**Exhibit13**

**SantaLucia Bancorp 2006 Annual Report**

**2006**

**Santa Lucia Bancorp**

7480 El CaminoReal

Atascadero, California 93422

***Stock Symbol*—SLBA.OB**

**Santa Lucia Bank**

7480 El CaminoReal

Atascadero, California 93422

**www.santaluciabank.com**

| **Atascadero**      |   | **Paso Robles** |   | **Arroyo Grande**  |   | **Santa Maria**  |
|---------------------|--------|-----------------|--------|--------------------|--------|------------------|
| 7480 El Camino Real |   | 1240 Spring St. |   | 1530 E. Grand Ave. |   | 1825 S. Broadway |
| (805) 466-7087      |   | (805) 239-1140  |   | (805) 473-1988     |   | (805) 614-9100   |

 

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***Message from the President***

Dear Shareholders, Customers and Friends,

Santa Lucia Bancorp (“the Company”) is pleased toreport that 2006 was a very exciting and rewarding year. Santa Lucia BankShareholders approved the formation of a Bank Holding Company at the AnnualShareholders Meeting on March 15, 2006. Santa Lucia Bancorp became a reality onApril 3, 2006. Santa Lucia Bank now operates as a wholly owned subsidiary ofSanta Lucia Bancorp.

One of the primary reasons we asked our Shareholdersto approve the formation of Santa Lucia Bancorp is that a Bank Holding Companycan issue Trust Preferred Securities. Santa Lucia Bancorp issued $5,155,000 inTrust Preferred Securities in April 2006. The Company has since invested$3,000,000 into Santa Lucia Bank to further support the Bank’s growth anddevelopment.

Net profits for the Company reached an all time highof $3,388,271 or a 23.4% increase over 2005’s Net Income of $2,746,820. We arevery pleased with the growth in Net Income in 2006, especially when youconsider this is following a 50.8% increase in Net Income from 2004 to 2005. Weare confident that the results support our continued commitment to providingquality, timely and personalized service to our Customers on a consistentbasis.

Larry H. Putnam, Presidentand Chief Executive Officer

 

Total Asset and Deposit growth were not at the samelevels as prior years, in a large extent due to the redeployment of ourCustomers funds into their Businesses and into alternate investments. There hasbeen a substantial improvement in Non-Bank investment alternatives during thepast several years. Total Deposits grew to $212,998,452 or 2.95%, despite thereallocation of deposits by our existing Customer base. We have seen a changein the mix of our Deposits, however the Company’s non-interest bearing DemandDeposits remain relatively unchanged between 2005 and 2006. Core deposit andloan growth are two of the major factors that allowed the Company to increaseits Net Income significantly since 2002.

Santa Lucia Bancorp, continued its wholly ownedsubsidiary’s practice of paying Cash Dividends to our Shareholders. Two CashDividends were paid in 2006 totaling $0.40 per share. This is the seventeenthconsecutive year that Cash Dividends have been paid to our Shareholders. Theresults from the 4 for 1 Stock Split, that took place June 30, 2005 producedthe results that

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Santa Lucia Bancorp’s Boardof Directors. Standing left to right—Douglas C. Filipponi, Vice Chairman, LarryH. Putnam, President and Chief Executive Officer, Jerry W. DeCou III, Chairmanof the Board. Seated left to right—Khatchik H. Achadjian, D. Jack Stinchfield,Jean Hawkins, Paul G. Moerman, and Stanley R. Cherry.

were expected. We have seen an increase in the volumeof trades and the overall liquidity of the Company’s Stock. Santa Lucia Bancorp’sstock closed the year at $28.00 per share, which represents a 7.7% increase in2006. This follows a 40.5% increase in 2005, when adjusted for the 4 for 1stock split. Earnings per share (basic) increased 21.2% to $1.77 per sharecompared to $1.46 in 2005 and $0.98 in 2004.

I am very pleased with the Company’s overallperformance and its ability to continue to grow its Core Business. A veryimportant factor in our success is the continued dedication and commitment ofour Board of Directors, Officers and Staff to the principal of providingquality personalized service to the markets we serve. This is enhanced by theFirst Class Facilities that we have strategically placed on the Central Coastof California, which is a very desirable and growing region.

In closing, I would especially like to thank all ofour Loyal Customers that continually support Santa Lucia Bank. This coupledwith the ongoing support of our Shareholders, Directors and Employees willallow us to improve on the Company’s performance for years to come. I wouldlike to wish you the very best in 2007 and thank you for your continuedsupport.
|            |                         |       |
|------------|-------------------------|------------|
| ** ** | **Larry H. Putnam**     | ** ** |
|       | President               |       |
|       | Chief Executive Officer |       |

 

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**SANTA LUCIA BANK***(a wholly owned subsidiaryof Santa Lucia Bancorp)*

**Senior Management Team**
|                                                                  | **LARRY H. PUTNAM**

President and Chief Executive Officer 

 

**JOHN C. HANSEN**  Executive Vice resident and  Chief Financial Officer 

 

**JIM COWAN**  Senior Vice President  Branch Administrator 

 

**WILLIAM F. FILIPPIN**

Senior Vice President  Credit Administrator

* *

* *

* *

* *

* *

* *

* *

***Eager to service  your  banking needs*** |
|------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| William F. Filippin, John C. Hansen, Jim Cowan,  Larry H. Putnam | ** **                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

** **

**Administrative Team**
|                                                                                                                                           | **LARRY H. PUTNAM**

President and Chief Executive Officer 

**JOHN C. HANSEN**

Executive Vice President and Chief Financial Officer 

**JIM COWAN**

Senior Vice President  Branch Administrator 

**WILLIAM F. FILIPPIN**

 Senior Vice  President  Credit Administrator

**CLAUDYA OGLESBY**

Vice President  Administration **MELODEE FONTANA**

Vice President

Operations Administrator 

**SHARON SATTERTHWAITE** Assistant VicePresident  Administration 

**KRISTIE KELLER**

Assistant Vice President  Central Operations |
|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Jim Cowan, John C. Hansen, Sharon Satterthwaite,  Kristie Keller, William F. Filippin,  Larry H. Putnam, Melodee Fontana, Claudya Oglesby | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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|        | **Atascadero Office**7480 El Camino Real, Atascadero, California |
|--------|------------------------------------------------------------------|
|   |                                                                  |

 

** **

 

**                                                               **
|                                                                                                                                                                                                                                                                                                        | **Atascadero Officer Team**                                                           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| **TERI DAVIS**  Vice President   Loan Officer 

**JIM KELLEY**

Vice President   Loan Officer 

**LARRY WOMACK**

Vice President   Loan Officer 

**KIM DONALDSON**

Assistant Vice President Operations Officer

**KAREN SAMPSON**

Assistant Operations Officer 

**ROBERT McCONAGHY**

Loan Officer |                                                                                       |
| ** **                                                                                                                                                                                                                                                                                             | Kim Donaldson, Teri Davis,  Karen Sampson, Larry Womack, Jim Kelley, Robert McConaghy |

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** **
| **Paso Robles Office**1240 Spring Street, Paso Robles, California | ** ** |
|-------------------------------------------------------------------|------------|
|                                                                   |       |

 

 

** **
| **Paso  Robles Officer Team**                                       |                                                                                                                                                                                                                  |
|---------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                     | **ROBERT COVARRUBIAS**Vice President   Manager**CHERYL MUMFORD**Assistant Vice President  Operations Officer**RYUN McCRORY**Assistant Vice President  Loan Officer****

**J. DARREN BARNES**Loan Officer

  |
| Cheryl Mumford, J.  Darren Barnes, Robert Covarrubias, Ryun McCrory | ** **                                                                                                                                                                                                       |

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|        | **Arroyo Grande Office**

1530 East Grand Avenue,  Arroyo Grande, California |
|--------|------------------------------------------------------------------------------|
|   |                                                                              |
|   | ** **                                                                   |

 

|                                                                                                                                                                                                                  | **Arroyo Grande Officer Team**                                                |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
| **MICHAEL  W. MCKENZIE******Vice President  Manager**JENNIFER BASSI GINDER**Assistant Vice President  Operations Officer**RICHARD ALLEN**Assistant Vice President  Loan Officer**REGINA M. SHELDON**Loan Officer |                                                                               |
| ** **                                                                                                                                                                                                       | Richard  Allen, Michael W. McKenzie, Regina M. Sheldon, Jennifer Bassi Ginder |

 

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** **
| **Santa Maria Office**1825 South Broadway, Santa Maria, California | ** ** |
|--------------------------------------------------------------------|------------|
|                                                                    |       |

 

 

**                                                                                                                                               **
| **Santa Maria Officer Team** | ** **                                                                                                                     |
|------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
|                              | **LEAH T. WEST**Vice President  Manager**JAMES P. BURUBELTZ**Vice President  Loan Officer**STELLA MARTINEZ**Operations Officer |
|                         |                                                                                                                           |

 

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**SANTALUCIA BANCORP**

**FINANCIAL HIGHLIGHTS**

*As of Years Ended December 31,*

The Company has only oneclass of securities, common stock, which is traded on the over-the-countermarket. Our stock is quoted on the OTC Bulletin Board under the symbol SLBA.OB.The information in the following table indicates the high and low bid prices ofthe Company’s common stock for each quarterly period during the last two yearsbased upon information provided by the Company market makers. These prices donot include retail mark ups, mark downs or commissions, but have been adjustedto reflect the Bank’s 4-for-1 stock split that was effective June 2005.

| Quarter Ended 2006 | ** ** | **Low**    | ** ** | **High**   | ** ** |
|------------------------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 31                  |       | $          | 24.00      |       | $          | 29.00 |   |
| September 30                 |       | 24.05      |       | 27.00      |       |
| June 30                      |       | 26.55      |       | 34.50      |       |
| March 31                     |       | 25.05      |       | 30.25      |       |
|                              |            |            |            |            |            |  |  |

 

| Quarter Ended 2005 | ** ** | **Low** | ** ** | **High** | ** ** |
|------------------------------|------------|---------|------------|----------|------------|
| December 31                  |       | $       | 25.50      |     | $          | 29.50 |   |
| September 30                 |       | 20.25   |       | 30.00    |       |
| June 30                      |       | 19.37   |       | 20.25    |       |
| March 31                     |       | 18.38   |       | 20.00    |       |
|                              |            |         |            |          |            |  |  |

 

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**SantaLucia Bancorp and Subsidiary**

**ConsolidatedSelected Financial Information**
| ** **                                           | ** ** | **Year Ended December 31,**                                      | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Summary of Operations:                     | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Interest Income                                      |       | $                                                                               | 17,027     |   | $ | 13,546 |   | $ | 10,220 |   | $ | 9,157 |   | $ | 8,426 |   |
| Interest Expense                                     |       | 3,577                                                                           |       | 1,984 |   | 1,343 |   | 1,324 |   | 1,614 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Net Interest  Income                                 |       | 13,450                                                                          |       | 11,562 |   | 8,877 |   | 7,833 |   | 6,812 |   |
| Provision for  Loan Loss                             |       | 240                                                                             |       | 300 |   | 110 |   | 115 |   | 30 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Net Interest  Income After Provision for Loan Losses |       | 13,210                                                                          |       | 11,262 |   | 8,767 |   | 7,718 |   | 6,782 |   |
| Nointerest  Income                                   |       | 1,010                                                                           |       | 1,052 |   | 1,191 |   | 1,376 |   | 1,244 |   |
| Nointerest  Expense                                  |       | 8,590                                                                           |       | 7,808 |   | 7,060 |   | 6,609 |   | 6,082 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Income Before  Income Taxes                          |       | 5,630                                                                           |       | 4,506 |   | 2,898 |   | 2,485 |   | 1,944 |   |
| Income Taxes                                         |       | 2,242                                                                           |       | 1,759 |   | 1,076 |   | 873 |   | 673 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Net Income                                           |       | $                                                                               | 3,388      |   | $ | 2,747 |   | $ | 1,822 |   | $ | 1,612 |   | $ | 1,271 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Cash Dividends  Paid                                 |       | $                                                                               | 768        |   | $ | 730 |   | $ | 697 |   | $ | 685 |   | $ | 672 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Per Share Data:                                      | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income —  Basic                             |       | $                                                                               | 1.77       |   | $ | 1.46 |   | $ | 0.98 |   | $ | 0.89 |   | $ | 0.71 |   |
| Net Income —  Diluted                           |       | $                                                                               | 1.68       |   | $ | 1.38 |   | $ | 0.94 |   | $ | 0.86 |   | $ | 0.67 |   |
| Dividends                                            |       | $                                                                               | 0.400      |   | $ | 0.388 |   | $ | 0.375 |   | $ | 0.375 |   | $ | 0.375 |   |
| Book Value                                           |       | $                                                                               | 9.93       |   | $ | 8.35 |   | $ | 7.42 |   | $ | 6.96 |   | $ | 6.56 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Common Outstanding  Shares:                          |       | 1,928,097                                                                       |       | 1,899,543 |   | 1,861,764 |   | 1,844,708 |   | 1,801,376 |   |
| (Adjusted for  4-for-1 stock split)                  |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Statement of Financial  Condition Summary:           | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total Assets                                         |       | $                                                                               | 240,738    |   | $ | 231,532 |   | $ | 211,684 |   | $ | 183,827 |   | $ | 162,483 |   |
| Total Deposits                                       |       | 212,988                                                                         |       | 206,879 |   | 194,868 |   | 168,033 |   | 149,831 |   |
| Total Net Loans                                      |       | 169,680                                                                         |       | 152,563 |   | 125,586 |   | 109,949 |   | 101,506 |   |
| Allowance for  Loan Losses                           |       | 1,654                                                                           |       | 1,470 |   | 1,200 |   | 1,112 |   | 1,026 |   |
| Total  Shareholders’ Equity                     |       | 19,137                                                                          |       | 15,866 |   | 13,807 |   | 12,845 |   | 11,812 |   |
|                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Selected Ratios:                                     | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Return on  Average Assets                            |       | 1.42                                                                            | %          | 1.21 | % | 0.91 | % | 0.94 | % | 0.85 | % |
| Return on  Average Equity                            |       | 19.45                                                                           | %          | 18.67 | % | 13.71 | % | 13.00 | % | 11.16 | % |
| Average Loans as  a Percentage of Average Deposits   |       | 79.74                                                                           | %          | 69.90 | % | 62.77 | % | 68.93 | % | 69.92 | % |
| Allowance for  Loan Losses to Total Loans            |       | 0.96                                                                            | %          | 0.95 | % | 0.94 | % | 1.00 | % | 1.00 | % |
| Company:                                             | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tier I Capital  to Average Assets                    |       | 10.00                                                                           | %          | — |   | — |   | — |   | — |   |
| Tier I Capital  to Risk-Weighted Assets              |       | 14.00                                                                           | %          | — |   | — |   | — |   | — |   |
| Total Capital to  Risk-Weighted Assets               |       | 15.00                                                                           | %          | — |   | — |   | — |   | — |   |
| Bank:                                                | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tier I Capital  to Average Assets                    |       | 9.11                                                                            | %          | 7.16 | % | 6.53 | % | 7.00 | % | 7.08 | % |
| Tier I Capital  to Risk-Weighted Assets              |       | 11.43                                                                           | %          | 9.33 | % | 8.80 | % | 9.34 | % | 9.47 | % |
| Total Capital to  Risk-Weighted Assets               |       | 13.13                                                                           | %          | 11.34 | % | 10.85 | % | 11.66 | % | 10.34 | % |

 

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**Santa Lucia Bancorp and Subsidiary**

**General**

Santa Lucia Bancorp (the “Company”) (OTC BulletinBoard SLBA.OB) is a California corporation organized April 3, 2006 to act asthe holding company for its wholly owned subsidiary Santa Lucia Bank (the “Bank”),collectively referred to herein as the “Company.”  The Bank was organized as a national bankingassociation on December 19, 1984 and commenced operations on August 5, 1985.The Bank converted from a national to a California state-chartered bank on May30, 1997.

The Bank is a commercial banking business, operatingfrom offices located at 7480 El Camino Real, Atascadero, California, 1240Spring Street, Paso Robles, California, 1530 East Grand Avenue, Arroyo Grande,California and 1825 South Broadway, Santa Maria, California.

The Bank’s operating policy since its inception hasemphasized general commercial banking. Most of the Bank’s customers are small to mid-sized businesses andindividuals.  The business of the Bankemphasizes serving the needs of local businesses, professionals, and wageearners.  The Bank provides servicesdesigned to meet the needs of the various segments of the markets itserves.  These services include a fullline of business loans, business leasing, personal loans and deposit products.

**Management’s Discussion and Analysisand Results of Operations**

Certain statements contained in this report,including, without limitation, statements containing the words “believes”, “anticipates”,“intends”, “expects”, and words of similar import, constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company to be materially differentfrom any future results, performance or achievements expressed or implied bysuch forward-looking statements.  Suchfactors include, among others, the following: general economic and businessconditions in those areas in which the Company operates, demographic changes,competition, fluctuations in interest rates, changes in business strategy ordevelopmental plans, changes in governmental regulations, credit quality, theavailability of capital to fund the expansion of the Company’s business, andother factors referenced in the Company’s reports filed pursuant to theExchange Act.  Given these uncertainties,shareholders are cautioned not to place undue reliance on such forward-lookingstatements.  The Company disclaims anyobligation to update any such factors or to publicly announce the results ofany revisions to any of the forward-looking statements contained herein toreflect future events or developments.

This discussion should be read in conjunction with theCompany’s audited financial statements and notes thereto which appear elsewherein this report.

***Overview***

The following sections set forth an analysis of thesignificant operating changes, business trends, financial condition, earnings,capital position and liquidity that have occurred in the three-year periodended December 31, 2006.

**Consolidated Results of Operations**

In 2006 the Company recorded record earnings of$3,388,000, which reflects an increase of $641,000 or 23.4% over the previousyear.  In 2005, earnings were $2,747,000,an increase of 50.8% from 2004’s earnings of $1,822,000, which reflected anincrease of 13.0% from earnings posted in 2003. Basic earnings per share in 2006 were $1.77 compared with $1.46 and$0.98 for 2005 and 2004, respectively. This reflects an increase from 2005 to 2006 of 21.2%.  The earnings per share (diluted) for 2006,2005 and 2004 were $1.68, $1.38 and $0.94, respectively, a 21.7% increase from2005 to 2006.  The Company paid cashdividends totaling $0.40 per share during 2006 compared to $0.388 paid in 2005and $0.375 paid in 2004.  Return onaverage shareholder’s equity was 19.5% in 2006 compared to 18.7% in 2005 and13.7% in 2004.  Return on average assetswas 1.42% in 2006 compared to 1.21% in 2005 and 0.91% in 2004.

The increase in the Company’s net earnings from 2005to 2006 was due to an $11.7 million increase in average earning assets coupledwith a 100 basis point increase in the prime lending rate.  The significant increase in the Company’sloans coupled with the increase in rates, resulted in a $3.5 million increasein interest income.

The Company believes that the local economies, inwhich it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Mariacontinue to remain stable.

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***Net Interest Income***

Net interest income is theCompany’s largest source of operating income and is derived from interest andfees received on interest earning assets, less interest expense incurred oninterest bearing liabilities.  The mostsignificant impact on the Company’s net interest between periods is derivedfrom the interaction of changes in the volume of and rates earned or paid oninterest earning assets and interest bearing liabilities.  The volume of loans, investment securitiesand other interest earning assets, compared to the volume of interest bearingdeposits and indebtedness, combined with the spread, produces changes in thenet interest income between periods.

Interest income increased$3,481,000 or 25.7% in 2006 from $13,546,000 in 2005 to $17,027,000 in2006.  This is compared to an increase of$3,326,000 or 32.5% from 2004 to 2005 and an increase of $1,063,000 or 11.6%from 2003 to 2004.  The increase in 2006was primarily due to the 16.5% growth in the average loan portfolio.

Total interest and feesproduced an 8.1% yield on average earning assets in 2006 versus 6.8% in 2005and 5.8% in 2004.  The average loan todeposit ratio for 2006 was 79.7%, which represents an increase of 14.1% overthe 69.9% average for 2005 and 62.8% for 2004.

Total interest expenseincreased $1,593,000, or 80.3% from $1,984,000 in 2005 to $3,577,000 in 2006compared to an increase of $641,000 or 47.7% from 2004 to 2005.  The increase in total interest expense wasdue to a 99 basis point increase in the rate paid on average interest bearingliabilities, plus an $11,707,000 shift from lower interest rate NOW, MoneyMarket and Savings accounts to higher interest rate Time Certificates ofdeposits, coupled with $190,000 interest expense for the $2,000,000Subordinated Debt and $243,000 interest expense for the $5,155,000 in TrustPreferred securities that the Company issued in April of 2006.  The volume of average interest bearingliabilities increased 2.8% in 2006, while increasing 12.4% in 2005.  The rate on interest-bearing depositsincreased 99 basis points from 1.52% in 2005 to 2.51% in 2006.

Net interest margin increased59 basis points from 5.79% in 2005 to 6.38% in 2006.  The primary reason for the increase in thenet interest margin was a change in the mix of the average earning assetscoupled with the rising rate environment. The loan portfolio on average increased from 72.8% of average earningassets at December 31, 2005 to 80.3% of average earning assets as of December31, 2006, while average investment securities decreased from 27.2% at December31, 2005 to 19.7% at December 31, 2006. The results of this portfolio mix change increases the effective yieldof earning assets.  In a rising rateenvironment, yields on assets tend to rise faster.  The yield on earning assets increased 129basis points while rates paid on deposits increased 99 basis points.

The following table shows thecomposition of average earning assets and average interest-bearing liabilities,average yields and rates, and the net interest margin for the years endedDecember 31, 2006, 2005 and 2004. Nonaccrual loans are included in the calculation of the average balancesof loans, and nonaccrued interest is excluded.
| ** **                                              | ** ** | **Year Ended December 31** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **Average**                               | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                              | ** ** | **Balance**                               | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Assets:**                                             | ** ** | **(dollars in thousands)**      | ** ** |
| Loans                                                   |       | $                                         | 169,139    |   | $ | 15,397 |   | 9.10 | % | $ | 145,195 |   | $ | 11,747 |   | 8.09 | % | $ | 115,255 |   | $ | 8,391 |   | 7.28 | % |
| Investment securities                                   |       | 38,573                                    |       | 1,485 |   | 3.85 | % | 48,660 |   | 1,625 |   | 3.34 | % | 53,012 |   | 1,734 |   | 3.27 | % |
| Federal funds sold                                      |       | 2,941                                     |       | 145 |   | 4.93 | % | 5,658 |   | 174 |   | 3.06 | % | 9,118 |   | 95 |   | 1.04 | % |
| Interest-earning deposits with other institutions       |       | —                                    |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total average interest-earning assets                   |       | 210,653                                   |       | 17,027 |   | 8.08 | % | 199,540 |   | 13,546 |   | 6.79 | % | 177,385 |   | 10,220 |   | 5.76 | % |
| Other assets                                            |       | 28,808                                    |       |   |   |   |   | 27,913 |   |   |   |   |   | 23,752 |   |   |   |   |   |
| Less allowance for loan losses                          |       | (1,593                                    | )          |   |   |   |   | (1,332 | ) |   |   |   |   | (1,155 | ) |   |   |   |   |
| Total average assets                                    |       | $                                         | 237,868    |   |   |   |   |   | $ | 226,121 |   |   |   |   |   | $ | 199,982 |   |   |   |   |   |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity:**         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transaction accounts                                    |       | $                                         | 17,784     |   | $ | 61 |   | 0.34 | % | $ | 21,097 |   | $ | 57 |   | 0.27 | % | $ | 19,137 |   | $ | 38 |   | 0.20 | % |
| Time deposits                                           |       | 55,853                                    |       | 2,317 |   | 4.15 | % | 40,772 |   | 1,196 |   | 2.93 | % | 38,353 |   | 849 |   | 2.21 | % |
| Other                                                   |       | 49,089                                    |       | 701 |   | 1.43 | % | 57,483 |   | 563 |   | 0.98 | % | 48,649 |   | 340 |   | 0.70 | % |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total average interest-bearing deposits                 |       | 122,726                                   |       | 3,079 |   | 2.51 | % | 119,352 |   | 1,816 |   | 1.52 | % | 106,139 |   | 1,227 |   | 1.16 | % |
| Demand deposits                                         |       | 89,383                                    |       |   |   |   |   | 88,366 |   |   |   |   |   | 77,470 |   |   |   |   |   |
| Total deposits                                          |       | 212,109                                   |       |   |   |   |   | 207,718 |   |   |   |   |   | 183,609 |   |   |   |   |   |
| Subordinated debt                                       |       | 2,000                                     |       | 190 |   | 9.50 | % | 2,000 |   | 152 |   | 7.60 | % | 2,000 |   | 116 |   | 5.80 | % |
| Other borrowings                                        |       | 4,821                                     |       | 308 |   | 6.39 | % | 439 |   | 16 |   | 3.64 | % | — |   | — |   | — |   |
| Other liabilities                                       |       | 1,515                                     |       |   |   |   |   | 1,253 |   |   |   |   |   | 1,083 |   |   |   |   |   |
| Shareholders’ equity                               |       | 17,423                                    |       |   |   |   |   | 14,711 |   |   |   |   |   | 13,290 |   |   |   |   |   |
|                                                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total average liabilities and shareholders’ equity |       | $                                    | 237,868    |   |   |   |   |   | $  | 226,121 |   |   |   |   |   | $  | 199,982 |   |   |   |   |   |
| Net interest income                                     |       |                                      |       | $ | 13,450 |   |   |   |   |   | $ | 11,562 |   |   |   |   |   | $ | 8,877 |   |   |   |
| Net interest  margin                                    |       |                                      |       |   |   | 6.38 | % |   |   |   |   | 5.79 | % |   |   |   |   | 5.00 | % |

 

12

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The Company’s net yield on interest-earning assets is affected bychanges in the rates earned and paid and the volume of interest earning assetsand interest-bearing liabilities. The impact of changes in volume and rate onnet interest income are shown in the following table:
| ** **                                   | ** ** | **Year Ended December 31, 2006** | ** ** | **Year Ended December 31, 2005** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **over**                                             | ** ** | **over**                                             | ** ** |
| ** **                                   | ** ** | **Year Ended December 31, 2005** | ** ** | **Year Ended December 31, 2004** | ** ** |
| ** **                                   | ** ** | **Increase (Decrease) Due to**        | ** ** | **Increase (Decrease) Due to**        | ** ** |
| ** **                                   | ** ** | **Change in (000’s)**                 | ** ** | **Change in (000’s)**                 | ** ** |
| ** **                                   | ** ** | **Volume**                                           | ** ** | **Rate**                                             | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Change** | ** ** |
| **Interest-bearing  Assets:**                | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Loans                                    |       | 2,075                                                |       | 1,575                                                |       | 3,650 |   | 2,349 |   | 1,007 |   | 3,356 | ) |
| Investment Securities                        |       | (366                                                 | )          | 226                                                  |       | (140 | ) | (144 | ) | 35 |   | (109 | ) |
| Federal funds sold                           |       | (107                                                 | )          | 78                                                   |       | (29 | ) | (47 | ) | 126 |   | 79 |   |
| Interest-earning deposits                    |       | —                                               |       | —                                               |       | — |   | — |   | — |   | — |   |
| Total interest income                        |       | 1,602                                                |       | 1,879                                                |       | 3,481 |   | 2,158 |   | 1,168 |   | 3,326 |   |
| **Interest-bearing  Liabilities:**           | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing demand — NOW           |       | (8                                                   | )          | 4                                                    |       | (4 | ) | 2 |   | 8 |   | 10 |   |
| Money Market                                 |       | (102                                                 | )          | 159                                                  |       | 57 |   | 93 |   | 77 |   | 170 |   |
| Savings                                      |       | 1                                                    |       | 88                                                   |       | 89 |   | 14 |   | 49 |   | 63 |   |
| Time Certificates of deposit                 |       | 528                                                  |       | 593                                                  |       | 1,121 |   | 57 |   | 289 |   | 346 |   |
| Short-term borrowings                        |       | 43                                                   |       | 6                                                    |       | 49 |   | 16 |   | — |   | 16 |   |
| Long-term borrowings                         |       | 16                                                   |       | 265                                                  |       | 281 |   | — |   | 36 |   | 36 |   |
|                                         |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total interest expense                       |       | 478                                                  |       | 1,115                                                |       | 1,593 |   | 182 |   | 459 |   | 641 |   |
|                                         |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest differential or net interest income |       | $                                                    | 1,124      |                                                 | $          | 764 |   | $ | 1,888 |   | $ | 1,976 |   | $ | 709 |   | $ | 2,685 |   |
|                                              |            |                                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Noninterest Income***

Noninterest income totaled$1,010,000 compared to $1,052,000 for the same period in 2005.  That represents a decrease of $42,000 or4.0%.  The decrease was primarily due toa decrease in mortgage origination fees.

Service charges on depositaccounts totaled $616,000, which represents an increase of $13,000 or 2.2% overthe same period in 2005. The increase in services charges was primarily due toa 5.4% increase in non-sufficient fund fees.

Other noninterest incometotaled $394,000 compared to $449,000 for the same period in 2005.  That represents a decrease of $55,000 or12.3%.  The decrease is primarily due toa decrease in mortgage origination fees and equipment leasing fees.

Refer to the “Statement ofEarnings” for a breakdown of noninterest income.

***Noninterest Expense***

Noninterest expense increased$782,000 or 10.0% in 2006 over 2005 to $8,590,000 as compared to an increase of$748,000 or 10.6% in 2005 over 2004.  Theoverall increase can be largely attributed to the continued growth of theCompany.

Salaries and related expensesincreased $501,000 or 11.8% from 2005 to 2006 compared to an increase of$430,000 or 11.3% between 2004 and 2005. This increase is attributed to normal staff related increases, coupledwith a 7.3% increase in group health insurance and a $64,000 shared-basedpayment, which is part of a new requirement effective January of 2006 underSFAS 123(R), “Share-Based Payment.”  SFAS123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values.

Occupancy expense for theyear ended December 31, 2006 totaled $664,000, which reflects an increase of$99,000 or 17.5% over the same period in 2005. This was primarily due to an increase in building depreciation coupledwith an increase in real estate taxes associated with our new office in ArroyoGrande.

Equipment expense for theyear ended December 31, 2006 totaled $691,000, which reflects an increase of$107,000 or 18.3% over the same period in 2005. This was primarily due to an increase in depreciation and maintenanceexpense due to the purchase of the Company’s new item processing and imagingequipment coupled with an upgrade to the teller workstations and platformsystem to enhance customer service.

Professional services for theyear ended December 31, 2006 totaled $538,000, which reflects an increase of$73,000 or 15.7% over the same period in 2005. This was primarily due to the increased scope and coverage of theCompany’s third party audits and expenses associated with the formation of theholding company in April of 2006.

Data processing expense forthe year ended December 31, 2006 totaled $468,000, which reflects an increaseof $28,000 or 6.4% from the same period in 2005.  This was primarily due to a 5% increase incontracted fees coupled with the continued growth of the Company.

Office expenses decreased$14,000 or 3.7% from $374,000 in 2005 to $360,000 in 2006.  This was primarily due to a 14.3% decrease inpostage expense.

Marketing expense increased$10,000 or 2.5% from $398,000 in 2005 to $408,000 in 2006.

Director fees and expensesfor the year ended December 31, 2006 totaled $263,000, which reflects anincrease of $2,000 or 0.8% over the like period in 2005.

Messenger and courierexpenses increased $4,000 or 2.8% from $144,000 in 2005 to $148,000 in 2006.

Other expense decreased$27,000 or 10.0% from $269,000 in 2005 to $242,000 in 2006.  This decrease was due to a $12,000 decreasein operating losses coupled with a $15,000 decrease in stockholder relatedfees.

The Company’s efficiencyratio for 2006 was 60.4%.  Thisrepresents an improvement from the 2005 efficiency ratio of 63.4%, which was animprovement from the 2004 ratio of 70.9%. The improvement in the efficiencyratio was primarily due to the improved profitability of our Santa Maria officecombined with the overall growth of the Company.

Refer to the “Statement ofEarnings” for a breakdown of noninterest expense.

13

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***Income Taxes***

The provision for incometaxes was $2,242,000 in 2006, $1,759,000 in 2005 and $1,076,000 in 2004.  The effective tax rate was 39.9% in 2006 ascompared to 39.0% in 2005 and 37.2% in 2004. This increase was due to a decreasing percentage of tax-freeinvestments.

**Financial Condition**

In 2006, the Company’sconsolidated total assets increased to $240,738,000 compared to $231,532,000 in2005 and $211,684,000 in 2004 for increases of 4.0%, 9.3% and 15.2%respectively.

Total deposits increased $6.1million to $213,988,000 compared to $206,879,000 in 2005 and $194,868,000 in2004 for increases of 3.0%, 6.2% and 16.0% respectively.

Securities available for saletotaled $42,778,000 at December 31, 2006, compared to $41,830,000 at December31, 2005 and $57,535,000 at December 31, 2004. This represents an increase of 2.3% over December 31, 2005.

***Loan Portfolio***

Total loans outstandingaveraged $169,139,000 in 2006 compared to $145,195,000 in 2005.  This represents an increase of $23,944,000 or16.5% in 2006 compared to an increase of $29,940,000 or 26.0% in 2005.  Actual net loans at December 31, 2006 equaled$169,680,000 for an increase of $17,117,000 or 11.2% over 2005.

The following table setsforth the amount of total loans outstanding in each category for the yearsindicated:
| ** **                                    | ** ** | **Year Ended December 31** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**      | ** ** |
| Commercial                                    |       | $                                         | 36,407     |   | $ | 34,139 |   | $ | 32,797 |   | $ | 30,490 |   | $ | 29,598 |   |
| Real Estate —  construction              |       | 55,307                                    |       | 52,696 |   | 29,707 |   | 25,446 |   | 19,222 |   |
| Real Estate —  other                     |       | 78,757                                    |       | 66,390 |   | 63,433 |   | 53,931 |   | 51,409 |   |
| Consumer                                      |       | 1,604                                     |       | 1,493 |   | 1,570 |   | 1,645 |   | 2,749 |   |
| Total gross loans                             |       | 172,075                                   |       | 154,758 |   | 127,507 |   | 111,512 |   | 102,978 |   |
| Less: unearned  fees                          |       | (741                                      | )          | (725 | ) | (721 | ) | (451 | ) | (446 | ) |
| Less: allowance  for loan losses              |       | (1,654                                    | )          | (1,470 | ) | (1,200 | ) | (1,112 | ) | (1,026 | ) |
|                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Total net loans                               |       | $                                         | 169,680    |   | $ | 152,563 |   | $ | 125,586 |   | $ | 109,949 |   | $ | 101,506 |   |
|                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Weighted average yield  on loans for the year |       | 9.1                                       | %          | 8.1 | % | 7.3 | % | 7.3 | % | 7.4 | % |

 

The following table setsforth the amount of total loans outstanding at December 31, 2006 by contractualmaturity date:

|                                  | ** ** | ** **                           | ** ** | **After One**    | ** ** | ** **          | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|-----------------------|------------|---------------------|------------|------------|------------|
| ** **                       | ** ** | **One Year**                    | ** ** | **Year Through** | ** ** | **After**           | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **or Less**                     | ** ** | **Five Years**   | ** ** | **Five Years** | ** ** | **Total**  | ** ** |
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Commercial                       |       | $                                    | 22,815     |                  | $          | 7,537               |       | $          | 6,055      |   | $ | 36,407 |   |
| Real Estate —  construction |       | 49,909                               |       | 5,398                 |       | —              |       | 55,307     |       |
| Real Estate —  other        |       | 1,536                                |       | 12,271                |       | 64,950              |       | 78,757     |       |
| Consumer                         |       | 998                                  |       | 415                   |       | 191                 |       | 1,604      |       |
|                             |       |                                 |       |                  |       |                |       |       |       |
|                             |       | $                                    | 75,258     |                  | $          | 25,621              |       | $          | 71,196     |   | $ | 172,075 |   |

 

A significant portion of theloan portfolio of the Company is dependent on real estate.  At December 31, 2006, real estate served asthe principal source of collateral with respect to 77.9% of the Company’s loanportfolio.  A decline in current economicconditions or a continued rise in interest rates could have an adverse effecton the demand for new loans.  It is alsounderstood that the ability of borrowers to repay outstanding loans, the valueof real estate and other collateral securing loans and the value of real estateowned by the Company, could affect the Company’s financial condition 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 the Company’sfinancial condition.

Real estate construction andother real estate loans equaled $134,064,000 or 77.9% of the total loanportfolio and $119,086,000 or 77.0% of the total loan portfolio at December 31,2006 and 2005, respectively.  Other realestate loans are comprised of loans to individuals for their businesses,consumer real estate loans including home equity lines of credit and loans forfarmland, including vineyards.  TheCompany has known for some time that it has a concentration in commercial realestate loans.  As a means to more closelymonitor this concentration, the Company has instituted the use of NAICS codesto monitor industry trends within its commercial real estate portfolio.  As of December 31, 2006, the Company had$69,971,000 or 39.5% of its loans in commercial real estate.  Of this number, $38,206,000 or 56.2% iscommercial real estate for owners use. No industry type exceeds 5.0% of total loans.  The remaining $29,765,000 or 43.8% iscommercial real estate for non-owners use.  Commercial real estate loans for non-ownersuse as a percentage of total loans equates to 17.3%.  We watch the commercial real estate loans fornon-owners

14

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use along with changes withinour owners use very closely and are familiar with the individuals and projectsand at this time we do not foresee any problems or undue risk.  It has always been a part of our businessbanking practice to loan to small businesses for their facilities as well astheir other business needs.  Total realestate loans increased $14,705,000 or 12.3% in 2006 over 2005 compared to anincrease of $25,946,000 or 27.9% in 2005 over 2004.  The increase is spread throughoutconstruction of residential units held for resale or for the borrower’spersonal residence, off-site development, or land held for future developmentof commercial or residential properties. The Company has not seen a significant increase in the number of loansbut rather a significant increase in the size of loans due to appreciating realestate values along the Central Coast. The Company loans to customers with a long history of successfuldevelopments in our market areas, as well as a long-term relationship withSanta Lucia Bank.  The Company hasexperience and knowledge in construction lending and does not feel that thereis any undue risk to the Company.  Theseloans are secured by real estate, and in general, do not exceed 75% of theappraised value on commercial residential real estate or 80% on an individual’spersonal residence.

The Company makes commercialloans to small and mid-size businesses for various reasons, including workingcapital, inventory and equipment. Commercial loans equaled $36,407,000 or 21.2% of the total loanportfolio and $34,139,000 or 22.1% of the total loan portfolio at December 31,2006 and 2005, respectively.  Commercialloans increased $2,268,000 or 6.6% from 2005 to 2006 compared to an increase of$1,238,000 or 3.8% in 2005 over 2004.

Consumer and other loansequaled $1,604,000 or 0.9% of the total loan portfolio at December 31, 2006compared to $1,533,000 or 1.0% at December 31, 2005.  Consumer loans increased $71,000 or 4.6% in2006 over 2005 compared to a decrease of $37,000 or 2.4% in 2005 over 2004.

The Company had undisbursedloans totaling $56,557,000, $53,280,000, and $51,164,000 as of December 31,2006, December 31, 2005 and December 31, 2004, respectively.  Standby Letters of Credit accounted for$2,603,000, $1,546,000 and $2,689,000 of the undisbursed loans as of December31, 2006, December 31, 2005 and December 31, 2004, respectively.  The Company uses the same credit policies inmaking these commitments as is done for all of its lending activities.  As such, the credit risk involved in thesetransactions is the same as that involved in extending loan facilities tocustomers.

Loans with maturities greaterthan one year at December 31, 2006 include approximately $11,060,000 of fixedrate loans or 6.4% of the total loan portfolio compared to $7,642,000 or 4.9%of the total loan portfolio as of December 31, 2005 and $8,647,000 or 6.8% ofthe total loan portfolio as of December 31, 2004.  The balance of the loans that have maturitiesof one year or less, or are variable rate loans at December 31, 2006 totaled$161,015,000 or 93.6% compared to $147,116,000 or 95.1% as of December 31, 2005and $118,860,000 or 93.2% as of December 31, 2004.

***Nonperforming loans***

Interest income is accrueddaily as earned on all loans.  Loans onwhich the accrual of interest has been discontinued are designated asnonaccrual loans.  The accrual of intereston loans is discontinued when principal or interest is past due 90 days basedon the contractual terms of the loan or when, in the opinion of management,there is reasonable doubt as to collectibility. When loans are placed on nonaccrual status, all interest previouslyaccrued but not collected is reversed against current period interest income.Income on nonaccrual loans is subsequently recognized only to the extent thatcash is received and the loan’s principal balance is deemed collectible.

The composition ofnonperforming loans as of the end of the last five fiscal years is summarizedin the following table:
| ** **                                                 | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                 | ** ** | **(dollars in thousands)**      | ** ** |
| **Nonaccrual  loans:**                                     | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial                                                 |       | $                                         | —     |   | $ | — |   | $ | — |   | $ | 23 |   | $ | 70 |   |
| Real estate                                                |       | —                                    |       | 135 |   | 758 |   | 805 |   | 888 |   |
| Consumer                                                   |       | —                                    |       | — |   | — |   | — |   | — |   |
| Total                                                      |       | —                                    |       | 135 |   | 758 |   | 828 |   | 958 |   |
| **Loans  90 days or more past due and still accruing:**    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Real estate                                                |       | —                                    |       | — |   | — |   | — |   | — |   |
| Consumer                                                   |       | —                                    |       | — |   | — |   | — |   | — |   |
| Commercial                                                 |       | 550                                       |       | — |   | — |   | — |   | — |   |
| Total                                                      |       | 550                                       |       | — |   | — |   | — |   | — |   |
| Total  nonperforming loans:                                |       | 550                                       |       | 135 |   | 758 |   | 828 |   | 958 |   |
| OREO                                                       |       | —                                    |       | — |   | — |   | — |   | 329 |   |
| Total  nonperforming assets:                               |       | $                                         | 550        |   | $ | 135 |   | $ | 758 |   | $ | 828 |   | $ | 1,287 |   |
|                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Nonperforming  assets as a percentage of total gross loans |       | 0.32                                      | %          | 0.09 | % | 0.59 | % | 0.74 | % | 1.25 | % |
| Nonperforming  assets as a percentage of total assets      |       | 0.23                                      | %          | 0.06 | % | 0.36 | % | 0.45 | % | 0.79 | % |
| Allowance for loan  losses to nonperforming loans          |       | 300.73                                    | %          | 1088.89 | % | 158.31 | % | 134.30 | % | 107.10 | % |

 

The Company had onenonperforming loan totaling $550,000 as of December 31, 2006, compared to onenonperforming loan totaling $135,000 at December 31, 2005 and one nonperformingloan totaling $758,000 at December 31, 2004. The current nonperforming loan is in the process of being collected andhas been determined to be fully collectible.

15

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There were no significant loans that were current asof December 31, 2006, where serious doubt existed as to the ability of theborrower to comply with the present loan repayment terms or that represent a “troubleddebt restructuring.”

The Company had no “Other Real Estate Owned” (OREO)property as of December 31, 2006.

The Company experienced net charge-offs of $56,000,$30,000 and $22,000 in 2006, 2005 and 2004 respectively

***Quality of loans***

Inherent in lending is the fact that loan losses willbe experienced and that the risk of loss will vary with the type of loanextended and the creditworthiness of the borrower.  To reflect the estimated risks of lossassociated with its loan portfolio, provisions are made to the Company’sallowance for possible loan losses.  Asan integral part of this process, the allowance for possible loan losses issubject to review and possible adjustment as a result of regulatoryexaminations conducted by governmental agencies and through management’sassessment of risk.  The Company’s entireallowance is a valuation allocation; that is, it has been created by directcharges against operations through the provision for possible loan losses. 

The Company evaluates the allowance for possible loanlosses based upon an individual analysis of specific categories of loans,specific categories of classified loans and individual classified assets.  The adequacy of the allowance is determinableonly on an approximate basis, since estimates as to the magnitude and timing ofloan losses are not predictable because of the impact of external events.  In addition, the Company contracts with anindependent loan review firm to evaluate overall credit quality on an ongoingbasis.  Management then considers theadequacy of the allowance for possible loan losses in relation to the totalloan portfolio.

The provision for possible loan losses charged againstoperating expense is based upon an analysis of the actual migration of loans tolosses plus an amount for other factors that, in management’s judgment, deserverecognition in estimating possible loan losses. These factors include numerous items among which are: specific loanconditions as determined by management; the historical relationship betweencharge-offs and the level of the allowance; the estimated future loss in allsignificant loans; known deterioration in concentrations of credit; certainclasses of loans or pledged collateral; historical loss experience based onvolume and type of loan; the results of any independent review or evaluation ofthe loan portfolio quality conducted by or at the direction of the Company’smanagement or by bank regulatory agencies; trends in portfolio volume,maturity, and composition; off-balance sheet credit risk; volume and trends indelinquencies and nonaccruals; lending policies and procedures including thosefor charge-off, collection, and recovery; national and local economicconditions and downturns in specific local industries; and the experience,ability, and depth of the lending staff and management.  The Company evaluates the adequacy of itsallowance for possible loan losses quarterly. 

It is management’s view that the allowance for loanlosses of $1,654,000 or .96% of total loans as of December 31, 2006 is adequateafter considering the above factors.  This allowance is compared to $1,470,000 or..95% in 2005 and $1,200,000 or .94% in 2004. However, there can be no assurance that in any given period the Companywill not sustain charge-offs that are substantial in relation to the size ofthe allowance.

The allocation of the allowance for possible loanlosses as of the end of the last five fiscal years is summarized in thefollowing table:
| ** **                                                                   | ** ** | **Year Ended December 31** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                   | ** ** | **(dollars in thousands)**      | ** ** |
| **Outstanding loans:**                                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Average for the year  (net)                                                  |       | $                                         | 169,139    |   | $ | 145,195 |   | $ | 115,255 |   | $ | 109,148 |   | $ | 95,600 |   |
| End of the year (net)                                                        |       | 169,680                                   |       | 152,563 |   | 125,586 |   | 109,949 |   | 101,506 |   |
| Allowance for loan losses:                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Balance at beginning of  year                                                |       | $                                         | 1,470      |   | $ | 1,200 |   | $ | 1,112 |   | $ | 1,026 |   | $ | 1,010 |   |
| Actual charge-offs:                                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                                   |       | 77                                        |       | 43 |   | 22 |   | 16 |   | 4 |   |
| Real estate                                                                  |       | —                                    |       | — |   | — |   | — |   | — |   |
| Consumer                                                                     |       | —                                    |       | — |   | — |   | — |   | — |   |
| All other (including  overdrafts)                                            |       | 6                                         |       | 3 |   | 1 |   | 17 |   | 13 |   |
| Total charge-offs                                                            |       | 83                                        |       | 46 |   | 23 |   | 33 |   | 17 |   |
| **Less Recoveries:**                                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Commercial                                                                   |       | 26                                        |       | 15 |   | — |   | 4 |   | 2 |   |
| Real estate                                                                  |       | —                                    |       | — |   | — |   | — |   | — |   |
| Consumer                                                                     |       | —                                    |       | — |   | — |   | — |   | — |   |
| All other (including  overdrafts)                                            |       | 1                                         |       | 1 |   | 1 |   | _ |   | 1 |   |
| Total recoveries                                                             |       | 27                                        |       | 16 |   | 1 |   | 4 |   | 3 |   |
| Net loan charge-offs (recoveries)                                            |       | 56                                        |       | 30 |   | 22 |   | 29 |   | 14 |   |
| Provision for loan loss                                                      |       | 240                                       |       | 300 |   | 110 |   | 115 |   | 30 |   |
| Balance at end of period                                                     |       | $                                         | 1,654      |   | $ | 1,470 |   | $ | 1,200 |   | $ | 1,112 |   | $ | 1,026 |   |
| **Ratios:**                                                                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Net loan charge-offs (recoveries) to average loans                           |       | 0.03                                      | %          | 0.02 | % | 0.02 | % | 0.03 | % | 0.01 | % |
| Allowance for loan losses to end of year loans                               |       | 0.96                                      | %          | 0.95 | % | 0.94 | % | 1.00 | % | 1.00 | % |
| Net loan charge-offs (recoveries) to allowance for loan losses               |       | 3.39                                      | %          | 2.04 | % | 1.83 | % | 2.61 | % | 1.36 | % |
| Net loan charge-offs (recoveries) to provision charged to operating  expense |       | 23.33                                     | %          | 10.00 | % | 20.00 | % | 25.22 | % | 46.67 | % |

 

16

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***InvestmentSecurities***

The average balance of Federal Funds Sold (overnightinvestments with other banks) was $2,941,000 in 2006, $5,685,000 in 2005, and$9,118,000 in 2004.  These investmentsare maintained primarily for the short-term liquidity needs of theCompany.  The major factors influencingthe levels of required liquidity are the loan demand of the Company’s customersand fluctuations in the Company’s deposits.  The Company’s loan-to-deposit ratio averaged 79.7% in 2006, compared to69.9% in 2005, and 62.8% in 2004.

Average total investment securities decreased by$10,087,000 or 20.7% during 2006, compared to a decrease of $4,352,000 or 8.2%in 2005.  The decrease in 2006 was due inlarge part to the redeployment of assets into higher yielding loans.  The aggregate market value of the investmentportfolio was $462,000 less than the amortized cost as of December 31,2006.  While a significant number ofindividual investments classified as available for sale had a market value lessthan the amortized cost as of December 31, 2006, the Company has the abilityand intent to hold these securities to maturity.  It is the Company’s policy not to engage insecurities trading transactions.  Thereare no investments in the portfolio deemed to be permanently impaired.  The Company has classified all of itsinvestment securities as available for sale.
| ** **                             | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **Amortized**        | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                             | ** ** | **Cost**             | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Gains** | ** ** | **(Losses)** | ** ** | **Fair Value** | ** ** |
|                                   |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Securities  available for sale:**    |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government  and Agency securities |       | $               | 19,094,065 |   | $  | 3,029 |   | $  | (76,599 | ) | $  | 19,020,495 |   | $  | 22,164,983 |   | $  | — |   | $  | (349,578 | ) | $  | 21,815,405 |   |
| State and  Political Subdivisions      |       | $               | 4,805,053  |   | $  | 9,970 |   | $  | (89,397 | ) | $  | 4,725,626 |   | $  | 4,598,941 |   | $  | 21,840 |   | $  | (95,856 | ) | $  | 4,524,925 |   |
| Mortgage—Backed  Securities       |       | $                    | 19,340,821 |   | $ | 20,303 |   | $ | (328,828 | ) | $ | 19,032,296 |   | $ | 15,891,090 |   | $ | — |   | $ | (401,707 | ) | $ | 15,489,383 |   |
|                                   |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                  |       | $                    | 43,239,939 |   | $ | 33,302 |   | $ | (494,824 | ) | $ | 42,778,417 |   | $ | 42,655,014 |   | $ | 21,840 |   | $ | (847,141 | ) | $ | 41,829,713 |   |

 

The amortized cost, estimated fair value, and weightedaverage yield for investment securities available for sale based on maturitydate are set forth in the table below. The weighted average yield is based on the amortized cost of thesecurities using a method that approximates the level yield method:
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **            | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                               | ** ** | **Book**              | ** ** | **Market** | ** ** | **Average** | ** ** | **Book** | ** ** | **Market** | ** ** | **Average** | ** ** |
| ** **                               | ** ** | **Value**             | ** ** | **Value** | ** ** | **Yield** | ** ** | **Value** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| **Available-for-Sale  Securities:**      |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and Agency Securities    |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| One Year or Less                         |       | 8,998,769             |       | 8,924,794 |   | 3.59 | % | 15,183,779 |   | 14,999,175 |   | 2.81 | % |
| One to Five Years                        |       | 8,095,296             |       | 8,095,701 |   | 5.03 | % | 6,981,204 |   | 6,816,230 |   | 3.14 | % |
| Five to Ten Years                        |       | 2,000,000             |       | 2,000,000 |   | 5.10 | % | — |   | — |   |   |   |
| Over Ten Years                           |       | —                |       | — |   |   |   | — |   | — |   |   |   |
| Total U.S. Agency                        |       | 19,094,065            |       | 19,020,495 |   | 4.36 | % | 22,164,983 |   | 21,815,405 |   | 2.91 | % |
|                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| **State  and Political Subdivisions:**   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| One Year or Less                         |       | 708,100               |       | 702,151 |   | 4.36 | % | 440,000 |   | 443,410 |   | 7.69 | % |
| One to Five Years                        |       | 3,859,382             |       | 3,790,725 |   | 5.20 | % | 3,921,647 |   | 3,854,612 |   | 4.77 | % |
| Five to Ten Years                        |       | 237,571               |       | 232,750 |   | 5.74 | % | 237,294 |   | 226,903 |   | 5.57 | % |
| Over Ten Years                           |       | —                |       | — |   |   |   | — |   | — |   |   |   |
| Total State & Political Subdivisions |       | 4,805,053             |       | 4,725,626 |   | 5.10 | % | 4,598,941 |   | 4,524,925 |   | 5.09 | % |
|                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| **Mortgage  Backed Securities:**         |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| One Year or Less                         |       | 3,650,978             |       | 3,590,877 |   | 4.26 | % | 3,634,891 |   | 3,543,760 |   | 3.87 | % |
| One to Five Years                        |       | 11,261,147            |       | 11,033,390 |   | 4.20 | % | 9,503,938 |   | 9,274,471 |   | 3.94 | % |
| Five to Ten Years                        |       | 2,711,676             |       | 2,695,483 |   | 4.63 | % | 2,309,893 |   | 2,237,967 |   | 3.91 | % |
| Over Ten Years                           |       | 1,717,020             |       | 1,712,546 |   | 4.71 | % | 442,368 |   | 433,185 |   | 4.12 | % |
| Total Mortgage Backed Securities         |       | 19,340,821            |       | 19,032,296 |   | 4.32 | % | 15,891,090 |   | 15,489,383 |   | 3.92 | % |
|                                     |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Total  Available-for-Sale Securities     |       | $                     | 43,239,939 |   | $ | 42,778,417 |   | 4.42 | % | $ | 42,655,014 |   | $ | 41,829,713 |   | 3.52 | % |
|                                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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***Deposits***

Total average deposits increased $4,391,000 or 2.11%during 2006, compared to an increase of $24,109,000 or 13.1% in 2005 and anincrease of $25,267,000 or 16.0% in 2004. Average noninterest-bearing deposits increased $1,017,000 or 1.2% in2006, compared to an increase of $10,896,000 or 14.1% in 2005 and an increaseof $14,053,000 or 22.2% in 2004.  Averageinterest-bearing deposits increased $3,374,000 or 2.8% in 2006 compared to anincrease of $13,213,000 or 12.5% in 2005 and an increase of $11,214,000 or11.8% in 2004.

The chart below indicates a shift in lowerinterest-bearing deposits (NOW, Money Market and Savings) to higher interestrate Time Certificates of Deposit.  Thisappears to be a trend that is common throughout the local banking industry andis expected to continue in 2007 as competition for deposits remains strong. 

The following table summarizes the distribution ofaverage deposits and the average rates paid for the period indicated:
| ** **                           | ** ** | **December 31**                 | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Average**                          | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** |
| ** **                           | ** ** | **Balance**                          | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Rate** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Noninterest-bearing  demand deposits |       | $                                    | 89,383     |   |   |   | $ | 88,366 |   |   |   | $ | 77,470 |   |   |   |
| Money market  accounts               |       | 24,103                               |       | 2.09 | % | 30,186 |   | 1.48 | % | 23,286 |   | 1.13 | % |
| NOW accounts                         |       | 14,696                               |       | 0.26 | % | 17,834 |   | 0.24 | % | 16,765 |   | 0.19 | % |
| Savings deposits                     |       | 28,074                               |       | 0.79 | % | 30,560 |   | 0.44 | % | 27,736 |   | 0.25 | % |
| Time deposits of  $100,000 or more   |       | 29,800                               |       | 4.21 | % | 19,859 |   | 2.93 | % | 17,159 |   | 2.14 | % |
| Other time  deposits                 |       | 26,053                               |       | 4.08 | % | 20,913 |   | 2.94 | % | 21,193 |   | 2.27 | % |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total deposits                       |       | $                                    | 212,109    |   | 1.45 | % | $ | 207,718 |   | 0.87 | % | $ | 183,609 |   | 0.67 | % |

 

The remaining maturities of the Company’s certificatesof deposit in the amount of $100,000 or more as of December 31, 2006 areindicated in the table below.  Interestexpense on these certificates of deposit totaled $1,255,000 in 2006:

| Deposits Maturing in        | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
|                                  |       |                            |       |
| Three months or less                  |       | $                               | 15,934,943 |   |
| Over three months through six months  |       | 10,404,297                      |       |
| Over six months through twelve months |       | 7,289,250                       |       |
| Over twelve months                    |       | 3,597,699                       |       |
|                                  |       |                            |       |
| Total                                 |       | $                               | 37,226,189 |   |

 

***Capital***

The Bank is required to maintain a minimumleverage-capital ratio of Tier I (as defined) to total assets based on the Bank’sratings under the regulatory rating system. At the end of 2006, all Bankcapital ratios were above all current Federal capital guidelines for a “wellcapitalized” bank.  As of December 31,2006 the regulatory total capital to risk-weighted assets ratio was 13.1% comparedto 11.3% as of December 31, 2005 and 10.9% as of December 31, 2004. Theregulatory Tier I capital to risk-weighted assets ratio was 11.4% on December31, 2006 compared to 9.3% on December 31, 2005 and 8.8% as of December 31,2004.  The regulatory Tier I capital toaverage assets ratio was 9.1% as of December 31, 2006 compared to 7.2% as ofDecember 31, 2005 and 6.5% as of December 31, 2004.

The Bank’s Tier I Capital ratio increased 190 basispoints and the Bank’s Total Capital to Risk Weighted Assets ratio increased 180basis points, due to a $3.0 million contribution from the Company, whichrepresents a portion of its trust preferred proceeds, coupled with strongearnings for the year.

***Long-termBorrowings***

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 debt securities may be redeemed for 105% of theprincipal balance through July 7, 2011 and then at par thereafter.  Interest is payable quarterly beginning July7, 2006 at 1.48% over the quarterly adjustable 3-month LIBOR. Of this $5.2million, the Company contributed $3.0 million to the Bank and retained $2.0million at the Company level.  Thesecurities do not entitle the holders to voting rights in the Company but willcontain certain restrictive covenants, including restrictions on the payment ofdividends to the holders of the Company’s common stock in the event thatinterest payments on the trust preferred securities are postponed.  The capital received from the trust preferredissuance is designated as Tier 1 capital for regulatory purposes.

18

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During the third quarter of 2003, the Bank undertookand completed a private placement of subordinated debentures (“notes”) toaugment its 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 full onJune 30, 2011.

***Interest RateSensitivity and Liquidity***

The Company closely follows the maturities andrepricing opportunities of both assets and liabilities to reduce gaps ininterest spreads.  An analysis isperformed quarterly to determine the various interest sensitivity gaps thatexist. In general, the Company is asset sensitive, meaning that when interestrates change, assets (loans) will reprice faster than short-term liabilities(deposits).  Therefore, higher interestrates improve short-term profits and lower rates decrease short-term profits.  Currently, management’s analysis indicatesthat the Company’s asset sensitive position would not materially affect incomefor interest rate changes of one percent or less in one year.

The following table presents the Bank’s RateSensitivity Gap Report as of December 31, 2006:
| ** **                              | ** ** | ** **                           | ** ** | ** **           | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | **Non-Rate**  | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|------------|------------|---------------|------------|------------|------------|
| ** **                              | ** ** | **0-3 months**                  | ** ** | **3-12 months** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **Beyond** | ** ** | **Sensitive** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | ** **                           | ** ** | ** **           | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| **Interest  sensitive assets:**         |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| Investment securities                   |       | $                                    | 4,389      |                 | $          | 10,417             |       | $                  | 15,079     |       | $          | 9,001         |       | $          | 5,750      |   | $ | — |   | $ | 44,636 |   |
| Loan receivables                        |       | 100,964                              |       | 25,833               |       | 34,585             |       | 8,555              |       | 2,203      |       | —        |       | 172,140    |       |
| Federal funds sold                      |       | —                               |       | —               |       | —             |       | —             |       | —     |       | —        |       | —     |       |
| Non-earning assets                      |       | —                               |       | —               |       | —             |       | —             |       | —     |       | 23,059        |       | 23,059     |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| **Total assets**                        |       | $                                    | 105,353    |                 | $          | 36,250             |       | $                  | 49,664     |       | $          | 17,556        |       | $          | 7,953      |   | $ | 23,059 |   | $ | 239,835 |   |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| **Interest  sensitive liabilities:**    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| Demand deposits                         |       | $                                    | —     |                 | $          | —             |       | $                  | —     |       | $          | —        |       | $          | —     |   | $ | 85,961 |   | $ | 85,961 |   |
| NOW accounts                            |       | 378                                  |       | 1,133                |       | 3,022              |       | 3,022              |       | 5,414      |       | —        |       | 12,969     |       |
| Money Market Accounts                   |       | 2,102                                |       | 6,306                |       | 14,012             |       | —             |       | —     |       | —        |       | 22,420     |       |
| Savings deposits                        |       | 966                                  |       | 2,899                |       | 7,732              |       | 7,732              |       | 8,055      |       | —        |       | 27,384     |       |
| Time deposits                           |       | 28,022                               |       | 29,680               |       | 6,334              |       | 1,795              |       | 87         |       | —        |       | 65,918     |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| Total saving and time deposits          |       | $                                    | 31,468     |                 | $          | 40,018             |       | $                  | 31,100     |       | $          | 12,549        |       | $          | 13,556     |   | $ | 85,961 |   | $ | 214,652 |   |
| Short-term borrowing                    |       | —                               |       | —               |       | —             |       | —             |       | —     |       | —        |       | —     |       |
| Long-term borrowing                     |       | 2,000                                |       | —               |       | —             |       | —             |       | —     |       | —        |       | 2,000      |       |
| Non-funding liabilities and capital     |       | —                               |       | —               |       | —             |       | —             |       | —     |       | 23,183        |       | 23,183     |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| Total liabilities and capital           |       | $                                    | 33,468     |                 | $          | 40,018             |       | $                  | 31,100     |       | $          | 12,549        |       | $          | 13,556     |   | $ | 109,144 |   | $ | 239,835 |   |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| **Interest rate sensitivity gap**       |       | $                                    | 71,885     |                 | $          | (3,768             | )          | $                  | 18,564     |       | $          | 5,007         |       | $          | (5,603     | ) |   |   |   |   |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| **Risk  Indicators from GAP Analysis:** |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
|                                    |       |                                 |       |                 |       |               |       |               |       |       |       |          |       |       |       |
| Cumulative GAP                          |       | $                                    | 71,885     |                 | $          | 68,117             |       | $                  | 86,681     |       | $          | 91,688        |       | $          | 86,085     |   |   |   |   |   |
| Cumulative GAP  (% of total assets)     |       | 29.97                                | %          | 28.40                | %          | 36.14              | %          | 38.23              | %          | 35.89      | %          |          |       |       |       |

 

The asset liability reports indicate that the Bank hasan actual dollar risk exposure of $711,000 if interest rates fall 100 basispoints.  This represents a -5.2% risk tointerest income.  The Economic Value ofEquity is 17.61% at zero basis points and 16.49% at a negative 100 basispoints.
| ** **               | ** ** | **Interest Income and Expense Under Rate Shock** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **-200bp**                                                                     | ** ** | **-100bp** | ** ** | **0bp** | ** ** | **+100bp** | ** ** | **+200bp** | ** ** |
| **Net  Interest Income** |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Earnings at Risk         |       | $                                                                              | (1,455     | ) | $ | (711 | ) | $ | 0 |   | $ | 646 |   | $ | 1,281 |   |
| Percent of Risk          |       | -10.6                                                                          | %          | -5.2 | % | 0.00 | % | 4.7 | % | 9.3 | % |
|                          |            |                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company closely monitors its liquidity so that thecash requirements for loans and deposit withdrawals are met in an orderlymanner.  Management monitors liquidity inrelation to trends of loans and deposits for short term and long-termrequirements.  Liquidity sources arecash, deposits with other banks, overnight Federal Fund investments, investmentsecurities and the ability to sell loans. As of December 31, 2006, the Bank’s liquidity ratio was 24.5% comparedto 27.7% at December 31, 2005 and 35.4% at December 31, 2004.  The 24.5% liquidity ratio at December 31,2006 is well within the Company’s policy limit.

19

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**Critical Accounting Policies**

This discussion should be read in conjunction with theconsolidated financial statements of the Company, including the notes thereto.

Our accounting policies are integral to understandingthe results reported.  Our most complexaccounting policies require management’s judgment to ascertain the valuation ofassets, liabilities, commitments and contingencies.  We have established detailed policies andcontrol procedures that are intended to ensure valuation methods are wellcontrolled and applied consistently from period to period.  In addition, the policies and procedures areintended to ensure that the process for changing methodologies occurs in anappropriate manner.  The following is abrief description of our current accounting policies involving significantmanagement valuation judgments.

***Use of Estimates inthe Preparation of Financial Statements***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of certain assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of certain revenues and expenses during the reporting period. Actualresults could differ from those estimates.

***Allowance for LoanLosses***

The allowance for loan losses represents management’sbest estimate of losses inherent in the existing loan portfolio. The allowancefor loan losses is increased by the provision for loan losses charged toexpense and reduced by loans charged off, net of recoveries. The provision forloan losses is determined based on management’s assessment of several factors:reviews and evaluation of specific loans, changes in the nature and volume ofthe loan portfolio, current economic conditions and the related impact onspecific borrowers and industry groups, historical loan loss experiences, thelevel of classified and nonperforming loans and the results of regulatoryexaminations. 

Loans are considered impaired if, based on currentinformation and events, it is probable that we will be unable to collect thescheduled payments of principal or interest when due according to thecontractual terms of the loan agreement. The measurement of impaired loans isgenerally based on the present value of expected future cash flows discountedat the historical effective interest rate stipulated in the loan agreement,except that all collateral-dependent loans are measured for impairment based onthe fair value of the collateral. In measuring the fair value of thecollateral, management uses assumptions and methodologies consistent with thosethat would be utilized by unrelated third parties.

Changes in the financial condition of individualborrowers, in economic conditions, in historical loss experience and in thecondition of the various markets in which collateral may be sold may all affectthe required level of the allowance for loan losses and the associatedprovision for loan losses.

***Available-for-SaleSecurities***

The fair value of most securities classified asavailable-for-sale are based on quoted market prices. If quoted market pricesare not available, fair values are extrapolated from the quoted prices ofsimilar instruments.

***Deferred Tax Assets***

We use an estimate of future earnings to support ourposition that the benefit of our deferred tax assets will be realized. Iffuture income should prove non-existent or less than the amount of the deferredtax assets within the tax years to which they may be applied, the asset may notbe realized and our net income will be reduced.

***DeferredCompensation Liabilities***

Management estimates the life expectancy of theparticipants and the accrual methods used to accrue compensation expense.  If individuals outlive their assumedexpectancies the amounts accrued for the payment of their benefits will beinadequate and additional changes to income will be required.

**Availability of Form 10-KSB**

If any shareholder wouldlike a copy of the Company’s Annual Report on Form 10-KSB for the fiscal yearending December 31, 2006, they can be obtained without charge by sending awritten request to John C. Hansen, Executive Vice President and Chief FinancialOfficer, P. O. Box 6047, Atascadero, California 93423.

20

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**Report of Independent Registered Public Accounting Firm**

The Board ofDirectors and Shareholders Santa Lucia Bancorp and Subsidiary

We have audited theconsolidated balance sheets of Santa Lucia Bancorp and Subsidiary (the Company)as of December 31, 2006 and 2005, and the related consolidated statements ofearnings, cash flows and shareholders’ equity for the three years endedDecember 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

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

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Santa Lucia Bancorp and Subsidiary as ofDecember 31, 2006 and 2005, and the results of its operations and cash flowsfor the three years ended December 31, 2006, in conformity with accountingprinciples generally accepted in the United States of America.

Laguna Hills, CaliforniaJanuary 17, 2007

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**Santa Lucia Bancorp and Subsidiary**

**Consolidated Balance Sheets**

*December31, 2006 and 2005*

**ASSETS**

 
| ** **                                                      | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| Cash and due from banks                                         |       | $           | 10,139,526  |        | $          | 15,293,047 |   |
| Federal funds sold                                              |       | —      |        | 5,000,000   |       |
| TOTAL CASH AND  CASH EQUIVALENTS                                |       | 10,139,526  |        | 20,293,047  |       |
| Securities available  for sale                                  |       | 42,778,417  |        | 41,829,713  |       |
| Loans, net                                                      |       | 169,680,473 |        | 152,563,108 |       |
| Premises and equipment,  net                                    |       | 9,258,207   |        | 9,460,584   |       |
| Deferred income tax  assets                                     |       | 941,000     |        | 944,000     |       |
| Cash surrender value of  life insurance                         |       | 3,336,076   |        | 3,223,142   |       |
| Federal Reserve Bank  and Federal Home Loan Bank stock, at cost |       | 1,397,700   |        | 1,242,150   |       |
| Accrued interest and  other assets                              |       | 3,206,685   |        | 1,975,819   |       |
| TOTAL ASSETS                                                    |       | $           | 240,738,084 |        | $          | 231,531,563 |   |

 

 

**LIABILITIES & SHAREHOLDERS’EQUITY**
| ** **                                                                                                                                                                | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| Deposits                                                                                                                                                                  |       |        |        |        |       |
| Noninterest-bearing  demand                                                                                                                                               |       | $           | 86,252,426  |        | $          | 86,689,231 |   |
| Interest-bearing  demand and NOW accounts                                                                                                                                 |       | 12,968,951  |        | 17,755,571  |       |
| Money market                                                                                                                                                              |       | 20,465,756  |        | 30,984,368  |       |
| Savings                                                                                                                                                                   |       | 27,383,605  |        | 28,893,924  |       |
| Time  certificates of deposit of $100,000 or more                                                                                                                         |       | 37,226,189  |        | 21,226,735  |       |
| Other time  certificates                                                                                                                                                  |       | 28,691,525  |        | 21,329,250  |       |
| TOTAL DEPOSITS                                                                                                                                                            |       | 212,988,452 |        | 206,879,079 |       |
| Short-term borrowings                                                                                                                                                     |       | —      |        | 5,500,000   |       |
| Long-term borrowings                                                                                                                                                      |       | 7,155,000   |        | 2,000,000   |       |
| Accrued interest and  other liabilities                                                                                                                                   |       | 1,457,716   |        | 1,286,311   |       |
| TOTAL  LIABILITIES                                                                                                                                                        |       | 221,601,168 |        | 215,665,390 |       |
| Commitments and  contingencies*(Note M)*                                                                                                                                  | * *   | *—*    | * *    | *—*    | * *   |
| Shareholders’ equity                                                                                                                                                 |       |        |        |        |       |
| Common stock —  no par value; 20,000,000 shares authorized; issued and outstanding: 1,928,097  shares at December 31, 2006 and 1,899,543 shares at December 31, 2005 |       | 9,566,563   |        | 9,298,748   |       |
| Additional  paid-in capital                                                                                                                                               |       | 216,558     |        | —      |       |
| Retained earnings                                                                                                                                                         |       | 9,624,939   |        | 7,052,289   |       |
| Accumulated  other comprehensive income-net unrealized losses on available-for-sale  securities, net of taxes of $190,378 in 2006 and $340,437 in 2005                    |       | (271,144    | )           | (484,864    | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                                                          |       | 19,136,916  |        | 15,866,173  |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                          |       | $           | 240,738,084 |        | $          | 231,531,563 |   |

 

*The accompanying notes are an integral part ofthese financial statements.*

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**Santa Lucia Bancorp and Subsidiary**

**Consolidated Statements of Earnings**

*YearsEnded December 31, 2006, 2005 and 2004*

 
| ** **                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income                                     |       |       |       |       |       |       |       |
| Interest and fees on loans                          |       | $          | 15,397,450 |       | $          | 11,747,437 |       | $ | 8,391,289 |   |
| Federal funds sold                                  |       | 145,314    |       | 173,515    |       | 94,662     |       |
| Investment securities — taxable                |       | 1,352,675  |       | 1,476,915  |       | 1,557,055  |       |
| Investment securities — nontaxable             |       | 131,233    |       | 148,368    |       | 177,253    |       |
|                                                |       | 17,026,672 |       | 13,546,235 |       | 10,220,259 |       |
| Interest expense                                    |       |       |       |       |       |       |       |
| Time certificates of deposit of $100,000 or more    |       | 1,254,951  |       | 581,566    |       | 367,226    |       |
| Other deposits                                      |       | 1,824,577  |       | 1,234,377  |       | 859,750    |       |
| Long-term debt and other borrowings                 |       | 497,610    |       | 167,979    |       | 116,217    |       |
|                                                |       | 3,577,138  |       | 1,983,922  |       | 1,343,193  |       |
| Net interest income                                 |       | 13,449,534 |       | 11,562,313 |       | 8,877,066  |       |
| Provision for  loan losses                          |       | 240,000    |       | 300,000    |       | 110,000    |       |
| Net interest income after provision for loan losses |       | 13,209,534 |       | 11,262,313 |       | 8,767,066  |       |
| Noninterest  income                                 |       |       |       |       |       |       |       |
| Service charges and fees                            |       | 615,917    |       | 602,809    |       | 579,408    |       |
| Dividends on cash surrender value of life insurance |       | 138,181    |       | 132,319    |       | 147,037    |       |
| Mortgage fees                                       |       | 48,487     |       | 94,972     |       | 78,741     |       |
| Gain (loss) on sale of investment securities        |       | —     |       | (5,877     | )          | 949        |       |
| Gain on sale of land                                |       | —     |       | —     |       | 123,763    |       |
| Other income                                        |       | 207,676    |       | 227,727    |       | 261,443    |       |
|                                                |       | 1,010,261  |       | 1,051,950  |       | 1,191,341  |       |
| Noninterest  expense                                |       |       |       |       |       |       |       |
| Salaries and employee benefits                      |       | 4,743,094  |       | 4,241,897  |       | 3,812,189  |       |
| Occupancy                                           |       | 664,482    |       | 565,467    |       | 492,821    |       |
| Equipment                                           |       | 691,028    |       | 583,772    |       | 469,545    |       |
| Professional services                               |       | 538,282    |       | 465,661    |       | 463,781    |       |
| Data processing                                     |       | 468,211    |       | 439,591    |       | 413,347    |       |
| Office expenses                                     |       | 359,588    |       | 374,478    |       | 357,934    |       |
| Marketing                                           |       | 407,638    |       | 397,907    |       | 327,604    |       |
| Regulatory assessments                              |       | 63,851     |       | 65,793     |       | 59,370     |       |
| Directors’ fees and expenses                   |       | 263,444    |       | 261,338    |       | 243,684    |       |
| Messenger and courier expenses                      |       | 148,335    |       | 143,834    |       | 117,609    |       |
| Other                                               |       | 241,571    |       | 268,705    |       | 302,628    |       |
|                                                |       | 8,589,524  |       | 7,808,443  |       | 7,060,512  |       |
| Earnings before income taxes                        |       | 5,630,271  |       | 4,505,820  |       | 2,897,895  |       |
| Income taxes                                        |       | 2,242,000  |       | 1,759,000  |       | 1,076,000  |       |
| NET EARNINGS                                        |       | $          | 3,388,271  |       | $          | 2,746,820  |       | $ | 1,821,895 |   |
|                                                |       |       |       |       |       |       |       |
| Per share data:                                     |       |       |       |       |       |       |       |
| Net earnings — basic                           |       | $          | 1.77       |       | $          | 1.46       |       | $ | 0.98 |   |
|                                                |       |       |       |       |       |       |       |
| Net earnings —  diluted                        |       | $          | 1.68       |       | $          | 1.38       |       | $ | 0.94 |   |

 

*The accompanying notes are an integral part ofthese financial statements.*

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**Santa Lucia Bancorp and Subsidiary**

**Consolidated Statements of Cash Flows**

*YearsEnded December 31, 2006, 2005 and 2004*

 
| ** **                                                         | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Cash flows from  operating activities:                             |       |        |       |        |       |        |       |
| Net earnings                                                       |       | $           | 3,388,271  |        | $          | 2,746,820   |       | $ | 1,821,895 |   |
| Adjustments to reconcile net earnings to net cash                  |       |        |       |        |       |        |       |
| provided by operating activities:                                  |       |        |       |        |       |        |       |
| Depreciation and amortization                                      |       | 669,159     |       | 556,907     |       | 456,176     |       |
| Provision for loan losses                                          |       | 240,000     |       | 300,000     |       | 110,000     |       |
| Amortization of investment securities                              |       | 5,450       |       | 32,240      |       | 205,321     |       |
| Loss (gain) on sale of investment securities                       |       | —      |       | 5,877       |       | (948        | )          |
| Gain on sale of other real estate                                  |       | —      |       | —      |       | (123,763    | )          |
| Deferred income taxes                                              |       | (147,000    | )          | (25,000     | )          | (15,000     | )          |
| Increase in cash value of life insurance                           |       | (112,934    | )          | (132,319    | )          | (123,688    | )          |
| Other items, net                                                   |       | (1,156,962  | )          | (432,992    | )          | (18,940     | )          |
| Net cash provided by operating activities                          |       | 2,885,984   |       | 3,051,533   |       | 2,311,053   |       |
| Cash flows from  investing activities:                             |       |        |       |        |       |        |       |
| Proceeds from maturities of investment securities.                 |       | 18,962,594  |       | 11,007,571  |       | 24,845,136  |       |
| Proceeds from sale of investment securities                        |       | —      |       | 6,016,550   |       | 8,093,602   |       |
| Purchases of investment securities                                 |       | (19,391,969 | )          | (2,001,378  | )          | (45,386,494 | )          |
| Purchase of Federal Reserve Bank and Federal Home  Loan Bank stock |       | (155,550    | )          | (194,450    | )          | (639,600    | )          |
| Net change in loans                                                |       | (17,357,365 | )          | (27,277,292 | )          | (15,747,188 | )          |
| Purchases of bank premises and equipment                           |       | (466,782    | )          | (347,532    | )          | (3,652,381  | )          |
| Proceeds from sale of bank premises and equipment                  |       | —      |       | —      |       | 791,375     |       |
| Proceeds from life insurance                                       |       | —      |       | 132,255     |       | —      |       |
| Proceeds from sale of other real estate owned                      |       | —      |       | —      |       | —      |       |
| Net cash used in investing activities                              |       | (18,409,072 | )          | (12,664,276 | )          | (31,695,550 | )          |
| Cash flows from  financing activities:                             |       |        |       |        |       |        |       |
| Net change in deposits                                             |       | 6,109,373   |       | 12,011,229  |       | 26,835,033  |       |
| Proceeds and tax benefit from exercise of stock  options           |       | 372,781     |       | 416,562     |       | 126,702     |       |
| Net (repayments) proceeds from borrowings                          |       | (345,000    | )          | 5,500,000   |       | —      |       |
| Cash dividends paid                                                |       | (767,587    | )          | (729,550    | )          | (697,460    | )          |
| Net cash provided by financing activities                          |       | 5,369,567   |       | 17,198,241  |       | 26,264,275  |       |
| Net increase (decrease) in cash and cash equivalents               |       | (10,153,521 | )          | 7,585,498   |       | (3,120,222  | )          |
| Cash and cash  equivalents at beginning of year                    |       | 20,293,047  |       | 12,707,549  |       | 15,827,771  |       |
|                                                               |       |        |       |        |       |        |       |
| Cash and cash  equivalents at end of year                          |       | $           | 10,139,526 |        | $          | 20,293,047  |       | $ | 12,707,549 |   |
|                                                               |       |        |       |        |       |        |       |
| Supplemental  disclosure of cash flow information:                 |       |        |       |        |       |        |       |
| Interest paid                                                      |       | $      | 3,415,383  |        | $     | 1,957,610   |       | $  | 1,342,441 |   |
| Income taxes paid                                                  |       | $           | 2,415,000  |        | $          | 1,720,000   |       | $ | 795,000 |   |
| Cashless  exercise of stock options                                |       | $           | 48,034     |        | $          | 32,515      |       | $ | 54,596 |   |

 

*The accompanying notes are an integral part ofthese financial statements.*

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**Santa Lucia Bancorp and Subsidiary**

**Consolidated Statement of Shareholders’ Equity**

*YearsEnded December 31, 2006, 2005 and 2004*

 
| ** **                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** | ** **     | ** ** | ** **  | ** ** | **Accumulated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-----------------|------------|
| ** **                                                                                           | ** ** | ** **        | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**       | ** ** |
| ** **                                                                                           | ** ** | **Comprehensive** | ** ** | **Shares**            | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Retained**    | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                           | ** ** | **Income**        | ** ** | **Outstanding**       | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Earnings**    | ** ** | **Income** | ** ** |
| **Balance  at January 1, 2004**                                                                      |       |              |       | $                     | 1,844,708  |           | $          | 8,668,373   |       | $               | —     |   | $ | 3,997,695 |   | $ | 178,656 |   |
|                                                                                                 |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Cash dividends —  $0.375 per share                                                              |       |              |       |                  |       |           |       |        |       | (697,460        | )          |   |   |
| Exercise of stock  options, including the realization of tax benefits of $50,000                     |       |              |       | 17,056                |       | 181,298        |       |        |       | (54,596         | )          |   |   |
| **Comprehensive  Income:**                                                                           |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Net earnings for the year                                                                            |       | $                 | 1,821,895  |                  |       |           |       |        |       |            | 1,821,895  |   |   |   |
| Change in unrealized gain on available-for-sale  securities, net of taxes of $202,489                |       | (288,387          | )          |                  |       |           |       |        |       |            |       | (288,387 | ) |
| Less reclassification adjustments for gains included  in the net income,  net of taxes or  $389 |       | (560              | )          |                  |       |           |       |        |       |            |       | (560 | ) |
| **Total Comprehensive Income**                                                                       |       | $                 | 1,532,948  |                  |       |           |       |        |       |            |       |   |   |   |
| **Balance  at December 31, 2004**                                                                    |       |              |       | 1,861,764             |       | 8,849,671      |       | —      |       | 5,067,534       |       | (110,291 | ) |
|                                                                                                 |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Cash dividends —  $0.3875 per share                                                             |       |              |       |                  |       |           |       |        |       | (729,550        | )          |   |   |
| Exercise of stock  options, including the realization of tax benefits of $226,000                    |       |              |       | 37,779                |       | 449,077        |       |        |       | (32,515         | )          |   |   |
| **Comprehensive  Income:**                                                                           |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Net earnings for the year                                                                            |       | $                 | 2,746,820  |                  |       |           |       |        |       |            | 2,746,820  |   |   |   |
| Change in unrealized gain on available-for-sale  securities, net of taxes of $265,409                |       | (378,040          | )          |                  |       |           |       |        |       |            |       | (378,040 | ) |
| Less reclassification adjustments for gains included  in the net income, net of taxes or $2,410      |       | 3,467             |       |                  |       |           |       |        |       |            |       | 3,467 |   |
| **Total Comprehensive Income**                                                                       |       | $                 | 2,372,247  |                  |       |           |       |        |       |            |       |   |   |   |
| **Balance  at December 31, 2005**                                                                    |       |              |       | 1,899,543             |       | $              | 9,298,748  |        | —     |            | 7,052,289  |   | (484,864 | ) |
|                                                                                                 |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Cash dividends —  $0.40 per share                                                               |       |              |       |                  |       |           |       |        |       | (767,587        | )          |   |   |
| Exercise of stock  options, including the realization of tax benefits of $153,000                    |       |              |       | 28,554                |       | 267,815        |       | 153,000     |       | (48,034         | )          |   |   |
| Stock Option  Compensation Expense                                                                   |       |              |       |                  |       |           |       | 63,558      |       |            |       |   |   |
| **Comprehensive  Income:**                                                                           |       |              |       |                  |       |           |       |        |       |            |       |   |   |
| Net earnings for the year                                                                            |       | $                 | 3,388,271  |                  |       |           |       |        |       |            | 3,388,271  |   |   |   |
| Change in unrealized loss on available-for-sale  securities, net of taxes of $150,059                |       | 213,720           |       |                  |       |           |       |        |       |            |       | 213,720 |   |
| **Total Comprehensive Income**                                                                       |       | $                 | 3,601,991  |                  |       |           |       |        |       |            |       |   |   |   |
| **Balance at December 31, 2006**                                                                     |       |              |       | 1,928,097             |       | $              | 9,566,563  |        | $          | 216,558         |       | $ | 9,624,939 |   | $ | (271,144 | ) |
|                                                                                                      |            |                   |            |                       |            |                |            |             |            |                 |            |  |  |  |  |  |  |  |  |

 

*The accompanying notes are an integral part ofthese financial statements.*

 

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**Santa LuciaBancorp and Subsidiary**

**NOTES TOFINANCIAL STATEMENTS**

*December31, 2006, 2005 and 2004*

**NOTE A —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —**The consolidated financial statements includethe accounts of Santa Lucia Bancorp and its wholly owned subsidiary Santa LuciaBank (the “Bank”), collectively referred to herein as the “Company.”  All significant intercompany transactionshave been eliminated.

The accounting and reportingpolicies of the Company are in accordance with accounting principles generallyaccepted in the Unites States of America and prevailing practices within thebanking industry.  A summary of thesignificant accounting policies consistently applied in preparation of theaccompanying financial statements follows:

**Nature ofOperations —**TheCompany has been organized as a single operating segment and maintains fourbranches in the San Luis Obispo and northern Santa Barbara Counties.  The Company’s primary source of revenue isinterest income from loans to customers. The Company’s customers arepredominantly small and middle-market businesses and individuals.

**Use ofEstimates in the Preparation of Financial Statements —**The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of certain revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

**Presentationof Cash Flows —**Forthe purposes of reporting cash flows, cash and cash equivalents includes cash,noninterest-earning deposits and federal funds sold.  Generally, federal funds are sold for one dayperiods.

**Cash and DueFrom Banks —**Bankingregulations require that all banks maintain a percentage of their deposits asreserves in cash or on deposit with the Federal Reserve Bank.  The Bank was in compliance with the reserverequirements as of December 31, 2006 and 2005.

The Company periodicallymaintains amounts due from banks that exceed federally insured limits.  The Company has not experienced any losses insuch accounts.

**InvestmentSecurities —**Bonds,notes, and debentures for which the Company has the positive intent and abilityto hold to maturity are reported at cost, adjusted for premiums and discountsthat are recognized in interest income using the interest method over theperiod to maturity.

Investments not classified astrading securities nor as held-to-maturity securities are classified asavailable-for-sale securities and recorded at fair value.  Unrealized gains or losses onavailable-for-sale securities are excluded from net income and reported as anamount net of taxes as a separate component of other comprehensive incomeincluded in shareholders’ equity. Premiums or discounts on held-to-maturity and available-for-salesecurities are amortized or accreted into income using the interestmethod.  Realized gains or losses onsales of held-to-maturity or available-for-sale securities are recorded usingthe specific identification method.

Declines in the fair value ofindividual held-to-maturity and available-for-sale securities below their costthat are other-than-temporary result in write-downs of the individualsecurities to their fair value.  Therelated write-downs are included in earnings as realized losses.  In estimating other-than-temporary impairmentlosses, management

26

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considers the length of timeand the extent to which the fair value has been less than cost, the financialcondition and near-term prospects of the issuer, and the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

**Provisionand Allowance for Loan Losses —**The determination of the balance in the allowance for loan losses isbased on an analysis of the loan portfolio and reflects an amount which, inmanagement’s judgment, is adequate to provide for potential credit losses aftergiving consideration to the character of the loan portfolio, current economicconditions, past credit loss experience and such other factors as deservecurrent recognition in estimating credit losses.  The provision for loan losses is charged toexpenses.

The Company considers a loanto be impaired when it is probable that the Company will be unable to collectall amounts due (principal and interest) according to the contractual terms ofthe loan agreement. Measurement of impairment is based on the expected futurecash flows of an impaired loan, which are to be discounted at the loan’seffective interest rate, or measured by reference to an observable marketvalue, if one exists, or the fair value of the collateral for acollateral-dependent loan.  The Companyselects the measurement method on a loan-by-loan basis except thatcollateral-dependent loans for which foreclosure is probable are measured atthe fair value of the collateral.  TheCompany recognizes interest income on impaired loans based on its existingmethods of recognizing interest income on nonaccrual loans.

**Interest andFees on Loans —**Interestincome is accrued daily as earned on all loans. Loans on which the accrual ofinterest has been discontinued are designated as nonaccrual loans.  The accrual of interest on loans isdiscontinued when principal or interest is past due 90 days based oncontractual terms of the loan or when, in the opinion of management, there isreasonable doubt as to collectibility. When loans are placed on nonaccrual status, all interest previouslyaccrued but not collected is reversed against current period interestincome.  Income on nonaccrual loans issubsequently recognized only to the extent that cash is received and the loan’sprincipal balance is deemed collectible. Interest accruals are resumed on suchloans only when they are brought current with respect to interest and principaland when, in the judgment of management, the loans are estimated to be fullycollectible as to all principal and interest. Loan origination fees and certaindirect origination costs are capitalized and recognized as an adjustment of theyield of the related loan.

**Premises andEquipment —**Land iscarried at cost.  Premises and equipmentare carried at cost less accumulated depreciation and amortization.  Depreciation is computed using thestraight-line method over the estimated useful lives, which ranges from threeto ten years for furniture and fixtures and forty years for buildings.  Expenditures for betterments or major repairsare capitalized and those for ordinary repairs and maintenance are charged tooperations as incurred.

**Other RealEstate Owned —**Otherreal estate owned represents real estate acquired through foreclosure and iscarried at the lower of the recorded investment in the property or its fairvalue.  Prior to foreclosure, the valueof the underlying loan is written down to the fair market value of the realestate to be acquired by a charge to the allowance for credit losses, ifnecessary.  Any subsequent write-downsare charged against operating expenses. Operating expenses of such properties, net of related income, areincluded in other expenses.

27

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**Income Taxes—**Deferred incometaxes are computed using the asset and liability method, which recognizes a liabilityor asset representing the tax effects, based on current tax law, of futuredeductible or taxable amounts attributable to events that have been recognizedin the financial statements.  A valuationallowance is established to reduce the deferred tax asset to the level at whichit is “more likely than not” that the tax asset or benefits will berealized.  Realization of tax benefits ofdeductible temporary differences and operating loss carryforwards depends onhaving sufficient taxable income of an appropriate character within thecarryforward periods.

**AdvertisingCosts —**The Companyexpenses the costs of advertising in the period incurred.

**ComprehensiveIncome —**Beginning in1998, the Company adopted Statement of Financial Accounting Standard (“SFAS”)No. 130, *“Reporting Comprehensive Income*”(SFAS No. 130), which requires the disclosure of comprehensive income and itscomponents.  Changes in unrealized gainor loss on available-for-sale securities net of income taxes is the onlycomponent of accumulated other comprehensive income for the Company..

**FinancialInstruments —**In theordinary course of business, the Company has entered into off-balance sheetfinancial instruments consisting of commitments to extend credit, commercialletters of credit, and standby letters of credit as described in Note M.  Such financial instruments are recorded inthe financial statements when they are funded or related fees are incurred orreceived.

**Earnings PerShares (EPS) —**BasicEPS excludes dilution and is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding forthe period.  Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the entity.

**Stock-BasedCompensation —**TheCompany has adopted SFAS No. 123(R) *“Shared-BasedPayment.”*This Statement generally requires entities to recognizethe cost of employee services received in exchange for awards of stock options,or other equity instruments, based on the grant-date fair value of thoseawards.  This cost is recognized over theperiod which an employee is required to provide services in exchange for theaward, generally the vesting period.

**Change inAccounting Principle —**TheCompany adopted SFAS No. 123 (R) on January 1, 2006 using the “modifiedprospective method.”  Under this methodcompensation expense is recognized using the fair-value method for all newstock option awards as well as any existing awards that are modified,repurchased or cancelled after January 1, 2006 and prior periods are notrestated.  In addition, the unvested portionof previously awarded options outstanding as of January 1, 2006 will also berecognized as expense over the requisite service period based on the fair valueof those options as previously calculated at the grant date under the pro-formadisclosures of SFAS No. 123.  The fairvalue of each grant is estimated using the Black-Scholes option pricing model.During 2006 the Company recognized pre-tax stock-based compensation expense of$63,558, as a result of adopting SFAS No. 123 (R).

Prior to the adoption of SFASNo. 123 (R), the Company accounted for stock-based awards using the intrinsicvalue method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, *“Accounting for Stock Issued to Employees,”*andrelated interpretations.  Accordingly,compensation cost for stock options was measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock.  All of the Company’s stock option grantsincluded exercise prices equal to the Company’s current market price per share;accordingly, no compensation expense was reported using the intrinsic valuemethod of APB Opinion No. 25.

28

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Had compensation cost for theCompany’s stock option plans been determined based on the fair value at thegrant dates for awards under those plans consistent with the method of SFAS No.123, the Company’s net income and income per share for 2005 and 2004 would havechanged to the pro forma amounts indicated below:
| ** **                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income:                                                                                     |       |     |       |     |       |
| As reported                                                                                     |       | $        | 2,746,820  |     | $          | 1,821,895 |   |
| Stock-Based Compensation using the Intrinsic Value  Method                                      |       | —   |       | —   |       |
| Stock-Based Compensation that would have been  reported using the Fair Value Method of SFAS 123 |       | (43,436  | )          | (66,770  | )          |
| Pro Forma                                                                                       |       | $        | 2,703,384  |     | $          | 1,755,125 |   |
| Per share:                                                                                      |       |     |       |     |       |
| Net Income - Basic                                                                              |       |     |       |     |       |
| As Reported                                                                                     |       | $        | 1.46       |     | $          | 0.98 |   |
| Pro Forma                                                                                       |       | $        | 1.44       |     | $          | 0.95 |   |
| Net Income -  Diluted                                                                           |       |     |       |     |       |
| As Reported                                                                                     |       | $        | 1.38       |     | $          | 0.94 |   |
| Pro Forma                                                                                       |       | $        | 1.36       |     | $          | 0.90 |   |

 

**Disclosureabout Fair Value of Financial Instruments —**SFAS No. 107 specifies the disclosure of theestimated fair value of financial instruments. The Company’s estimated fair value amounts have been determined by theCompany using available market information and appropriate valuationmethodologies.

However, considerablejudgment is required to develop the estimates of fair value.  Accordingly, the estimates are notnecessarily indicative of the amounts the Company could have realized in acurrent market exchange.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

Although management is notaware of any factors that would significantly affect the estimated fair valueamounts, such amounts have not been comprehensively revalued for purposes ofthese financial statements since the balance sheet date and, therefore, currentestimates of fair value may differ significantly from the amounts presented inthe accompanying notes.

**Reclassification—**Certainreclassifications have been made in the 2005 and 2004 financial statements toconform to the presentation used in 2006. These reclassifications had no impact on the Company’s previouslyreported financial statements.

**NOTE B —INVESTMENT SECURITIES —**Theamortized cost, carrying value and estimated fair values of investmentsecurities available for sale as of December 31, are as follows:
| ** **                             | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                             | ** ** | **cost**                        | ** ** | **gains** | ** ** | **(losses)** | ** ** | **fair value** | ** ** |
| U.S. Government  and Agency Securities |       | $                               | 19,094,065 |   | $ | 3,029 |   | $ | (76,599 | ) | $ | 19,020,495 |   |
| States and  Political Subdivisions     |       | 4,805,053                       |       | 9,970 |   | (89,397 | ) | 4,725,626 |   |
| Mortgage-Backed  Securities            |       | 19,340,821                      |       | 20,303 |   | (328,828 | ) | 19,032,296 |   |
|                                   |       | $                               | 43,239,939 |   | $ | 33,302 |   | $ | (494,824 | ) | $ | 42,778,417 |   |

 
| ** **                             | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                             | ** ** | **cost**                        | ** ** | **gains** | ** ** | **(losses)** | ** ** | **fair value** | ** ** |
| U.S. Government  and Agency Securities |       | $                               | 22,164,983 |   | $ | — |   | $ | (349,578 | ) | $ | 21,815,405 |   |
| States and  Political Subdivisions     |       | 4,598,941                       |       | 21,840 |   | (95,856 | ) | 4,524,925 |   |
| Mortgage-Backed  Securities            |       | 15,891,090                      |       |   |   | (401,707 | ) | 15,489,383 |   |
|                                   |       | $                               | 42,655,014 |   | $ | 21,840 |   | $ | (847,141 | ) | $ | 41,829,713 |   |

 

29

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The carrying value ofinvestment securities pledged to secure public funds, borrowings and for otherpurposes as required or permitted by law amounts to approximately $14,316,000and $13,198,000 at December 31, 2006 and 2005, respectively.  During 2005 the Bank had proceeds from thesale of available for sale securities of $6,016,550, gross gains of $1,298 andgross losses of $7,175.  During 2004 theBank had proceeds from the sale of available for sale securities of $8,093,602,gross gains of $14,170 and gross losses of $13,221.

The amortized cost andestimated fair value of debt securities at December 31, 2006, by contractualmaturity, are shown below. Mortgage-backed securities are classified inaccordance with their estimated lives. Expected maturities may differ from contractual maturities becauseborrowers may have the right to prepay obligations.
| ** **                             | ** ** | **Amortized** | ** ** | **Estimated**       | ** ** |
|----------------------------------------|------------|---------------|------------|---------------------|------------|
| ** **                             | ** ** | **cost**      | ** ** | **fair value** | ** ** |
| Securities available-for-sale:         |       |          |       |                |       |
| Due in one year or less                |       | $             | 13,357,845 |                | $          | 13,217,822 |   |
| Due after one year through five years  |       | 23,215,827    |       | 22,919,816          |       |
| Due after five years through ten years |       | 4,949,247     |       | 4,928,233           |       |
| Due after ten years                    |       | 1,717,020     |       | 1,712,546           |       |
|                                   |       | $             | 43,239,939 |                | $          | 42,778,417 |   |

 

Thegross unrealized loss and related estimated fair value of investment securitiesthat have been in a continuous loss position for less than twelve months andover twelve months at December 31, are as follows:
| ** **                               | ** ** | **Less than**     | ** ** | **Over**               | ** ** | ** **     | ** ** | ** **    | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|
| ** **                               | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** | **Total**      | ** ** |
| ** **                               | ** ** | ** **             | ** ** | **Estimated**          | ** ** | ** **     | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Unrealized**         | ** ** | **fair**               | ** ** | **Unrealized** | ** ** | **fair**      | ** ** | **Unrealized** | ** ** | **fair** | ** ** |
| **December 31, 2006:**         | ** ** | **losses**             | ** ** | **value**              | ** ** | **losses**     | ** ** | **value**     | ** ** | **losses** | ** ** | **value** | ** ** |
| U.S. Government  & Agency Securities |       | $                      | (2,954     | )                      | $          | 4,000,971      |       | $             | (73,645    | ) | $ | 6,924,3 |   | $ | (76,599 | ) | $ | 10,925,288 |   |
| States and  Political Subdivisions       |       | (493                   | )          | 352,419                |       | (88,905        | )          | 3,587,649     |       | (89,398 | ) | 3,940,068 |   |
| Mortgage-Backed Securities               |       | —                 |       | —                 |       | (328,827       | )          | 12,473,837    |       | (328,827 | ) | 12,473,837 |   |
|                                     |       | $                      | (3,447     | )                      | $          | 4,353,390      |       | $             | (491,377   | ) | $ | 22,985,803 |   | $ | (494,824 | ) | $ | 27,339,193 |   |

 
| ** **                               | ** ** | **Less than**     | ** ** | **Over**               | ** ** | ** **     | ** ** | ** **    | ** ** |
|------------------------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|
| ** **                               | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** | **Total**      | ** ** |
| ** **                               | ** ** | ** **             | ** ** | **Estimated**          | ** ** | ** **     | ** ** | **Estimated** | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                               | ** ** | **Unrealized**         | ** ** | **fair**               | ** ** | **Unrealized** | ** ** | **fair**      | ** ** | **Unrealized** | ** ** | **fair** | ** ** |
| **December 31, 2005:**         | ** ** | **losses**             | ** ** | **value**              | ** ** | **losses**     | ** ** | **value**     | ** ** | **losses** | ** ** | **value** | ** ** |
| U.S. Government  & Agency Securities |       | $                      | —     |                   | $          | —         |       | $             | (349,578   | ) | $ | 21,815,405 |   | $ | (349,578 | ) | $ | 21,815,405 |   |
| States and  Political Subdivisions       |       | (21,158                | )          | 1,735,427              |       | (74,698        | )          | 1,852,658     |       | (95,856 | ) | 3,588,085 |   |
| Mortgage-Backed  Securities              |       | (231,446               | )          | 11,029,374             |       | (170,261       | )          | 4,460,009     |       | (401,707 | ) | 15,489,383 |   |
|                                     |       | $                      | (252,604   | )                      | $          | 12,764,801     |       | $             | (594,537   | ) | $ | 28,128,072 |   | $ | (847,141 | ) | $ | 40,892,873 |   |

 

As of December 31, 2006, theCompany has 30 investment securities where estimated fair market value haddeclined 1.8% from amortized cost. Management evaluates investment securities for other-than-temporaryimpairment taking into consideration the extent and length of time the fairvalue has been less than cost, the financial condition of the issuer andwhether the Bank has the intent and ability to retain the investment for aperiod of time sufficient to allow for any anticipated recovery in fairvalue.  As of December 31, 2006, nodeclines are deemed to be other than temporary.

**NOTE C —LOANS —**The Bank’sloan portfolio consists primarily of loans to borrowers within San Luis Obispoand northern Santa Barbara Counties, California.  Although the Bank seeks to avoidconcentrations of loans to a single industry or based upon a single class ofcollateral, real estate and real estate associated businesses are among theprincipal industries in the Bank’s market areas.  As a result, the Bank’s loan and collateralportfolios are, to some degree, concentrated in those industries.

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The composition of the loanportfolio at December 31, is as follows:
| ** **                       | ** ** | **2006**    | ** **  | **2005**    | ** ** |
|----------------------------------|------------|-------------|-------------|-------------|------------|
| Real estate —  construction |       | $           | 55,307,210  |        | $          | 52,695,715 |   |
| Real estate —  other        |       | 78,757,513  |        | 66,390,495  |       |
| Commercial                       |       | 36,406,663  |        | 34,178,640  |       |
| Consumer                         |       | 1,603,836   |        | 1,493,737   |       |
|                             |       | 172,075,222 |        | 154,758,587 |       |
| Deferred loan  fees              |       | (741,054    | )           | (725,218    | )          |
| Allowance for  loan losses       |       | (1,653,695  | )           | (1,470,261  | )          |
|                             |       | $           | 169,680,473 |        | $          | 152,563,108 |   |

 

The allowance for loan lossesis increased by the provision to income and decreased by net charge-offs.  Management’s periodic evaluation of theadequacy of the allowance is based on the Company’s past loan experience, knownand inherent risks in the portfolio, adverse situations that may affect theborrower’s ability to repay, the estimated value of any underlying collateral,and current economic conditions.

Transactions in the allowancefor credit losses are summarized as follows:
| ** **                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Balance at  beginning of year               |       | $        | 1,470,261  |     | $          | 1,200,036 |       | $ | 1,112,103 |   |
| Provision  charged to expense               |       | 240,000  |       | 300,000  |       | 110,000   |       |
| Loans charged  off                          |       | (84,002  | )          | (46,355  | )          | (22,865   | )          |
| Recoveries on  loans previously charged off |       | 27,436   |       | 16,580   |       | 798       |       |
| Balance at end of year                      |       | $        | 1,653,695  |     | $          | 1,470,261 |       | $ | 1,200,036 |   |

 

The following is a summary ofthe investment in impaired loans, the related allowance for loan losses, incomerecognized and information pertaining to nonaccrual and past due loans as ofDecember 31:
| ** **                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Recorded  investment in impaired loans                       |       | $        | —     |     | $          | 134,872  |       | $ | 758,061 |   |
|                                                         |       |     |       |     |       |     |       |
| Related  allowance for loan losses                           |       | $        | —     |     | $          | —   |       | $ | 45,484 |   |
|                                                         |       |     |       |     |       |     |       |
| Average recorded  investment in impaired loans               |       | $        | 250,000    |     | $          | 459,000  |       | $ | 790,000 |   |
|                                                         |       |     |       |     |       |     |       |
| Interest income  recognized for cash payments                |       | $        | 3,045      |     | $          | 28,581   |       | $ | 49,448 |   |
|                                                         |       |     |       |     |       |     |       |
| Total nonaccrual  loans                                      |       | $        | —     |     | $          | 134,872  |       | $ | 758,061 |   |
|                                                         |       |     |       |     |       |     |       |
| Total loans past-due  ninety days or more and still accruing |       | $        | 550,000    |     | $          | —   |       | $ | — |   |

 

**NOTE D —RELATED PARTY TRANSACTIONS —**In the ordinary course of business, the Bank has granted loans tocertain executive officers, directors and the businesses with which they areassociated. All such loans and commitments to lend were made under terms whichare consistent with the Bank’s normal lending policies.

The following is an analysisof the activity of all such loans:
| ** **                           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Beginning  balance                   |       | $          | 2,976,502  |       | $          | 2,534,603 |   |
| Credits granted,  including renewals |       | 2,797,483  |       | 2,786,964  |       |
| Repayments                           |       | (2,039,832 | )          | (2,345,065 | )          |
|                                 |       | $          | 3,734,153  |       | $          | 2,976,502 |   |

 

Undisbursed loans amount toapproximately $2,337,163 and $1,746,738 at December 31, 2006 and 2005,respectively.

Deposits from related partiesheld by the Bank at December 31, 2006 and 2005 amounted to $3,323,903 and$2,331,216, respectively.

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**NOTE E —PREMISES AND EQUIPMENT —**The composition of premises and equipment at December 31 is as follows:
| ** **                         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| Premises                           |       | $          | 7,411,967  |       | $          | 7,388,139 |   |
| Furniture,  fixtures and equipment |       | 4,149,808  |       | 3,747,687  |       |
|                               |       | 11,561,775 |       | 11,135,826 |       |
| Less accumulated  depreciation     |       | 4,334,333  |       | 3,706,007  |       |
|                               |       | 7,227,442  |       | 7,429,819  |       |
| Land                               |       | 2,030,765  |       | 2,030,765  |       |
|                               |       | $          | 9,258,207  |       | $          | 9,460,584 |   |

 

**NOTE F —DEPOSITS —**At December31, 2006, the scheduled maturities of time deposits are as follows:
| Due in one year            |   | $         | 57,701,611 |   |
|----------------------------|--------|-----------|------------|--------|
| Due in one to  three years |   | 6,333,836 |       |
| Due after three  years     |   | 1,882,267 |       |
|                       |   | $         | 65,917,714 |   |

 

**NOTE G —SHORT-TERM BORROWINGS —**TheBank has two borrowing arrangements with the Federal Home Loan Bank of SanFrancisco.  The first allows the Bank toborrow up to approximately $43 million against which the Bank has pledgedapproximately $105 million of its real estate secured loans.  The second arrangement allows the Bank toborrow up to approximately $11 million against which the Bank has pledgedapproximately $11 million of its investment securities.  

The Bank may also borrow upto $5,900,000 overnight on an unsecured basis from two correspondentbanks.  As of December 31, 2006, noamounts were outstanding under these arrangements.

**NOTE H —LONG-TERMBORROWINGS —**Duringthe third quarter of 2003, the Bank issued Subordinated Debentures to nineteeninvestors including executive officers and members of the Bank’s Board ofDirectors, in the total sum of $2,000,000 (“Debentures”).  The total amount issued to executive officersand directors was $1,100,000.  TheDebentures include quarterly payment of interest at prime plus 1.5% andquarterly principal installments of $166,666 commencing on September 30, 2008until paid in full on June 30, 2011.  TheDebentures, which are subordinated to the right of payment to depositors and othercreditors, partially qualify as Tier 2 Capital.

On April 28, 2006, theCompany issued $5,155,000 in junior subordinated debt securities (the “debtsecurities”) to the Santa Lucia Bancorp (CA) Capital Trust, a statutory trustcreated under the laws of the State of Delaware.  These debt securities are subordinated toeffectively all borrowings of the Company and are due and payable on July 7,2036.  These debt securities may beredeemed for 105% of the principal balance through July 7, 2011 and then at parthereafter. Interest is payable quarterly beginning July 7, 2006 at 1.48% overthe quarterly adjustable 3-month LIBOR.

The Company also purchased a3% minority interest in Santa Lucia Bancorp (CA) Capital Trust.  The balance of the equity of Santa LuciaBancorp (CA) Capital Trust is comprised of mandatorily redeemable preferredsecurities.

**NOTE I —INCOMETAXES —**Theasset and liability method is used in accounting for income taxes.  Under this method, deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse.

Deferred income taxes reflectthe net tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts usedfor income tax purposes.

32

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Significant components of theCompany’s deferred tax liabilities and assets as of December 31 are as follows:
| ** **                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred  liabilities:                           |       |      |       |      |       |
| Tax over book depreciation                       |       | $         | 493,000    |      | $          | 487,000 |   |
| Other                                            |       | 107,000   |       | 81,000    |       |
| Total deferred tax liabilities                   |       | 600,000   |       | 568,000   |       |
| Deferred tax  assets:                            |       |      |       |      |       |
| Allowance for loan losses                        |       | 673,000   |       | 598,000   |       |
| Deferred compensation plans                      |       | 390,000   |       | 348,000   |       |
| Market value adjustment on investment securities |       | 190,000   |       | 340,000   |       |
| State taxes                                      |       | 224,000   |       | 149,000   |       |
| Net loss carryforward                            |       | 55,000    |       | 69,000    |       |
| Other                                            |       | 9,000     |       | 8,000     |       |
| Total deferred tax assets                        |       | 1,541,000 |       | 1,512,000 |       |
| Net deferred tax  assets                         |       | $         | 941,000    |      | $          | 944,000 |   |

 

The provision for incometaxes consists of the following:
| ** **                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** |
|----------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Currently  payable         |       | $        | 2,389,000  |     | $          | 1,784,000 |       | $ | 1,091,000 |   |
| Deferred taxes  (benefits) |       | (147,000 | )          | (25,000  | )          | (15,000   | )          |
|                       |       | $        | 2,242,000  | )        | $          | 1,759,000 | )          | $ | 1,076,000 | ) |

 

The principal sources ofdeferred income taxes and the tax effect of each are as follows:
| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax over book  depreciation |       | $        | 6,000      |     | $          | 173,000  |       | $ | 47,000 |   |
| Provision for  loan losses  |       | (75,000  | )          | (118,000 | )          | (42,000  | )          |
| State taxes                 |       | (75,000  | )          | (46,000  | )          | (26,000  | )          |
| Net loss  carryforward      |       |     |       | 14,000   |       | 14,000   |       |
| 14,000                      |       |     |       |     |       |     |       |
| Sale leaseback              |       | —   |       | —   |       | 34,000   |       |
| Other                       |       | (17,000  | )          | (48,000  | )          | (42,000  | )          |
| Net deferred  taxes         |       | $        | (147,000   | )        | $          | (25,000  | )          | $ | (15,000 | ) |

 

As of December 31, 2006, theBank had federal net operating loss carryforwards available to reduce futuretaxable income of approximately $163,000. These net operating losscarryforwards expire in 2010.  The 1995merger with Central Coast National Bank resulted in an ownership change asdefined in the Internal Revenue Code Section 382. Accordingly, the utilizationof the net operating loss will be subject to the limitations prescribed inSection 382.

As a result of the followingitems, the total tax expense was different from the amount computed by applyingthe statutory income tax rate to earnings before income taxes:
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  “expected” tax |       | $        | 1,914,000  |     | 34.0       | %        | $          | 1,532,000 |   | 34.0 | % | $ | 985,000 |   | 34.0 | % |
| State franchise  tax, net         |       | 396,000  |       | 7.0      |       | 318,000  |       | 7.0 |   | 200,000 |   | 6.9 |   |
| Tax exempt income                 |       | (80,000  | )          | (1.3     | )          | (82,000  | )          | (1.8 | ) | (104,000 | ) | (3.6 | ) |
| Other                             |       | 12,000   |       | 0.2      |       | (9,000   | )          | (0.2 | ) | (5,000 | ) | (0.1 | ) |
|                              |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Total expense                     |       | $        | 2,242,000  |     | 39.9       | %        |       |   | 39.0 | % | $ | 1,076,000 |   | 37.2 | % |

 

**NOTE J —EMPLOYEE PROFIT SHARING AND DEFERRED COMPENSATION —**The Bank sponsors a 401 (k) plan for thebenefit of its employees.  In 1994 theBank also approved the creation of an Employee Stock Ownership Plan for thebenefit of its employees. Contributions to these plans are determined by theBoard of Directors. For income tax purposes, the annual contribution is limitedto 15% of the compensation of eligible employees.  The Bank contributed $210,000 in 2006,$240,000 in 2005, and $225,000 in 2004, to the Employee Stock Ownership Plan.  The Bank contributed $50,000 to the 401 (k)plan in 2006.  There were nocontributions to the 401 (k) plan in 2005 and 2004.

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The Bank has entered intodeferred compensation agreements with key officers and board members.  Under these agreements, the Bank is obligatedto provide, upon retirement, a lifetime benefit for the officers and directors.The annual benefits ranging from $25,000 to $36,000 for key officers and $4,000to $6,000 for directors.  The estimatedpresent value of future benefits to be paid is being accrued over the period fromthe effective date of the agreements until the expected retirement dates of theparticipants.  The expense incurred andamount accrued for this plan for the years ended December 31, 2006, 2005, and2004 totaled $131,454, $120,715, and $103,983, respectively.  The Bank is a beneficiary of life insurancepolicies that have been purchased as a method of financing the benefits underthe agreements.

**NOTE K —STOCK OPTIONS —**TheCompany sponsors one compensatory incentive and non-qualified stock option planwhich provides certain key employees and the Board of Directors with the optionto purchase shares of common stock, and one Equity Based Compensation Planwhich provides certain key employees and the Board of Directors with the awardof any Option, Stock Appreciation Right, Restricted Stock Award, RestrictedShare Unit, Performance Share Award, Dividend Equivalent, or any combinationthereof.  In 1999, the Bank adopted astock option plan (the 2000 plan) under which up to 360,000 shares of the Bank’scommon stock may be issued to directors, officers, and key employees.  In 2006, the Company adopted the 2006 EquityBased Compensation Plan (the Plan), which the maximum number of shares ofcommon stock that may be awarded under this Plan shall not exceed 200,000shares, including 38,200 shares rolled over from the Company’s 2000 StockOption Plan.  Option prices may not beless than 100% of the fair market value of the stock at the date of grant.  Options became exercisable at the rate of 20%per year beginning at various dates and expire not more than ten years from thedate of grant.  The Company recognizedstock-based compensation costs of $63,558 and $7,193 of related tax benefits.

The fair value of each optiongranted was estimated on the date of grant using the Black-Scholes optionspricing model with the following assumptions:
| ** **                              | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-----------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Risk-free rates                         |       | 4.77      | %          | 3.75      | %          | 3.86      | %          |
| Expected  volatility                    |       | 20.00     | %          | 17.00     | %          | 13.70     | %          |
| Expected  dividened yield               |       | 1.40      | %          | 2.10      | %          | 2.10      | %          |
| Expected term                           |       | 6.0 years |       | 6.5 years |       | 7.0 years |       |
| Weighted-average grant  date fair value |       | $         | 6.43       |      | $          | 4.47      |       | $ | 3.07 |   |
|                                         |            |           |            |           |            |           |            |  |  |  |

 

A summary of the status ofthe Company’s fixed stock option plan as of December 31, 2006 and changesduring the year then ended is presented below:
| ** **                          | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Shares**                      | ** ** | **Weighted-   Average Exercise  Price** | ** ** | **Weighted-  Average   Remaining   Contractual Term** | ** ** | **Aggregate   Intrinsic Value** | ** ** |
| Outstanding at  the                 |       |                            |       |   |   |   |   |   |   |
| beginning of the year               |       | 209,916                         |       | $ | 11.73 |   |   |   |   |   |
| Granted                             |       | 65,000                          |       | 24.85 |   |   |   |   |   |
| Exercised                           |       | (30,940                         | )          | 9.29 |   |   |   |   |   |
| Foreited or expired                 |       | (800                            | )          | 11.00 |   |   |   |   |   |
| Outstanding at  the end of the year |       | 243,176                         |       | 15.55 |   | 6.7 years |   | $ | 3,028,000 |   |
| Options Exercisable                 |       | 130,976                         |       | $ | 5.08 |   | 5.2 years |   | $ | 2,235,000 |   |

 

The total intrinsic value ofoptions exercised during the years ended December 31 2006, 2005 and 2004 wereapproximately $539,000, 760,000 and $150,000 respectively.  As of December 31, 2006 there was $480,000 oftotal unrecognized compensation cost related to the outstanding stock optionsthat will be recognized over a weighted average period of 2.7 years.

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**NOTE L —EARNINGS PER SHARE (EPS) —**The following is a reconciliation of net income and shares outstandingto the income and number of shares used to compute EPS:
| ** **                                    | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Income**                      | ** ** | **Shares** | ** ** |
| ** **                                    | ** ** | **(Numerator)**                 | ** ** | **(Denominator)** | ** ** |
| Net income                                    |       | $                               | 3,388,271  |   |   |   |
| Average shares  outstanding                   |       |                            |       | 1,916,253 |   |
| **Used in Basic EPS**                         |       | 3,388,271                       |       | 1,916,253 |   |
| Dilutive effect  of outstanding stock options |       |                            |       | 98,413 |   |
| **Used in  Diluted EPS**                      |       | $                               | 3,388,271  |   | 2,014,666 |   |

 
| ** **                                    | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Income**                      | ** ** | **Shares** | ** ** |
| ** **                                    | ** ** | **(Numerator)**                 | ** ** | **(Denominator)** | ** ** |
| Net income                                    |       | $                               | 2,746,820  |   |   |   |
| Average shares  outstanding                   |       |                            |       | 1,878,949 |   |
| **Used in Basic EPS**                         |       | 2,746,820                       |       | 1,878,949 |   |
| Dilutive effect  of outstanding stock options |       |                            |       | 105,289 |   |
| **Used in  Diluted EPS**                      |       | $                               | 2,746,820  |   | 1,984,238 |   |

 
| ** **                                    | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Income**                      | ** ** | **Shares** | ** ** |
| ** **                                    | ** ** | **(Numerator)**                 | ** ** | **(Denominator)** | ** ** |
| Net income                                    |       | $                               | 1,821,895  |   |   |   |
| Average shares  outstanding                   |       |                            |       | 1,859,036 |   |
| **Used in Basic EPS**                         |       | 1,821,895                       |       | 1,859,036 |   |
| Dilutive effect  of outstanding stock options |       |                            |       | 87,400 |   |
| **Used in  Diluted EPS**                      |       | $                               | 1,821,895  |   | 1,946,436 |   |

 

**NOTE M —COMMITMENTS AND CONTINGENCIES —**The Company’s exposure to credit loss in the event of nonperformance bythe other party to the financial instrument for commitments to extend creditand standby letters of credit is represented by the contractual amount of thosecommitments. Commitments to extend credit (such as the unfunded portion onlines of credit and commitments to fund new loans) as of December 31, 2006 and2005 amounts to approximately $56,557,000 and $53,280,000, respectively, ofwhich approximately $2,603,000 and $1,546,000 are related standby letters ofcredit, respectively.  The Company usesthe same credit policies in these commitments as is done for all of its lendingactivities.  As such, the credit riskinvolved in these transactions is essentially the same as that involved inextending loan facilities to customers. 

Commitments to extend creditare agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Since many of the commitments areexpected to expire without being drawn upon, the total amounts do notnecessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-casebasis.  The amount of collateral obtainedif deemed necessary by the Company is based on management’s credit evaluationof the customer.  The majority of theCompany’s commitments to extend credit and standby letters of credit aresecured by real estate. 

In the normal course ofbusiness, the Company is involved in various litigation.  In the opinion of management, and based onthe advise of the Company’s legal counsel, the disposition of all pendinglitigation will not have a material effect on the Company’s financial position.

**NOTE N —FAIRVALUESOFFINANCIALINSTRUMENTS —**The fair value of a financial instrument is the amount at which theasset or obligation could be exchanged in a current transaction between willingparties, other than in a forced or liquidation sale.  Fair value estimates are made at a specificpoint in time based on relevant market information and information about thefinancial instrument.  These estimates donot reflect any premium or discount that could result from offering for sale atone time the entire holdings of a particular

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financial instrument.  Because no market value exists for asignificant portion of the financial instruments, fair value estimates arebased on judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.  These estimates are subjectivein nature, involve uncertainties and matters of judgment, and therefore cannotbe determined with precision.  Changes inassumptions could significantly affect the estimates.

Fair value estimates arebased on financial instruments both on and off the balance sheet withoutattempting to estimate the value of anticipated future business and the valueof assets and liabilities that are not considered financial instruments.  Additionally, tax consequences related to therealization of the unrealized gains and losses can have a potential effect onfair value estimates and have not been considered in many of the estimates.

The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

**FinancialAssets —**The carryingamounts of cash, short term investments, due from customers on acceptances, andbank acceptances outstanding are considered to approximate fair value.  Short term investments include federal fundssold, securities purchased under agreements to resell, and interest bearingdeposits with banks.  The fair values ofinvestment securities, including available for sale, are generally based onquoted market prices.  The fair value ofloans are estimated using a combination of techniques, including discountingestimated future cash flows and quoted market prices of similar instrumentswhere available.

**FinancialLiabilities —**Thecarrying amounts of deposit liabilities payable on demand, commercial paper,and other borrowed funds are considered to approximate fair value.  For fixed maturity deposits, fair value isestimated by discounting estimated future cash flows using currently offeredrates for deposits of similar remaining maturities.  The fair value of long term debt is based onrates currently available for debt with similar terms and remaining maturities.

**Off-BalanceSheet Financial Instruments —**The fair value of commitments to extend credit and standby letters ofcredit is estimated using the fees currently charged to enter into similaragreements.  The fair values of thesefinancial instruments are not deemed to be material. 

The estimated fair value offinancial instruments at December 31, 2006 and 2005 are summarized as follows:
| ** **                              | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Carrying**                    | ** ** | **Market**                      | ** ** | **Carrying** | ** ** | **Market** | ** ** |
| ** **                              | ** ** | **Value**                       | ** ** | **Value**                       | ** ** | **Value** | ** ** | **Value** | ** ** |
| Financial  Assets:                      |       |                            |       |                            |       |   |   |   |   |
| Cash and cash equivalents               |       | $                               | 10,139,526 |                            | $          | 10,139,526 |   | $ | 20,293,047 |   | $ | 20,293,047 |   |
| Investment securities                   |       | 42,778,417                      |       | 42,778,417                      |       | 41,829,713 |   | 41,829,713 |   |
| Loans receivable, net                   |       | 169,680,473                     |       | 170,091,100                     |       | 152,563,108 |   | 151,937,599 |   |
| Cash surrender value of life insurance  |       | 3,336,076                       |       | 3,336,076                       |       | 3,223,142 |   | 3,223,142 |   |
| Federal Reserve Bank FHLB Stock         |       | 1,397,700                       |       | 1,397,700                       |       | 1,242,150 |   | 1,242,150 |   |
| Accrued interest receivable             |       | 1,559,551                       |       | 1,559,551                       |       | 1,016,760 |   | 1,016,760 |   |
| Financial  Liabilities:                 |       |                            |       |                            |       |   |   |   |   |
| Time deposits                           |       | $                               | 65,917,714 |                            | $          | 65,838,613 |   | $ | 42,555,985 |   | $ | 42,517,685 |   |
| Other deposits                          |       | 147,070,738                     |       | 147,070,738                     |       | 164,323,094 |   | 164,323,094 |   |
| Other borrowings                        |       | —                          |       | —                          |       | 5,500,000 |   | 5,500,000 |   |
| Long-term debt                          |       | 7,155,000                       |       | 7,155,000                       |       | 2,000,000 |   | 2,000,000 |   |
| Accrued interest  and other liabilities |       | 1,457,716                       |       | 1,457,716                       |       | 1,286,311 |   | 1,286,311 |   |

 

**NOTE O —REGULATORY MATTERS —**TheCompany and the Bank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary, actions by regulators that,if undertaken, could have a direct material effect on the Bank’s financialstatements.  Under capital 

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adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices. The Bank’s capital amounts and classifications are alsosubject to qualitative judgments by the regulators about components, riskweightings, and other factors.

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the table below) of total andTier 1 capital (as defined in the regulations) to risk-weighted assets (asdefined), and of Tier 1 capital (as defined) to average assets (asdefined).  Management believes, as ofDecember 31, 2006, that the Bank meets all capital adequacy requirements towhich it is subject.

As of December 31, 2006, themost recent notification from the Federal Reserve Bank categorized the Bank aswell capitalized under the regulatory framework for prompt corrective action(there are no conditions or events since that notification that managementbelieves have changed the Bank’s category). To be categorized as well capitalized, the Bank must maintain minimumratios as set forth in the table below. The following table also sets forth theCompany’s and Bank’s actual capital amounts and ratios (dollar amounts inthousands):
| ** **                    | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **To be well**   | ** ** |
|-------------------------------|------------|-----------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **capitalized under** | ** ** |
| ** **                    | ** ** | ** **      | ** ** | ** **                 | ** ** | **For capital**       | ** ** | **prompt corrective** | ** ** |
| ** **                    | ** ** | **Actual**      | ** ** | **adequacy purposes** | ** ** | **action provisions** | ** ** |
| ** **                    | ** ** | **Amount**      | ** ** | ** **                 | ** ** | **Amount**                 | ** ** | ** **                 | ** ** | **Amount**                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **(thousands)** | ** ** | **Ratio**                  | ** ** | **(thousands)**            | ** ** | **Ratio**                  | ** ** | **(thousands)**            | ** ** | **Ratio** | ** ** |
| **As of  December 31, 2006:** |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **Company**                   |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total Capital                 |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 26,272     |                       | 15.0       | %                          | $          | 14,026                     |       | 8.0                        | %          | $ | 17,533 |   | 10.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 24,563     |                       | 14.0       | %                          | $          | 7,013                      |       | 4.0                        | %          | $ | 10,520 |   | 6.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Average Assets)           |       | $               | 24,563     |                       | 10.0       | %                          | $          | 9,794                      |       | 4.0                        | %          | $ | 12,243 |   | 5.0 | % |
| **Bank**                      |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total Capital                 |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 25,575     |                       | 13.1       | %                          | $          | 15,588                     |       | 8.0                        | %          | $ | 19,485 |   | 10.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 22,266     |                       | 11.4       | %                          | $          | 7,794                      |       | 4.0                        | %          | $ | 11,691 |   | 6.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Average Assets)           |       | $               | 22,266     |                       | 9.1        | %                          | $          | 9,777                      |       | 4.0                        | %          | $ | 12,221 |   | 5.0 | % |
| **As of  December 31, 2005:** |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| **Bank**                      |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| Total Capital                 |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 19,876     |                       | 11.3       | %                          | $          | 14,026                     |       | 8.0                        | %          | $ | 17,533 |   | 10.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Risk-Weighted Assets)     |       | $               | 16,351     |                       | 9.3        | %                          | $          | 7,013                      |       | 4.0                        | %          | $ | 10,520 |   | 6.0 | % |
| Tier 1 Capital                |       |            |       |                       |       |                       |       |                       |       |                       |       |   |   |
| (to Average  Assets)          |       | $               | 16,351     |                       | 7.2        | %                          | $          | 9,129                      |       | 4.0                        | %          | $ | 11,412 |   | 5.0 | % |

 

The California Financial Codeprovides that a bank may not make a cash distribution to its shareholders inexcess of the lesser of the Bank’s undivided profits or the Bank’s net incomefor its last three fiscal years less the amount of any distribution made by theBank to shareholders during the same period.

With certain exceptions theCompany may not pay a dividend to its shareholders unless its retained earningsequal at least the amount of the proposed dividend.

**NOTE P —HOLDING COMPANY —**OnApril 3, 2006 Santa Lucia Bancorp acquired all the outstanding shares of SantaLucia Bank by issuing 1,909,837 shares of common stock in exchange for thesurrender of all outstanding shares of the Bank’s common stock.  There was no cash involved in thistransaction. The acquisition was accounted for like a pooling of interest andthe consolidated financial statements contained herein have been restated togive full effect to this transaction. 

Santa Lucia Bancorp has nosignificant business activities other than its investment in Santa Lucia Bankand its investment and related borrowings from Santa Lucia (CA) Capital Trustas discussed in Note H. Accordingly, no separate financial information on theCompany is provided.

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**SANTA LUCIA BANCORP**
| **SANTA LUCIA BANCORP BOARD OF DIRECTORS** | ** **    | **SANTA LUCIA BANK BOARD OF DIRECTORS** |
|--------------------------------------------|---------------|-----------------------------------------|
| **JERRY W. DECOU III**                     | CHAIRMAN      | ** **                              | **JERRY W. DECOU III** | CHAIRMAN |
| **DOUGLAS C. FILIPPONI**                   | VICE CHAIRMAN | ** **                              | **DOUGLAS C. FILIPPONI** | VICE CHAIRMAN |
| **KHATCHIK H. ACHADJIAN**                  | ** **    | ** **                              | **KHATCHIK H. ACHADJIAN** | ** ** |
| **STANLEY R. CHERRY**                      | ** **    | ** **                              | **STANLEY R. CHERRY** | ** ** |
| **JEAN HAWKINS**                           | ** **    | ** **                              | **JEAN HAWKINS** | ** ** |
| **PAUL G. MOERMAN**                        | ** **    | ** **                              | **PAUL G. MOERMAN** | ** ** |
| **LARRY H. PUTNAM**                        | ** **    | ** **                              | **LARRY H. PUTNAM** | ** ** |
| **D. JACK STINCHFIELD**                    | ** **    | ** **                              | **D. JACK STINCHFIELD** | ** ** |

 

**SANTA LUCIA BANK**
| **EXECUTIVE OFFICERS**      | ** **                                           | **ASSISTANT VICE PRESIDENTS** |
|-----------------------------|------------------------------------------------------|-------------------------------|
| **LARRY H. PUTNAM**         | President and Chief Executive Officer                | ** **                    | **SHARON  SATTERTHWAITE** | Assistant Vice  President, Administration |
| **JOHN C. HANSEN**          | Executive Vice President and Chief Financial Officer | ** **                    | **JENNIFER  BASSI GINDER** | Assistant Vice  President, Operations Officer |
| ** **                  | ** **                                           |                          | **KRISTIE  KELLER** | Assistant Vice  President, Central Operations |
| **SENIOR  VICE PRESIDENTS** | ** **                                           | **KIM  DONALDSON**            | Assistant Vice  President, Operations Officer |
| **JIM COWAN**               | Senior Vice President, Branch Administrator          | ** **                    | **CHERYL  MUMFORD** | Assistant Vice  President, Operations Officer |
| **WILLIAM F. FILIPPIN**     | Senior Vice President, Credit Administrator          |                          | **RYUN  McCRORY** | Assistant Vice  President, Loan Officer |
| ** **                  | ** **                                           |                          | **RICHARD  ALLEN** | Assistant Vice  President, Loan Officer |
| **VICE  PRESIDENTS**        |                                                 |                          |
| **TERI DAVIS**              | Vice President, Loan Officer                         |                          | **OFFICERS** |
| **CLAUDYA OGLESBY**         | Vice President, Administration                       |                          | **KARENSAMPSON** | Assistant Operations  Officer |
| **MELODEE FONTANA**         | Vice President, Operations Administrator             |                          | **STELLA  MARTINEZ** | Operations Officer |
| **ROBERT COVARRUBIAS**      | Vice President, Manager                              |                          | **J.  DARREN BARNES** | Loan Officer |
| **LEAH T. WEST**            | Vice President, Manager                              | ** **                    | **REGINA  M. SHELDON** | Loan Officer |
| **JIM KELLEY**              | Vice President, Loan Officer                         | ** **                    | **ROBERT  McCONAGHY** | Loan Officer |
| **MICHAEL W. McKENZIE**     | Vice President, Manager                              |                          |   |   |
| **LARRY WOMACK**            | Vice President, Loan Officer                         |                          |   |   |
| **JAMES P. BURUBELTZ**      | Vice President, Loan Officer                         |                          |   |   |
|                             |                                                      |                               |  |  |  |  |  |  |  |  |

 
| **ATASCADERO**        | ** ** | **PASO ROBLES**       | ** ** | **ARROYO GRANDE**       | ** ** | **SANTA MARIA**       |
|-----------------------|------------|-----------------------|------------|-------------------------|------------|-----------------------|
| 7480 EL CAMINO  REAL  |       | 1240 SPRING STREET    |       | 1530 E. GRAND AVENUE    |       | 1825 S. BROADWAY      |
| ATASCADERO, CA  93422 |       | PASO ROBLES, CA 93446 |       | ARROYO GRANDE, CA 93420 |       | SANTA MARIA, CA 93454 |
| 805-466-7087          |       | 805-239-1140          |       | 805-473-1988            |       | 805-614-9100          |

 
| **MARKET MAKERS**                                                                      | ** ** | ** **                   |
|----------------------------------------------------------------------------------------|------------|------------------------------|
| **GEORGE  CROSBY, MAGUIRE INVESTMENTS — SANTA MARIA, CA.**                        |       | 805/922-6901 or 800/244-4183 |
| **MICHAEL  S. HEDREI, HOWE BARNES HOEFER & ARNETT, INC. — SAN FRANCISCO, CA** |       | 415/538-5749 or 800/774-8723 |
| **RANDY  KRUMLAND, EDWARD JONES — ATASCADERO, CA**                                |       | 805/466-0244 or 800/467-0244 |
| **JIM  MOFFATT, MORGAN STANLEY — PASO ROBLES, CA**                                |       | 805/239-0920 or 800/733-0920 |
| **TREVOR  MORRIS, UBS FINANCIAL SERVICES, INC. — LOS ANGELES, CA**                |       | 213/972-1511 or 800/443-5203 |
| **JOEY J.  WARMENHOVEN, WEDBUSH MORGAN SECURITIES — LAKE OSWEGO, OR**             |       | 503/675-3104 or 800/357-3680 |

 

**MEMBER FDIC**

**www.santaluciabank.com**

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