laws, the federal banking agencies may takecompliance with such laws and CRA into account when regulating and supervisingother activities.  A bank’s compliancewith its CRA obligations is based on a performance-based evaluation systemwhich based CRA ratings on an institution’s lending service and investmentperformance, resulting in a rating by the appropriate bank regulatory 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 and Strengthening America by ProvidingAppropriate Tools Required to Intercept and Obstruct Terrorism, or the PatriotAct, of 2001. Among other things, the Patriot Act (i) prohibits banks fromproviding correspondent accounts directly to foreign shell banks; (ii) imposesdue diligence requirements on banks opening or holding accounts for foreignfinancial institutions or wealthy foreign individuals (iii) requiresfinancial institutions to establish an anti-money-laundering complianceprogram, and (iv) eliminates civil liability for persons who filesuspicious activity reports. The Patriot Act also increases governmental powersto investigate terrorism, including expanded government access to accountrecords and makes rules to implement the Patriot Act.  On March 9, 2006, the President signedthe USA Patriot improvement and Reauthorization Act, which extended andmodified the original act.  While webelieve the Patriot Act may, to some degree, affect our recordkeeping and reportingexpenses, we do not believe that it will have a material adverse effect on ourbusiness and operations.

 

**Transactions between Affiliates**

 

Transactions betweenThe 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 ReserveAct.  Sections 23A and 23B and RegulationW restrict loans by a depository institution to its affiliates, asset 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:

 

 

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·                  initial notices to customersabout their privacy policies, describing the conditions under which they maydisclose non-public information to non-affiliated third parties and affiliates;

·                  annual notices of theirprivacy policies to current customers; and

·                  a reasonable method forcustomers to “opt out” of disclosures 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 bank customersthe opportunity to bar financial companies from sharing information with theiraffiliates.

 

**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 assetsof the borrower rather than on the borrower’s ability to repay an obligation orasset-based lending;

·                  inducing a borrower to refinance a loanrepeatedly in order to charge high points and fees each time the loan isrefinanced or loan flipping; and

·                  engaging in fraud or deception to conceal thetrue nature of the loan obligation from an unsuspecting or unsophisticatedborrower.

 

Federal Reserve Board regulations aimed at curbing such lendingsignificantly widened the pool of high-cost home-secured loans covered by thehome Ownership and Equity Protection Act of 1994, a federal law that requiresextra disclosures and consumer protections to borrowers.  The following triggers coverage under thehome ownership and Equity Protection Act of 1994:

 

·                  interest rates for first lien mortgage loansin excess of 8 percentage points above comparable Treasury securities,

·                  subordinate lien loans of 10 percentagepoints above Treasury securities, and

·                  fees such as optional insurance and similardebt protection costs paid in connection with the credit transaction whencombined with points and fees if deemed 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.

 

 

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**Bank Secrecy Act**

 

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 connected with drug trafficking, terrorism and othercriminal activities.  The primary toolused to implement BSA requirements is the filing of Suspicious ActivityReports.  Today, the BSA requires thatall banking institutions develop and provide for the continued administrationof a program reasonable designed to assure and monitor compliance with certainrecordkeeping and reporting requirements regarding both to domestic andinternational currency transactions. These programs must, at a minimum, provide for a system of internalcontrols to assure ongoing compliance, provide for independent testing of suchsystems and compliance, designate individuals responsible for such complianceand provide appropriate personnel 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 suggests thatinstitutions that are potentially exposed to significant commercial real estateconcentration risk will be subject to increased regulatory scrutiny.  Institutions that have experienced rapidgrowth in commercial real estate lending, have notable exposure to specifictypes of commercial real estate lending, or are approaching or exceed certainsupervisory criteria that measure an institution’s commercial real estateportfolio against its capital levels, may be subject to such increasedregulatory scrutiny.  Our commercial realestate portfolio may be viewed as falling within one or more of the foregoingcategories, and accordingly we may become subject to increased regulatoryscrutiny 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.

 

**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-KSB (Annual Report), Form ARS(Annual Report to Shareholders), Form 10-QSB (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-KSB.

 

 

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**FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS**

 

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 Report is qualified in itsentirety by these factors.  If any of thefollowing risks actually occur, our financial condition and results ofoperations 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 ourBusiness.**

 

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

 

We are operating in a challenging anduncertain economic environment, including generally uncertain national andlocal conditions.  Financial institutionscontinue to be affected by the softening of the real estate market andconstrained financial markets.  While wehave 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:

 

·                  Loandelinquencies, problem assets and foreclosures may increase;

·                  Demand for ourproducts and services may decline;

·                  Low cost ornon-interest bearing deposits may decrease; and

·                  Collateral forour loans, especially real estate, may decline in value, in turn reducingcustomers’ borrowing power, and reducing the value of assets and collateralassociate with our existing loans.

 

**A significant portion of our loan portfolio is secured by real estateand a downturn in the local economy and real estate market could affect ourbusiness.**

 

At December 31, 2007,real estate served as the principal source of collateral with respect toapproximately 79% of our loan portfolio. A decline in current economicconditions could have 

 

 

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an adverse effect on the demand for new loanseven if rates continue to decline.  It isalso understood that the ability of borrowers to repay outstanding loans, thevalue of real estate and other collateral securing loans and the value of realestate owned by the Company, could affect the Company’s financial condition andresults of 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 commercial real estate or CREloans.**

 

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 38% of our commercial term loans aregranted for owner use, which is repaid from the cash flow of the owner’sbusiness.  This coupled with thediversification of business types, location, conservative underwriting and losshistory further mitigates the risk in our CRE portfolio.  The Company targets commercial term loans forowners use as it supports the local business economy.  The Company feels that owner occupiedproperties do not carry the same risk as commercial strip centers and otherincome properties with higher vacancy factors that rely on third parties forrepayment.

 

                In addition, federal bankingregulators recently issued final guidance regarding commercial real estatelending.  This guidance suggests thatinstitutions that are potentially exposed to significant commercial real estateconcentration risk will be subject to increased regulatory scrutiny.  Institutions that have experienced rapidgrowth in commercial real estate lending, have notable exposure to specifictypes of commercial real estate lending, or are approaching or exceed certainsupervisory criteria that measure an institution’s commercial real estateportfolio against its capital levels, may be subject to such increasedregulatory scrutiny.  Our commercial realestate portfolio may be viewed as falling within one or more of the foregoing categories,and accordingly we may become subject to increased regulatory scrutiny becauseof our commercial real estate portfolio. If it is determined by our regulator that we have an undue concentrationin commercial real estate lending, we may be required to maintain increasedlevels of capital and/or be required to reduce our concentration in commercialreal estate loans.

 

**Ourreal estate lending also exposes us to the risk of environmental liabilities.**

 

In the course of our business, we may foreclose and take title to realestate, and could be subject to environmental liabilities with respect to theseproperties.  We may be held liable to agovernmental entity or to third persons for property damage, personal injury,investigation and

 

 

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clean-up costs incurred bythese parties in connection with environmental contamination, or may berequired to investigate or clean up hazardous or toxic substances, or chemicalreleases at a property.  The costs associatedwith investigation 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.

 

**Ourbusiness is subject to interest rate risk and changes in interest rates mayadversely affect our performance and financial condition.**

 

Our earnings are impacted bychanging interest rates. Changes in interest rates impact the demand for newloans, the credit profile of our borrowers, the rates received on loans andsecurities and rates paid on deposits and borrowings. The difference betweenthe rates received on loans and securities and the rates paid on deposits andborrowings is known as interest rate spread. Given our current volume and mixof interest-bearing liabilities and interest-earning assets, we would expectour interest rate spread to increase if interest rates rise and, conversely, todecline if interest rates fall. Increasing levels of competition in the bankingand financial services business may decrease our net interest margin by forcingus to offer lower lending interest rates and pay higher deposit interest rates.Although we believe our current level of interest rate sensitivity isreasonable, significant fluctuations in interest rates and increasing competitionmay have an adverse effect on our business, financial condition and results ofoperations.

 

Asustained decrease in market interest rates could adversely affect ourearnings.  When interest rates decline,borrowers tend to refinance higher-rate, fixed-rate loans at lower rates,prepaying their existing loans.  Underthose circumstances, we would not be able to reinvest those prepayments inassets earning interest rates 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.

 

**Economic conditions in the Central Coast of California areacould adversely affect our operations and/or cause us to sustain losses.**

 

Our retail and commercial banking operationsare concentrated primarily in San Luis Obispo and northern Santa BarbaraCounties.  As a result of this geographicconcentration, our results of operations depend largely upon economicconditions in this area.  A significantsource of risk arises from the possibility that losses will be sustained if asignificant number of our borrowers, guarantors and related parties fail toperform in accordance with the terms of their loans. This risk increases whenthe economy is weak. We have adopted underwriting and credit monitoringprocedures and credit policies, including the establishment and review of theallowance for credit losses, that management believes are appropriate tominimize this risk by assessing the likelihood of nonperformance, tracking loanperformance and diversifying our credit portfolio. 

 

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These policies and procedures, however, maynot prevent unexpected losses that could adversely affect our results ofoperations in general and the market value of our stock.

 

**We face strong competition from financial service companiesand other companies that offer banking services that could hurt our business.**

 

The financial services business in our market areasis highly competitive. It is becoming increasingly competitive due to changesin regulation, technological advances, and the accelerating pace ofconsolidation among financial services providers. We face competition both inattracting quality assets and deposits and in making loans. We compete forloans principally through the interest rates and loan fees we charge and theefficiency and quality of services we provide. Increasing levels of competitionin the banking and financial services business may reduce our market share,decrease loan demand, cause the prices we charge for our services to fall, ordecrease our net interest margin, which is our net interest income divided byour average earning assets, by forcing us to offer lower lending interest ratesand pay higher deposit interest rates. Therefore, our results may differ in future periods depending upon thenature or level of competition.

 

Technology and other changes are allowing parties tocomplete financial transactions that historically have involved banks throughalternative methods. For example, consumers can now maintain funds that wouldhave historically been held as bank deposits in brokerage accounts or mutualfunds. Consumers can also complete transactions such as paying bills and/ortransferring funds directly without the assistance of banks. The process ofeliminating banks as intermediaries, known as “disintermediation,” could resultin the loss of fee income, as well as the loss of customer deposits and therelated income generated from those deposits. The loss of these revenue streamsand the lower cost deposits as a source of funds could have an adverse effecton our financial condition and results of operations.

 

**Failureto successfully execute our strategy could adversely affect our performance.**

 

Our financial performance and profitability dependson our ability to execute our corporate growth strategy.  Continued growth, however, may presentoperating and other problems that could adversely affect our business,financial condition and results of operations. Factors that may adversely affect our ability to attain our long-termfinancial performance goals include those stated elsewhere in this section, aswell as:

 

·                  inability to controlnon-interest expense, including, but not limited to, rising employee andhealthcare costs;

·                  inability to increasenon-interest income; and

·                  continuing ability toexpand, through de novo branching and/or acquisitions of other banks.

 

**We may not be able to attract andretain skilled people**.

 

                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 ofour 

 

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market, years of industryexperience and the difficulty of promptly finding qualified replacementpersonnel.

 

**Our internal operations are subject to a number of risks.**

 

We are subject to certain operations risks, including, but not limitedto, data processing system failures and errors, customer or employee fraud andcatastrophic failures resulting from terrorist acts or natural disasters. Wemaintain a system of internal controls to mitigate against such occurrences andmaintain insurance coverage for such risks that are insurable, but should suchan event occur that is not prevented or detected by our internal controls, uninsuredor in excess of applicable insurance limits, it could have a significantadverse impact on our business, financial condition or results of operations.

 

*InformationSystems*.  We rely heavily oncommunications and information systems to conduct our business. Any failure,interruption or breach in security of these systems could result in failures ordisruptions in our customer relationship management, general ledger, deposit,loan and other systems. While we have policies and procedures designed toprevent or limit the effect of the failure, interruption or security breach ofour information systems, there can be no assurance that any such failures,interruptions or security breaches will not occur or, if they do occur, thatthey will be adequately addressed. The occurrence of any failures,interruptions or security breaches of our information systems could damage ourreputation, result in a loss of customer business, subject us to additionalregulatory scrutiny, or expose us to civil litigation and possible financialliability, any of which could have a material adverse effect on our financialcondition and results of operations.

 

*Technological Advances*. The financial servicesindustry is continually undergoing rapid technological change with frequentintroductions of new technology-driven products and services. The effective useof technology increases efficiency and enables financial institutions to betterserve customers and to reduce costs. Our future success depends, in part, uponour ability to address the needs of our customers by using technology toprovide products and services that will satisfy customer demands, as well as tocreate additional efficiencies in our operations.

 

*Natural Disasters, Acts Of War Or Terrorism and OtherExternal Events*.  Naturaldisasters, acts of war or terrorism and other adverse external events couldhave a significant impact on our ability to conduct business. Such events couldaffect the stability of our deposit base, impair the ability of borrowers torepay outstanding loans, impair the value of collateral securing loans, causesignificant property damage, result in loss of revenue and/or cause us to incuradditional expenses. For example, the Central Coast region of California issubject 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.

 

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**We depend on cash dividends from our subsidiary bank to meet our cashobligations.**

 

As a holding company, dividends from our subsidiary bank provide asubstantial portion of our cash flow used to service our obligations, includingcash dividends.  See “Item 5 — Market forCommon Equity and Related Stockholder Matters.” Various statutory provisions restrict the amount of dividends oursubsidiary bank can pay to us without regulatory approval.

 

**Risks Associated with our Industry.**

 

**We aresubject to government regulation that could limit or restrict our activities,which in turn could adversely impact our operations.**

 

Thefinancial services industry is regulated extensively. Federal and Stateregulation is designed primarily to protect the deposit insurance funds andconsumers, and not to benefit our shareholders. These regulations can sometimesimpose significant limitations on our operations.

 

Further,federal monetary policy, particularly as implemented through the FederalReserve System, significantly affects economic conditions for us.

 

**New legislative and regulatoryproposals may affect our operations and growth.**

 

Proposals to change the laws and regulationsgoverning the operations and taxation of, and federal insurance premiums paidby, banks and other financial institutions and companies that control suchinstitutions are frequently raised in the U.S. Congress, statelegislatures and before bank regulatory authorities. The likelihood of anymajor changes in the future and the impact such changes might have on us or oursubsidiaries are impossible to determine. Similarly, proposals to change theaccounting treatment applicable to banks and other depository institutions arefrequently raised by the SEC, the federal banking agencies, the IRS and otherappropriate authorities. The likelihood and impact of any additional futurechanges in law or regulation and the impact such changes might have on us orour subsidiaries are impossible to determine at this time.

 

**Risks Associated with our Stock.**

 

**Our Stock Trades Less Frequently Than Others.**

 

Although our common stock is quoted on theover-the-counter market, the trading volume in our common stock is less thanthat of other larger financial services companies.  A public trading market having the desired characteristicsof depth, liquidity and orderliness depends on the presence in the marketplaceof willing buyers and sellers of our common stock at any given time.  This presence depends on the individualdecisions of investors and general economic and market conditions over which wehave no control.  Given the lower tradingvolume of our common stock, significant sales of our common stock, or theexpectation of these sales, could cause out stock price to fall.

 

**Our Stock 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:

 

22

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·                  Actualor anticipated variations in quarterly results of operations

·                  Recommendationsby securities analysts

·                  Operatingand stock price performance of other companies that investors deem comparableto our company

·                  Newsreports relating to trends, concerns and other issues in the financial servicesindustry

·                  Perceptionsin the marketplace regarding our company and/or its competitors

 

**OurCommon Stock Is Not An Insured Deposit**.

 

                Ourcommon stock is not a bank deposit and, therefore, is not insured against lossby the FDIC, any other deposit insurance fund or by any other public or privateentity. Investment in our commonstock is inherently risky for the reasons described in this “Risk Factors”section and elsewhere in this report and is subject to the same market forcesthat affect the price of common stock in any company.

 

**Our Articles ofIncorporation and By-Laws, As Well As Certain Banking Laws, May Have AnAnti-Takeover Effect****.**

 

                Provisionsof our articles of incorporation, bylaws and federal banking laws, includingregulatory approval requirements, could make it more difficult for a thirdparty to acquire us, even if doing so would be perceived to be beneficial toour shareholders. The combination of these provisions may hinder anon-negotiated merger or other business combination, which, in turn, couldadversely affect the market price of our common stock.

 

**ITEM 2.          DESCRIPTIONOF PROPERTY**

 

TheCompany conducts its banking operations from four offices.  The Company owns the land and building of itsoffice located at 7480 El Camino Real, in Atascadero, California. The buildingis a two-story building of approximately 16,500 square feet.

 

Inaddition, the Company owns the land and building of its office located at 1240Spring Street, Paso Robles, California. The Bank occupies approximately 7,200square feet on the ground floor of the building and 2,800 square feet in thebasement is used for records storage and as a staff room.

 

TheCompany owns the land and building of its office located at 1530 East GrandAvenue in Arroyo Grande.  The building isa two-story building of approximately 10,200 square feet.

 

TheCompany owns the land and a two-story building of approximately 10,000 squarefeet which houses its office located at 1825 South Broadway, Santa Maria,California.

 

TheCompany believes that all of its properties are well maintained and aresuitable for their respective present needs and operations.

 

23

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**ITEM 3.          LEGALPROCEEDINGS**

 

The Company is, from time totime, subject to various pending and threatened legal actions which arise outof the normal course of its business. The Company is not a party to any pendinglegal or administrative proceedings (other than ordinary routine litigationincidental to the Company’s business) and no such proceedings are known to becontemplated.

 

Thereare no material proceedings adverse to the Company to which any director,officer, affiliate of the Company or 5% shareholder of the Company, or anyassociate of any such director, officer, affiliate or 5% shareholder of theCompany is a party, and none of the above persons has a material interestadverse to the Company.

 

**ITEM 4.          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

                Nomatters were submitted to a vote of security holders during the fourth quarterof 2007.

 

24

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# **PART II**

 

**ITEM 5.          MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Market Information**

 

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

 

Theinformation in the following table indicates the high and low bid prices of theCompany’s Common Stock for each quarterly period during the last two yearsbased upon information provided by certain of the firms mentioned above whoserve as the Company’s market makers. These prices do not include retailmark-ups, mark-downs or commission.

 
| **Quarter Ended** | ** ** | **Bid Prices (1)** | ** ** |
|-------------------|------------|--------------------|------------|
| ** **        | ** ** | **Low**            | ** ** | **High** | ** ** |
| 2007              |       |               |       |   |   |
| December 31  |       | $                  | 23.25      |   | $ | 26.25 |   |
| September 30 |       | 25.00              |       | 29.00 |   |
| June 30      |       | 26.00              |       | 28.99 |   |
| March 31     |       | 26.00              |       | 29.00 |   |
| 2006              |       |               |       |   |   |
| December 31  |       | $                  | 24.00      |   | $ | 29.00 |   |
| September 30 |       | 24.05              |       | 27.00 |   |
| June 30      |       | 26.55              |       | 34.50 |   |
| March 31     |       | 25.05              |       | 30.25 |   |

----

(1)          Based on data reported bythe market makers named above. Does not include information on shares tradeddirectly by shareholders or through other dealers.

 

**Holders**

 

Asof January 31, 2008, there were approximately 383 record holders of theCompany’s Common Stock. There are no other classes of equity outstanding.

 

25

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**Dividends**

 

The following table sets forth the per shareamount and month of payment for all cash dividends paid since January 1,2006:

 

| **Month Paid**      | ** ** | **Amount Per Share** | ** ** |
|---------------------|------------|----------------------|------------|
| March 2006     |       | $                    | 0.20       |   |
| September 2006 |       | 0.20                 |       |
| March 2007     |       | 0.20                 |       |
| September 2007 |       | 0.25                 |       |
|                     |            |                      |            |  |

 

The Company is a legal entity separate anddistinct from the Bank.  The Company’sshareholders are entitled to receive dividends when declared by its Board ofDirectors, out of funds legally available therefore, subject to therestrictions set forth in the California General Corporation Law (theCorporation law).  The Corporation Lawprovides that a corporation may make a distribution to its shareholders if thecorporation’s retained earnings equal at least the amount of the proposeddistribution.  The Corporation Law alsoprovides that, in the event that sufficient retained earnings are not availablefor the proposed distribution, a corporation may, nevertheless, make adistribution to its shareholders if it meets two conditions, which generallystates are as follows: (i) the corporation’s assets equal 1-1/4 times itsliabilities, and (ii) the corporation’s current assets equal at least itscurrent liabilities or, if the average of the corporation’s earnings beforetaxes on income and before interest expenses for the two preceding fiscal yearswas less than the average of the corporation’s interest expenses for suchfiscal years, then the corporation’s interest expenses for such fiscal years,then the corporation’s current assets must equal at least 1-1/4 times itscurrent liabilities.

 

The ability of the Company to pay a cashdividend depends largely on the Bank’s ability to pay a cash dividend to theCompany.  The payment of cash dividendsby the Bank is subject to restrictions set forth in the California FinancialCode (the Financial Code).  The FinancialCode provides that a bank may not make a cash distribution to its shareholdersin excess 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 parent holding company, theFederal Reserve Board might, under certain circumstances, place restrictions onthe ability of a particular bank to pay dividends based upon peer groupaverages and the performance and maturity of the particular bank, or object tomanagement fees to be paid by a subsidiary bank to its holding company on thebasis that such fees cannot be supported by the value of the services renderedor are not the result of an arm’s length transaction.

 

Additionally,the Company’s junior subordinated debt agreements contain provisions which prohibitthe paying of dividends if it defers payment of interest on outstanding trustpreferred securities (See “Item I. Business — Supervision and Regulation —Capital Standards”)

 

26

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The Company intends to pay cash dividends inthe future subject to various factors including regulatory restrictionsdescribed above. Whether or not any dividends will be paid in the future willbe determined by the Board of Directors after consideration of various factors.The Company’s profitability and regulatory capital ratios in addition to otherfinancial conditions will be key factors considered by the Board of Directorsin making such determinations regarding the payment of dividends by theCompany.

 

**Equity Compensation Plan**

 

**               **The Company hasa 2006 Equity Based Compensation plan that provides for grants of incentivestock options, non-qualified stock options, and various other forms of equityawards.  The plan covers a total of200,000 shares of Company common stock. When the 2006 Plan was adopted, our prior stock option plans were frozenand no other awards may be granted from such plans.

 

                The followingtable summarizes information as of December 31, 2007 relating to ourequity based compensation plans:

 
| **Equity  Compensation Plan Information**                  | ** ** | ** **                                                                                                 | ** ** | ** **                                                                               | ** ** | ** **                                                                                                                                                   | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                          | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights  (b)** | ** ** | **Number of  securities  remaining available  for future issuance  under equity  compensation  plans (excluding  securities reflected  in column (a))  (c)** | ** ** |
| Equity compensation plans approved by security holders     |       | 102,500                                                                                                    |       | $                                                                                        | 26.15      |                                                                                                                                                         | 97,500     |   |
| Equity compensation plans not approved by security holders |       | N/A                                                                                                        |       | N/A                                                                                      |       | N/A                                                                                                                                                          |       |
| **Total**                                                  |       | 102,500                                                                                                    |       | $                                                                                        | 26.15      |                                                                                                                                                         | 97,500     |   |

 

**Purchase of Equity Securities**

 

OnOctober 28, 2006, the Board authorized the repurchase of up to $1,000,000worth of the Company’s common stock. This authorization does not have an expiration date.  There were 11,900 shares of the Company’scommon stock repurchased in the fourth quarter of 2007 at an average price of$24.54 per share.  All of these shareswere purchased in open market transactions. As of December 31, 2007, the Company is continuing the program andcan repurchase up to $146,649 worth of additional shares under the October 2006authorization.  The chart below shows thenumber of shares purchased and average price paid per share on a month-to-monthbasis for the fourth quarter of 2007.

 

27

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The table below summarizes our monthlyrepurchases and redemptions of our common equity securities during the threemonths ended December 31, 2007:

** **
| **Period**                 | ** ** | **(a)  Total  number  of shares  purchased** | ** ** | **(b)  Average price  paid per share** | ** ** | **(c)  Total number of  shares purchased  as part of  publicly  announced plan** | ** ** | **(d) Approximate  dollar value of shares that  may yet be purchased  under the plan** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| October 1 - 31, 2007  |       | 0                                            |       | $                                      | 0.00       |                                                                             | 0          |                                                                                        | $          | 437,848 |   |
|                       |       |                                         |       |                                   |       |                                                                             |       |                                                                                        |       |
| November 1 - 30, 2007 |       | 7,600                                        |       | 24.28                                  |       | 7,600                                                                            |       | 253,139                                                                                     |       |
|                       |       |                                         |       |                                   |       |                                                                             |       |                                                                                        |       |
| December 1 - 31, 2007 |       | 4,300                                        |       | 24.75                                  |       | 4,300                                                                            |       | 146,649                                                                                     |       |
|                       |       |                                         |       |                                   |       |                                                                             |       |                                                                                        |       |
| Total                      |       | 11,900                                       |       | $                                      | 24.54      |                                                                             | 11,900     |                                                                                        | $          | 146,649 |   |

 

**ITEM 6.          MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**

 

**                The information required by Item6 of Form 10-KSB is incorporated by reference from the section entitled “Management’sDiscussion and Analysis and Results of Operations” in the Company’s 2007 (ARS)Annual Report to Shareholders, filed on February 15, 2008 with the SEC.**

** **

**ITEM 7.          FINANCIALSTATEMENTS**

 

Thefinancial statements and the notes thereto required by Item 7 of Form 10-KSBare incorporated by reference from the Company’s 2007 (ARS) Annual Report toShareholders, filed on February 15, 2008 with the SEC.

 

**ITEM 8.          CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL**

**                        DISCLOSURE**

 

Not applicable.

 

**ITEM 8A (T). CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

The Company’s management carried out an evaluation,under the supervision and with the participation of the Company’s President andChief Executive Officer and the Company’s Executive Vice President and ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of December 31, 2007, pursuantto

 

28

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Exchange Act Rule 13a-15. Based upon thatevaluation, the Company’s President and Chief Executive Officer along with theCompany’s Executive Vice President and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures as of December 31, 2007are effective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic filings under the Exchange Act.

 

**InternalControl Over Financial Reporting**

 

**(a)   Management’sAnnual Report on Internal Control Over Financial Reporting.**

 

The managementof the Company is responsible for establishing and maintaining adequateinternal control over financial reporting. The Company’s internal control overfinancial reporting is a process designed under the supervision of the Company’sChief Executive Officer and Chief Financial Officer to provide reasonableassurance regarding the reliability of financial reporting and the preparationof the Company’s financial statements for external purposes in accordance withU.S. generally accepted accounting principles.

 

As of December 31,2007, management assessed the effectiveness of the Company’s internal controlover financial reporting based on the criteria for effective internal controlover financial reporting established 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, 2007, based on those criteria.

 

The Company’smanagement, including its Chief Executive Officer and Chief Financial Officer, doesnot expect that its disclosure controls and procedures, or its internalcontrols will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefit of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected.

 
| /s/ Larry H. Putnam           |   | /s/ John C. Hansen            |
|-------------------------------|--------|-------------------------------|
| Larry H. Putnam               |   | John C. Hansen                |
| Chief Executive  Officer      |   | Chief Financial  Officer      |
| (Principal Executive Officer) |   | (Principal Financial Officer) |

 

**(b)   Changes inInternal Control Over Financial Reporting.**

 

No changes in the Company’s internal control overfinancial reporting have come to management’s attention that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

29

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**ITEM 8B.               OTHERINFORMATION**

 

                None.

 

# **PART III**

 

**ITEM 9.                  DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE**

**                                WITHSECTION 16(a) OF THE EXCHANGE ACT**

 

The Company has adopted a Code of BusinessConduct and Ethics that applies to all employees and directors of the Company,and complies with the SEC’s requirements for a code of ethics applicable tosenior executive officers.  A copy of theCode of Business Conduct and Ethics was attached to the Form 10-KSB filedon March 24, 2006, for the year ended December 31, 2005.

 

During 2007, the Board established aCorporate Governance Committee Charter and Corporate Governance Guidelines. Acopy of the Corporate Governance Committee Charter and Guidelines was attachedas “Exhibit A” to the Proxy Statement filed with the SEC on February 15,2008.

 

The remainder of the information required byItem 9 of Form 10-KSB is incorporated by reference from the informationcontained in the Company’s Proxy Statement for the 2008 Annual Meeting ofShareholders which has been filed pursuant to Regulation 14A.

 

**ITEM 10.               EXECUTIVECOMPENSATION**

 

The information required by Item 10 of Form 10-KSBis incorporated by reference from the information contained in the Company’sProxy Statement for the 2008 Annual Meeting of Shareholders which has beenfiled pursuant to Regulation 14A.

** **

**ITEM 11.               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND**

**                                RELATEDSTOCKHOLDER MATTERS**

 

The information required by Item 11 of Form 10-KSBis incorporated by reference from the information contained in the Company’sProxy Statement for the 2008 Annual Meeting of Shareholders which has beenfiled pursuant to Regulation 14A.

 

**ITEM 12.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ANDDIRECTOR INDEPENDENCE**

 

The information required by Item 12 of Form 10-KSBis incorporated by reference from the information contained in the Company’sProxy Statement for the 2008 Annual Meeting of Shareholders which has beenfiled pursuant to Regulation 14A.

 

30

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**ITEM 13.               EXHIBITS**

 

             (a)              The following exhibits are filedas part of the Form 10-KSB, and this list includes the Exhibit Index:

 

**Index to Exhibits**

 
| **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/                              |
|                |       |                                                                                                          |       |                             |
| 3.3                 |       | Certificate of  Amendment to Bylaws of Santa Lucia Bank, dated January 16, 2002                               |       | 7/                               |
|                |       |                                                                                                          |       |                             |
| 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/                               |

 

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|   |   |                                                                                                                                   |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 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/     |
|   |   |                                                                                                                                   |   |   |
| 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/     |

 

32

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|   |   |                                                                                                                 |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|--------|--------|
| 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 Stanley R. Cherry, dated May 10, 2000                                 |   | 6/     |
|   |   |                                                                                                                 |   |   |
| 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/     |

 

33

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|   |   |                                                                                                                       |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 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/    |
|   |   |                                                                                                                       |   |   |
| 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            |   |   |

----

1/             Incorporated by reference from the Bank’s Form 10-KSBfor the year ended December 31, 1995

 

2/             Incorporated by reference from the Bank’s Form 10-KSBfor the year ended December 31, 1996

 

3/             Incorporated by reference from the Bank’s Form 10-KSBfor the year ended December 31, 1997

 

4/             Incorporated by reference from the Bank’s Form 10-KSBfor the year ended December 31, 1998

 

5/             Incorporated by reference from the Bank’s Form 10-KSB for theyear ended December 31, 1999

 

6/                                      Incorporated byreference from the Bank’s Form 10-KSB for the year ended December 31,2000

 

7/                                      Incorporated byreference from the Bank’s Form 10-KSB for the year ended December 31,2001

 

8/                                      Incorporated byreference from the Bank’s Form 10-KSB for the year ended December 31,2002

 

34

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9/                                      Incorporated byreference from the Bank’s Form 10-QSB for the period ended September 30,2003

 

10/                                Incorporated byreference from the Bank’s Form 10-KSB for the period ended December 31,2003

 

11/                                Incorporated byreference from the Bank’s Form 10-KSB for the period ended December 31,2004

 

12/                                Filed as partof Registrants Registration Statement on Form S-8 (File #333-137997)(Filed on 10/13/06)

 

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

 

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

 

**ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

 

                The informationrequired by Item 14 of Form 10-KSB is incorporated by reference from theinformation contained in the Company’s Proxy Statement for the 2008 AnnualMeeting of Shareholders which has been filed pursuant to Regulation 14A.

 

# **SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Exchange Act, the registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
| ** ** | **SANTA LUCIA BANCORP**                              |
|------------|------------------------------------------------------|
| ** ** | ** **                                           |
| By:        | /s/ Larry H. Putnam                                  |
|       | LARRY H. PUTNAM                                      |
|       | President and Chief Executive Officer                |
|       | (Principal Executive Officer)                        |
|       | Dated: March  19, 2008                          |
|       |                                                 |
| By:        | /s/ John C. Hansen                                   |
|       | JOHN C. HANSEN                                       |
|       | Executive Vice President and Chief Financial Officer |
|       | (Principal Financial and Accounting Officer)         |
|       | Dated:  March 19, 2008                          |

 

35

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In accordance with the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
|                       |   |                       |   | Dated:               |
|----------------------------|--------|----------------------------|--------|----------------------|
| /s/  Larry H. Putnam       |   | President  and             |   | March 19,  2008 |
| LARRY  H. PUTNAM           |   | Chief  Executive Officer,  |   |                 |
|                       |   | and  Director              |   |                 |
|                       |   |                       |   |                 |
| /s/  Jerry W. DeCou III    |   | Chairman  of the           |   | March 19,  2008 |
| JERRY  W. DECOU III        |   | Board  of Directors        |   |                 |
|                       |   |                       |   |                 |
| /s/  Douglas C. Filipponi  |   | Vice  Chairman             |   | March 19,  2008 |
| DOUGLAS  C. FILIPPONI      |   | of  the Board of Directors |   |                 |
|                       |   |                       |   |                 |
| /s/  Khatchik H. Achadjian |   | Director                   |   | March 19,  2008 |
| KHATCHIK  H. ACHADJIAN     |   |                       |   |                 |
|                       |   |                       |   |                 |
| /s/  Stanley R. Cherry     |   | Director                   |   | March 19,  2008 |
| STANLEY R. CHERRY          |   |                       |   |                 |
|                       |   |                       |   |                 |
| /s/  Jean Hawkins          |   | Director                   |   | March 19,  2008 |
| JEAN  HAWKINS              |   |                       |   |                 |
|                       |   |                       |   |                 |
| /s/  Paul G. Moerman       |   | Director                   |   | March 19,  2008 |
| PAUL  G. MOERMAN           |   |                       |   |                 |
|                       |   |                       |   |                 |
| /s/  D. Jack Stinchfield   |   | Director                   |   | March 19,  2008 |
| D.  JACK STINCHFIELD       |   |                       |   |                 |

 

36

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# **EXHIBIT INDEX**

 
| **Exhibit**    | ** ** | ** **                                                                                                                     |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------|
| **Sequential** | ** ** | ** **                                                                                                                     |
| **Number**     | ** ** | **Description**                                                                                                                |
|           |       |                                                                                                                           |
| 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 |

 

37

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