Santa Lucia Bancorp and Subsidiary

Consolidated Selected Financial Information

	Year Ended December 31,
	2007			2006			2005			2004			2003
	(dollars in thousands, except per share data)
Summary of Operations:
Interest Income	$	17,719		$	17,027		$	13,546		$	10,220		$	9,157
Interest Expense	4,824			3,577			1,984			1,343			1,324

Net Interest Income	12,895			13,450			11,562			8,877			7,833
Provision for Loan Loss	—			240			300			110			115

Net Interest Income After Provision for Loan Losses	12,895			13,210			11,262			8,767			7,718
Noninterest Income	1,071			1,010			1,052			1,191			1,376
Noninterest Expense	9,029			8,590			7,808			7,060			6,609

Income Before Income Taxes	4,937			5,630			4,506			2,898			2,485
Income Taxes	1,934			2,242			1,759			1,076			873

Net Income	$	3,003		$	3,388		$	2,747		$	1,822		$	1,612

Cash Dividends Paid	$	871		$	768		$	730		$	697		$	685

Per Share Data:
Net Income – Basic	$	1.55		$	1.77		$	1.46		$	0.98		$	0.89
Net Income – Diluted	$	1.51		$	1.68		$	1.38		$	0.94		$	0.86
Dividends	$	0.450		$	0.400		$	0.388		$	0.375		$	0.375
Book Value	$	11.01		$	9.93		$	8.35		$	7.42		$	6.96

Common Outstanding Shares:	1,924,873			1,928,097			1,899,543			1,861,764			1,844,708

Statement of Financial Condition Summary:
Total Assets	$	248,640		$	240,738		$	231,532		$	211,684		$	183,827
Total Deposits	212,718			212,988			206,879			194,868			168,033
Total Net Loans	166,619			169,680			152,563			125,586			109,949
Allowance for Loan Losses	1,673			1,654			1,470			1,200			1,112
Total Shareholders’ Equity	21,189			19,137			15,866			13,807			12,845

Selected Ratios:
Return on Average Assets	1.22		%	1.42		%	1.21		%	0.91		%	0.94		%
Return on Average Equity	14.87		%	19.45		%	18.67		%	13.71		%	13.00		%
Average Loans as a Percentage of Average Deposits	76.11		%	79.74		%	69.90		%	62.77		%	68.93		%
Allowance for Loan Losses to Total Loans	0.99		%	0.96		%	0.95		%	0.94		%	1.00		%
Company:
Tier I Capital to Average Assets	10.50		%	10.00		%	—			—			—
Tier I Capital to Risk-Weighted Assets	13.20		%	12.70		%	—			—			—
Total Capital to Risk-Weighted Assets	14.60		%	14.40		%	—			—			—
Bank:
Tier I Capital to Average Assets	9.85		%	9.11		%	7.16		%	6.53		%	7.00		%
Tier I Capital to Risk-Weighted Assets	12.33		%	11.43		%	9.33		%	8.80		%	9.34		%
Total Capital to Risk-Weighted Assets	13.80		%	13.13		%	11.34		%	10.85		%	11.66		%

Net Interest Income

Net interest income is the Company’s largest source of operating income and is derived from interest and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. The volume of loans, investment securities and other interest earning assets, compared to the volume of interest bearing deposits and indebtedness, combined with the spread, produces changes in the net interest income between periods.

Interest income increased $692,000 or 4.1% in 2007 from $17,027,000 in 2006 to $17,719,000 in 2007. This is compared to an increase of $3,481,000 or 25.7% from 2005 to 2006 and an increase of $3,326,000 or 32.5% from 2004 to 2005. The slowdown in the increase in interest income is again attributable to the slowdown in real estate lending. The increase in 2007 was primarily due to the increase in average investments of $10,451,000 or 27.1% from 2006 and an increase in the average investment yield from 3.9% in 2006 to 5.0% in 2007.

Total interest and fees produced an 8.1% yield on average earning assets for 2007, 8.1% for 2006 and 6.8% in 2005. The average loan to deposit ratio for 2007 was 76.11%, which represents a decrease of 4.6% over the 79.74% average for 2006.

Total interest expense increased $1,247,000 or 34.9% from $3,577,000 in 2006 to $4,824,000 in 2007 compared to an increase of $1,593,000 or 80.3% from 2005 to 2006. The increase in total interest expense in 2007 was due to a combination of rising rates for all deposit categories coupled with an increase in interest bearing funds. In 2007, total interest bearing liabilities increased $12.1 million or 9.3%. These factors increased our rate paid on interest-bearing liabilities 65 basis points from 2.76% in 2006 to 3.41% in 2007.

Net interest margin decreased 46 basis points from 6.38% in 2006 to 5.92% in 2007. As noted above, this decrease was primarily due to changes in our asset mix and an increase in our cost of funds. In our asset mix, we experienced migration from higher yielding loans to lower yielding investments while in our liability mix, we experienced migration from lower costing NOW, Money Market and Savings accounts to higher costing time certificates of deposits and long-term debt.

We expect this trend of reduction in our net interest margin to continue into 2008 as anticipated prime rate decreases will impact our interest earning assets faster than we can reprice our interest-bearing deposits.

The following table shows the composition of average earning assets and average interest-bearing liabilities, average yields and rates, and the net interest margin for the years ended December 31, 2007, 2006 and 2005. Nonaccrual loans are included in the calculation of the average balances of loans, and nonaccrued interest is excluded.

	Year Ended December 31
	2007							2006							2005
	Average					Yield/		Average					Yield/		Average					Yield/
	Balance			Interest		Rate		Balance			Interest		Rate		Balance			Interest		Rate
	(dollars in thousands)
Assets:
Loans	$	163,741		$	15,031	9.18	%	$	169,139		$	15,397	9.10	%	$	145,195		$	11,747	8.09	%
Investment securities	49,024			2,438		4,97	%	38,573			1,485		3.85	%	48,660			1,625		3.34	%
Federal funds sold	4,954			250		5.05	%	2,941			145		4.93	%	5,685			174		3.06	%
Total average interest-earning assets	217,719			17,719		8.14	%	210,653			17,027		8.08	%	199,540			13,546		6.79	%
Other assets	29,278							28,808							27,913
Less allowance for loan losses	(1,707		)					(1,593		)					(1,332		)
Total average assets	$	245,290						$	237,868						$	226,121
Liabilities and Shareholders’ Equity:
Interest-bearing demand - NOW	$	13,391		$	55	0.41	%	$	14,696		$	38	0.26	%	$	17,834		$	42	0.24	%
Money Market	24,929			722		2.90	%	24,103			503		2.09	%	30,186			446		1.48	%
Savings	27,076			289		1.07	%	28,074			222		0.79	%	30,560			133		0.44	%
Time certificate of deposits	68,019			3,157		4.64	%	55,853			2,316		4.15	%	40,772			1,195		2.93	%
Total average interest-bearing deposits	133,415			4,223		3.17	%	122,726			3,079		2.51	%	119,352			1,816		1.52	%

Short-term borrowings	1,059			51		4.82	%	1,356			65		4.79	%	439			16		3.64	%
Long-term borrowings	7,155			550		7.69	%	5,465			433		7.92	%	2,000			152		7.60	%
Total interest-bearing liabilities	141,629			4,824		3.41	%	129,547			3,577		2.76	%	121,791			1,984		1.63	%
Demand deposits	81,714							89,383							88,366
Other liabilities	1,749							1,515							1,253
Sharholder’s equity	20,198							17,423							14,711
Total average liabilities and shareholders’ equity	$	245,290						$	237,868						$	226,121
Net interest income				$	12,895						$	13,450						$	11,562
Net interest margin						5.92	%						6.38	%						5.79	%

The Company’s net yield on interest-earning assets is affected by changes in the rates earned and paid and the volume of interest-earning assets and interest-bearing liabilities. The impact of changes in volume and rate on net interest income are shown in the following table:

	Year Ended December 31, 2007									Year Ended December 31, 2006
	over									over
	Year Ended December 31, 2006									Year Ended December 31, 2005
	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	(495		)	129			(366		)	2,075			1,575		3,650
Investment Securities	459			494			953			(366		)	226		(140		)
Federal funds sold	102			3			105			(107		)	78		(29		)
Interest-earning deposits	—			—			—			—			—		—
Total interest income	66			626			692			1,602			1,879		3,481
Interest-bearing Liabilities:
Interest bearing demand - NOW	(3		)	20			17			(8		)	4		(4		)
Money Market	18			201			219			(102		)	159		57
Savings	—			67			67			1			88		89
Time Certificates of deposit	542			299			841			528			593		1,121
Short-term borrowings	(14		)	—			(14		)	43			6		49
Long-term borrowings	16			101			117			16			265		281
Total interest expense	559			688			1,247			478			1,115		1,593
Interest differential or net interest income	$	(493	)	$	(62	)	$	(555	)	$	1,124		$	764	$	1,888

Noninterest Income

Noninterest income totaled $1,071,000 compared to $1,010,000 for the same period in 2006. That represents an increase of $61,000 or 6.0%. The increase was primarily due to the recovery of legal fees and costs on a previously charged off loan and an increase in interest income derived from the investment in bank owned life insurance.

Service charges on deposit accounts totaled $583,000, which represents a decrease of $33,000 or 5.4% over the same period in 2006. The decrease in service charges was primarily due to the decrease in non sufficient fund fees collected.

Other noninterest income totaled $488,000 compared to $394,000 for the same period in 2006. That represents an increase of $94,000 or 23.9%. The increase is primarily due to the recovery of legal fees and costs on a previously charged off loan and an increase in interest income derived from the investment in bank owned life insurance.

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

Noninterest Expense

Noninterest expense increased $439,000 or 5.1% in 2007 over 2006 to $9,029,000 as compared to an increase of $782,000 or 10.0% in 2006 over 2005. The overall increase can be largely attributed to the continued growth of the Company.

Salaries and related expenses increased $516,000 or 10.9% from 2006 to 2007 compared to an increase of $501,000 or 11.8% between 2005 and 2006. This increase is attributed to normal staff related increases, coupled with a 17.7% increase in group health insurance and a $54,000 shared-based payment, which is part of SFAS 123(R), “Share-Based Payment.” SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

Occupancy expense for the year ended December 31, 2007 totaled $628,000, which reflects a decrease of $36,000 or 5.4% over the same period in 2006. This was primarily due to a decrease in real estate taxes coupled with fewer maintenance and repair costs.

Equipment expense for the year ended December 31, 2007 totaled $666,000, which reflects a decrease of $25,000 or 3.6% over the same period in 2006. This was primarily due to the eliminations of depreciation expense associated with fully depreciated equipment in the Santa Maria office.

Professional services for the year ended December 31, 2007 totaled $427,000, which reflects a decrease of $111,000 or 20.6% over the same period in 2006. This was primarily due to the decreases in legal and other professional services.

Data processing expense for the year ended December 31, 2007 totaled $489,000, which reflects an increase of $21,000 or 4.5% from the same period in 2006. This was primarily due to a 5.1% increase in contracted fees coupled with the continued growth of the Company.

Office expenses increased $2,000 from $360,000 in 2006 to $362,000 in 2007.

Marketing expense increased $15,000 or 3.7% from $408,000 in 2006 to $423,000 in 2007.

Director fees and expenses for the year ended December 31, 2007 totaled $329,000, which reflects an increase of $66,000 or 25.1% over the like period in 2006. The primary reason for the increase was a $56,000 stock option expense recognized for new option grants made in late 2006.

Messenger and courier expenses increased $9,000 or 6.1% from $148,000 in 2006 to $157,000 in 2007.

Other expense decreased $17,000 or 7.0% from $242,000 in 2006 to $225,000 in 2007. This decrease was due to $9,000 decrease in inspection fees associated with construction loans.

The Company’s efficiency ratio for 2007 was 64.7%. This represents an increase from the 2006 efficiency ratio of 60.4%, which was a decrease from the 2005 ratio of 63.4%. The increase in the efficiency ratio was primarily due to the decrease in the net interest margin, and the increase in non interest expense.

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

Income Taxes

The provision for income taxes was $1,934,000 in 2007, $2,242,000 in 2006 and $1,759,000 in 2005. The effective tax rate was 39.1% in 2007 as compared to 39.9% in 2006 and 39.0% in 2005. This decrease was partially due to an increasing percentage of tax-free investments.

Financial Condition

In 2007, the Company’s consolidated total assets increased to $248,640,000 compared to $240,738,000 in 2006 and $231,532,000 in 2005 for increases of 3.3%, 4.0% and 9.4% respectively.

Total deposits decreased $270,000 to $212,718,000 compared to $212,988,000 in 2006 and $206,879,000 in 2005 for a decrease of 0.1% for 2007, and increases of 3.0% and 6.2% for 2006 and 2005 respectively. Deposit competition continues to be very strong in both the traditional bank deposits and alternative investments available in the market place.

Securities available for sale totaled $56,107,000 at December 31, 2007, compared to $42,778,000 at December 31, 2006 and $41,830,000 at December 31, 2005. This represents an increase of 31.2% over December 31, 2006. The increase in securities was primarily due to the decrease in loan demand, which is the result of the softening in the construction and real estate markets.

Loan Portfolio

Total loans outstanding averaged $163,741,000 in 2007 compared to $169,139,000 in 2006. This represents a decrease of $5,398,000 or 3.2% in 2007 compared to an increase of $23,944,000 or 16.5% in 2006. Actual net loans at December 31, 2007 equaled $166,619,000 for a decrease of $3,060,000 or 1.8 % over 2006.

The following table sets forth the amount of total loans outstanding in each category for the years indicated:

	Year Ended December 31
	2007			2006			2005			2004			2003
	(dollars in thousands)
Commercial	$	38,017		$	36,407		$	34,139		$	32,797		$	30,490
Real Estate – construction	47,819			55,307			52,696			29,707			25,446
Real Estate – other	81,895			78,757			66,390			63,433			53,931
Consumer	1,237			1,604			1,533			1,570			1,645
Total gross loans	168,968			172,075			154,758			127,507			111,512
Less: unearned fees	(676		)	(741		)	(725		)	(721		)	(451		)
Less: allowance for loan losses	(1,673		)	(1,654		)	(1,470		)	(1,200		)	(1,112		)
Total net loans	$	166,619		$	169,680		$	152,563		$	125,586		$	109,949
Weighted average yield on loans for the year	9.2		%	9.1		%	8.1		%	7.3		%	7.3		%

The following table sets forth the amount of total loans outstanding at December 31, 2007 by contractual maturity date:

			After One
	One Year		Year Through		After
	or Less		Five Years		Five Years		Total
	(dollars in thousands)
Commercial	$	24,140	$	6,865	$	7,011	$	38,016
Real Estate – construction	42,862		4,505		453		47,820
Real Estate – other	5,307		7,310		69,278		81,895
Consumer	607		466		164		1,237
	$	72,916	$	19,146	$	76,906	$	168,968

Nonperforming loans

Interest income is accrued daily as earned on all loans. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on 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 previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible.

The composition of nonperforming loans as of the end of the last five fiscal years is summarized in the following table:

	Year Ended December 31
	2007			2006			2005			2004			2003
	(dollars in thousands)

Nonaccrual loans:
Commercial	$	113		$	—		$	—		$	—		$	23
Real estate	2,062			—			135			758			805
Consumer	—			—			—			—			—
Total	2,175			—			135			758			828
Loans 90 days or more past due and still accruing:
Real estate	—			—			—			—			—
Consumer	—			—			—			—			—
Commercial	—			550			—			—			—
Total	—			550			—			—			—
Total nonperforming loans:	2,175			550			135			758			828
OREO	—			—			—			—			—
Total nonperforming assets:	$	2,175		$	550		$	135		$	758		$	828

Nonperforming assets as a percentageof total gross loans	1.29		%	0.32		%	0.09		%	0.59		%	0.74		%
Nonperforming assets as a percentageof total assets	0.87		%	0.23		%	0.06		%	0.36		%	0.45		%
Allowance for loan losses to nonperforming loans	76.92		%	300.73		%	1088.89		%	158.31		%	134.30		%

The Company had three nonperforming loans totaling $2,175,000 as of December 31, 2007, compared to one nonperforming loan totaling $550,000 at December 31, 2006 and one nonperforming loan totaling $135,000 at December 31, 2005. Of the Company’s nonperforming loans, two are well secured by residential real estate with minimal loss exposure. The commercial loan for $113,000 is 50% guaranteed by the U. S. Small Business Administration, and is secured by business assets of the borrower in addition to the personal residence of the guarantor. The Company is in the process of assessing the value of its collateral and any actual loss is unknown at this time. The Company has however, assigned loan loss reserves in an amount it feels is adequate to satisfy any potential loss based on the collateral.

There were no significant loans that were current as of December 31, 2007, where serious doubt existed as to the ability of the borrower to comply with the present loan repayment terms or that represent a “troubled debt restructuring.”

The Company had no “Other Real Estate Owned” (OREO) property as of December 31, 2007.

The Company experienced net charge-offs (recoveries) of ($19,000), $56,000 and $30,000 in 2007, 2006 and 2005 respectively.

Quality of loans

in lending is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, provisions are made to the Company’s allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of regulatory examinations conducted by governmental agencies and through management’s assessment of risk. The Company’s entire allowance is a valuation allocation; that is, it has been created by direct charges against operations through the provision for possible loan losses.

The Company evaluates the allowance for possible loan losses 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 determinable only on an approximate basis, since estimates as to the magnitude and timing of loan losses are not predictable because of the impact of external events. In addition, the Company contracts with an independent loan review firm to evaluate overall credit quality on an ongoing basis. Management then considers the adequacy of the allowance for possible loan losses in relation to the total loan portfolio.

The provision for possible loan losses charged against operating expense is based upon an analysis of the actual migration of loans to losses plus an amount for other factors that, in management’s judgment, deserve recognition in estimating possible loan losses. These factors include numerous items among which are: specific loan conditions as determined by management; the historical relationship between charge-offs and the level of the allowance; the estimated future loss

in all significant loans; known deterioration in concentrations of credit; certain classes of loans or pledged collateral; historical loss experience based on volume and type of loan; the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of the Company’s management or by bank regulatory agencies; trends in portfolio volume, maturity, and composition; off-balance sheet credit risk; volume and trends in delinquencies and nonaccruals; lending policies and procedures including those for charge-off, collection, and recovery; national and local economic conditions and downturns in specific local industries; and the experience, ability, and depth of the lending staff and management. The Company evaluates the adequacy of its allowance for possible loan losses quarterly.

It was management’s decision that no additional loan loss provision was needed during 2007 primarily based on the foregoing analysis and due to the decline of $10.3 million in real estate and construction loans during the first nine months ended September 30, 2007. During the last quarter of 2007, real estate and construction loans increased approximately $6.0 million however; year to date gross loans have decreased $3.1 million or 1.8%.

The following table summarizes the allocation of the allowance for loan losses by type for the years indicated and the percent loans in each category to total loans:

	Year Ended December 31
	2007				2006				2005				2004				2003
	(dollars in thousands)
			Loan				Loan				Loan				Loan				Loan
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commerical	$	525	22.50	%	$	495	21.16	%	$	536	22.06	%	$	502	25.72	%	$	460	27.34	%
Real Estate - construction	229		28.30	%	126		32.14	%	118		34.05	%	71		23.30	%	55		22.82	%
Real Estate - other	572		48.47	%	362		45.77	%	274		42.90	%	281		49.75	%	224		48.36	%
Consumer	32		0.73	%	38		0.93	%	36		0.99	%	39		1.23	%	155		1.48	%
Unallocated	315		n/a		633		n/a		506		n/a		307		n/a		218		n/a
Total	$	1,673	100.00	%	$	1,654	100.00	%	$	1,470	100.00	%	$	1,200	100.00	%	$	1,112	100.00	%

Management views the allowance for loan losses of $1,673,000 or .99% of total loans as of December 31, 2007 to be adequate after considering the above factors. This allowance is compared to $1,654,000 or .96% in 2006 and $1,470,000 or .95% in 2005. However, there can be no assurance that in any given period the Company will not sustain charge-offs that are substantial in relation to the size of the allowance.

The allocation of the allowance for possible loan losses as of the end of the last five fiscal years is summarized in the following table:

	Year Ended December 31
	2007			2006			2005			2004			2003
	(dollars in thousands)
Outstanding loans:
Average for the year (net)	$	163,741		$	169,139		$	145,195		$	115,255		$	109,148
End of the year (net)	166,619			169,680			152,563			125,586			109,949
Allowance for loan losses:
Balance at beginning of year	$	1,654		$	1,470		$	1,200		$	1,112		$	1,026
Actual charge-offs:
Commercial	51			77			43			22			16
Real estate	—			—			—			—			—
Consumer	—			—			—			—			—
All other (including overdrafts)	10			6			3			1			17
Total charge-offs	61			83			46			23			33

Less Recoveries:
Commercial	4			26			15			—			4
Real estate	76			—			—			—			—
Consumer	—			—			—			—			—
All other (including overdrafts)	—			1			1			1			—
Total recoveries	80			27			16			1			4
Net loan charge-offs (recoveries)	(19		)	56			30			22			29
Provision for loan loss	—			240			300			110			115
Balance at end of period	$	1,673		$	1,654		$	1,470		$	1,200		$	1,112

Ratios:
Net loan charge-offs (recoveries) to average loans	-0.01		%	0.03		%	0.02		%	0.02		%	0.03		%
Allowance for loan losses to end of year loans	0.99		%	0.96		%	0.95		%	0.94		%	1.00		%
Net loan charge-offs (recoveries) to allowance for loan losses	-1.14		%	3.39		%	2.04		%	1.83		%	2.61		%
Net loan charge-offs (recoveries) to provision charged to operating expense	0.00		%	23.33		%	10.00		%	20.00		%	25.22		%

Investment Securities

The average balance of Federal Funds Sold (overnight investments with other banks) was $4,954,000 in 2007, $2,941,000 in 2006, and $5,685,000 in 2005. These investments are maintained primarily for the short-term liquidity needs of the Company. The major factors influencing the levels of required liquidity are the loan demand of the Company’s customers and fluctuations in the Company’s deposits. The Company’s loan-to-deposit ratio averaged 76.1% in 2007, compared to 79.7% in 2006, and 69.9% in 2005.

Average total investment securities increased by $10,451,000 or 27.1% during 2007, compared to a decrease of $10,087,000 or 20.7% in 2006. The Company focused on maximizing investment opportunities during 2007, due to the softening of the loan demand which decreased by $7,105,000 in average loans or 4.2%. The aggregate market value of the investment portfolio was $334,000 over the amortized cost as of December 31, 2007. As of December 31, 2007, the Company had the ability and intent to hold securities to maturity and saw a significant market value increase of $796,000 over 2006. It is the Company’s policy not to engage in securities trading transactions. There are no investments in the portfolio deemed to be permanently impaired. The Company has classified all of its investment securities as available for sale. The exposure to sub prime loans in the Mortgage-Backed securities portfolio is minimal due to the fact these securities are guaranteed by United States Government Agencies and, as such, can be viewed as having credit risk comparable to United States Treasury securities.

	December 31
	2007									2006
	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	$	24,097,314	$	243,699	$	—		$	24,341,013	$	19,094,065	$	3,029	$	(76,599	)	$	19,020,495
State and Political
Subdivisions	$	6,527,226	$	30,399	$	(50,333	)	$	6,507,292	$	4,805,053	$	9,970	$	(89,397	)	$	4,725,626
Mortgage-Backed Securities	$	25,148,131	$	207,770	$	(97,050	)	$	25,258,851	$	19,340,821	$	20,303	$	(328,828	)	$	19,032,296
Total	$	55,772,671	$	481,868	$	(147,383	)	$	56,107,156	$	43,239,939	$	33,302	$	(494,824	)	$	42,778,417

The amortized cost, estimated fair value, and weighted average yield for investment securities available for sale based on maturity date are set forth in the table below. The weighted average yield is based on the amortized cost of the securities using a method that approximates the level yield method:

	December 31,
	2007						2006
					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	8,002,724		8,026,354		5.27	%	8,998,769		8,924,794		3.59	%
One to Five Years	14,094,590		14,310,616		5.07	%	8,095,296		8,095,701		5.03	%
Five to Ten Years	2,000,000		2,004,043		5.00	%	2,000,000		2,000,000		5.10	%
Over Ten Years	—		—				—		—
Total U.S. Agency	24,097,314		24,341,013		5.13	%	19,094,065		19,020,495		4.36	%

State and Political Subdivisions:
One Year or Less	1,061,296		1,070,745		6.23	%	708,100		702,151		4.36	%
One to Five Years	3,020,931		2,998,510		4.99	%	3,859,382		3,790,725		5.20	%
Five to Ten Years	2,444,999		2,438,037		6.26	%	237,571		232,750		5.74	%
Over Ten Years	—		—				—		—
Total State & Political Subdivisions	6,527,226		6,507,292		5.67	%	4,805,053		4,725,626		5.10	%

Mortgage Backed Securities:
One Year or Less	3,430,820		3,441,374		4.70	%	3,650,978		3,590,877		4.26	%
One to Five Years	14,849,863		14,894,034		4.66	%	11,261,147		11,033,390		4.20	%
Five to Ten Years	3,869,173		3,907,814		5.05	%	2,711,676		2,695,483		4.63	%
Over Ten Years	2,998,275		3,015,629		4.90	%	1,717,020		1,712,546		4.71	%
Total Mortgage Backed Securities	25,148,131		25,258,851		4.75	%	19,340,821		19,032,296		4.32	%
Total Available-for-Sale Securities	$	55,772,671	$	56,107,156	5.02	%	$	43,239,939	$	42,778,417	4.42	%

Deposits

Total average deposits increased $3,020,000 or 1.4% during 2007, compared to an increase of $4,391,000 or 2.1% in 2006 and an increase of $24,109,000 or 13.1% in 2005. Average noninterest-bearing deposits decreased $7,669,000 or 8.6% in 2007, compared to an increase of $1,017,000 or 1.2% in 2006 and an increase of $10,896,000 or 14.1% in 2005. Average interest-bearing deposits increased $10,689,000 or 8.7% in 2007 compared to an increase of $3,374,000 or 2.8% in 2006 and an increase of $13,213,000, or 12.5% in 2005.

The chart below indicates a shift in lower interest-bearing deposits (NOW, Money Market and Savings) to higher interest rate Time Certificates of Deposit. This appears to be a trend that is common throughout the local banking industry and is expected to continue in 2008. This was management’s strategy to retain and attract deposits to offset loss of funds to non-bank competition.

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

	December 31
	2007				2006				2005
	Average		Average		Average		Average		Average		Average
	Balance		Rate		Balance		Rate		Balance		Rate
	(dollars in thousands)
Noninterest-bearing demand deposits	$	81,714			$	89,383			$	88,366
Money Market Accounts	24,929		2.90	%	24,103		2.09	%	30,186		1.48	%
NOW accounts	13,391		0.41	%	14,696		0.26	%	17,834		0.24	%
Savings deposits	27,076		1.07	%	28,074		0.79	%	30,560		0.44	%
Time deposits of $100,000 or more	39,242		4.67	%	29,800		4.21	%	19,859		2.93	%
Other time deposits	28,777		4.60	%	26,053		4.08	%	20,913		2.94	%
Total deposits	$	215,129	1.96	%	$	212,109	1.45	%	$	207,718	0.87	%

The remaining maturities of the Company’s certificates of deposit in the amount of $100,000 or more as of December 31, 2007 are indicated in the table below. Interest expense on these certificates of deposit totaled $1,834,000 in 2007:

Deposits Maturing in	December 31, 2007
Three months or less	$	15,967,166
Over three months through six months	10,750,684
Over six months through twelve months	8,958,008
Over twelve months	3,153,935
Total	$	38,829,793

Capital

The Bank is required to maintain a minimum leverage-capital ratio of Tier I (as defined) to total assets based on the Bank’s ratings under the regulatory rating system. At the end of 2007, all Bank capital ratios were above all current Federal capital guidelines for a “well capitalized” bank. As of December 31, 2007 the regulatory total capital to risk-weighted assets ratio was 13.8% compared to 13.1% as of December 31, 2006 and 11.3% as of December 31, 2005. The regulatory Tier I capital to risk-weighted assets ratio was 12.3% on December 31, 2007 compared to 11.4% on December 31, 2006 and 9.3% as of December 31, 2005. The regulatory Tier I capital to average assets ratio was 9.9% as of December 31, 2007 compared to 9.1% as of December 31, 2006 and 7.2% as of December 31, 2005.

The Bank’s Tier I Capital ratio increased 74 basis points and the Bank’s Total Capital to Risk Weighted Assets ratio increased 67 basis points, due to the strong earnings of $3.2 million for 2007.

Short-term Borrowings

The Bank has two borrowing arrangements with the Federal Home Loan Bank of San Francisco. The first allows the Bank to borrow up to approximately $41 million against which the Bank has pledged approximately $100 million of its real estate secured loans. The second arrangement allows the Bank to borrow up to approximately $12 million against which the Bank has pledged approximately $12 million of its investment securities.

As of December 31, 2007 the Bank has borrowed $5,900,000 under these arrangements. This amount is due on January 2, 2008 and includes interest at 3.25%. During 2007 the bank had average borrowings outstanding of $1,100,000 at an effective rate of 4.55%.

Long-term Borrowings

Santa Lucia Bancorp issued $5,155,000 in junior subordinated debt securities (the “debt securities”) to the Santa Lucia Bancorp (CA) Capital Trust, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable on July 7, 2036. These debt securities may be redeemed for 105% of the principal balance through July 7, 2011 and then at par thereafter. Interest is payable quarterly beginning July 7, 2006 at 1.48% over the quarterly adjustable 3-month LIBOR. Of this $5.2 million, the Company contributed $3.0 million to the Bank and retained $2.0 million at the Company level. The securities do not entitle the holders to voting rights in the Company but will contain certain restrictive covenants, including restrictions on the payment of dividends to the holders of the Company’s common stock in the event that interest payments on the trust preferred securities are postponed. The capital received from the trust preferred issuance is designated as Tier 1 capital for regulatory purposes.

During the third quarter of 2003, the Bank undertook and completed a private placement of subordinated debentures (“notes”) to augment its Tier 2 capital. The total principal amount of the notes issued was $2,000,000. The notes were sold pursuant to an applicable exemption from registration under the Securities Act of 1933 to certain accredited investors, including some of the Company’s directors and executive officers. The notes include quarterly payment of interest at prime plus 1.5% and quarterly principal installments of approximately $166,666 commencing on September 30, 2008 until paid in full on June 30, 2011.

Interest Rate Sensitivity and Liquidity

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

The following table presents the Bank’s Rate Sensitivity Gap Report as of December 31, 2007.

																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	$	5,183		$	3,857		$	17,594		$	21,189		$	9,405		$	—	$	57,228
Loan receivables	90,316			27,823			32,983			14,578			3,268			—		168,968
Federal funds sold	—			—			—			—			—			—		—
Non-earning assets	—			—			—			—			—			21,847		21,847

Total assets	$	95,499		$	31,680		$	50,577		$	35,767		$	12,673		$	21,847	$	248,043

Interest sensitive liabilities:

Demand deposits	$	—		$	—		$	—		$	—		$	—		$	76,829	$	76,829
NOW accounts	349			1,048			2,796			2,795			5,008			—		11,996
Money Market Accounts	2,522			7,565			16,811			—			—			—		26,898
Savings deposits	930			2,789			7,436			7,436			7,746			—		26,337
Time deposits	26,851			37,950			6,189			705			149			—		71,844
Total saving and time deposits	$	30,652		$	49,352		$	33,232		$	10,936		$	12,903		$	76,829	$	213,904
Short-term borrowing	5,900			—			—			—			—			—		5,900
Long-term borrowing	2,000			—			—			—			—			—		2,000
Non-funding liabilities and capital	—			—			—			—			—			26,239		26,239
Total liabilities and capital	$	38,552		$	49,352		$	33,232		$	10,936		$	12,903		$	103,068	$	248,043

Interest rate sensitivity gap	$	56,947		$	(17,672	)	$	17,345		$	24,831		$	(230	)

Risk Indicators from GAP Analysis:

Cumulative GAP	$	56,947		$	39,275		$	56,620		$	81,451		$	81,221
Cumulative GAP (% of total assets)	22.96		%	15.83		%	22.83		%	32.84		%	32.74		%

The asset liability reports indicate that the Bank has an actual dollar risk exposure of $574,000 if interest rates fall 100 basis points. This represents a -4.5% risk to interest income.

	Interest Income and Expense Under Rate Shock
	-200bp			-100bp			0bp			+100bp			+200bp
Net Interest Income
Earnings at Risk	$	(1,088	)	$	(574	)	$	0		$	471		$	931
Percent of Risk	-8.5		%	-4.5		%	0.00		%	3.7		%	7.3		%
Equity Ratio	14.3		%	15.1		%	16.0		%	16.7		%	17.3		%

The Company closely monitors its liquidity so that the cash requirements for loans and deposit withdrawals are met in an orderly manner. Management monitors liquidity in relation to trends of loans and deposits for short term and long-term requirements. Liquidity sources are cash, deposits with other banks, overnight Federal Fund investments, investment securities and the ability to sell loans. As of December 31, 2007, the Bank’s liquidity ratio was 25.0% compared to 24.5% at December 31, 2006 and 27.7% at December 31, 2005. The 25.0% liquidity ratio at December 31, 2007 is well within the Company’s policy limit.

Critical Accounting Policies

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

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

Use of Estimates in the Preparation of Financial Statements

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

Allowance for Loan Losses

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

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

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.

Available-for-Sale Securities

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

Santa Lucia Bancorp and Subsidiary

Consolidated Balance Sheets

December 31, 2007 and 2006

ASSETS

	2007		2006
Cash and due from banks	$	7,399,412	$	10,139,526
Federal funds sold	—		—
TOTAL CASH AND CASH EQUIVALENTS	7,399,412		10,139,526
Securities available for sale	56,107,156		42,778,417
Loans, net	166,619,494		169,680,473
Premises and equipment, net	8,868,507		9,258,207
Deferred income tax assets	814,000		941,000
Cash surrender value of life insurance	5,005,357		3,336,076
Federal Reserve Bank and Federal Home Loan Bank stock, at cost	1,453,850		1,397,700
Accrued interest and other assets	2,371,999		3,206,685
TOTAL ASSETS	$	248,639,775	$	240,738,084

LIABILITIES & SHAREHOLDERS’ EQUITY

	2007		2006
Deposits
Noninterest-bearing demand	$	77,100,561	$	86,252,426
Interest-bearing demand and NOW accounts	11,996,402		12,968,951
Money market	25,440,394		20,465,756
Savings	26,336,827		27,383,605
Time certificates of deposit of $100,000 or more	38,829,793		37,226,189
Other time certificates	33,014,401		28,691,525
TOTAL DEPOSITS	212,718,378		212,988,452
Short-term borrowings	5,900,000		—
Long-term borrowings	7,155,000		7,155,000
Accrued interest and other liabilities	1,677,551		1,457,716
TOTAL LIABILITIES	227,450,929		221,601,168
Commitments and contingencies (Note M)	—		—
Shareholders’ equity
Common stock – no par value; 20,000,000 shares authorized;issued and outstanding: 1,924,873 shares at December 31, 2007 and 1,928,097 shares at December 31, 2006	9,851,392		9,566,563
Additional paid-in capital	358,203		216,558
Retained earnings	10,782,741		9,624,939
Accumulated other comprehensive income-net unrealized losses on available-for-sale securities, net of taxes of $137,975 in 2007 and $190,378 in 2006	196,510		(271,144		)
TOTAL SHAREHOLDERS’ EQUITY	21,188,846		19,136,916
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	248,639,775	$	240,738,084

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

Santa Lucia Bancorp and Subsidiary

Consolidated Statements of Earnings

Years Ended December 31, 2007, 2006 and 2005

	2007		2006		2005
Interest income
Interest and fees on loans	$	15,030,928	$	15,397,450	$	11,747,437
Federal funds sold	249,434		145,314		173,515
Investment securities – taxable	2,232,966		1,352,675		1,476,915
Investment securities – nontaxable	205,285		131,233		148,368
	17,718,613		17,026,672		13,546,235
Interest expense
Time certificates of deposit of $100,000 or more	1,833,831		1,254,951		581,566
Other deposits	2,389,580		1,824,577		1,234,377
Long-term debt and other borrowings	600,727		497,610		167,979
	4,824,138		3,577,138		1,983,922
Net interest income	12,894,475		13,449,534		11,562,313
Provision for loan losses	—		240,000		300,000
Net interest income after provision for loan losses	12,894,475		13,209,534		11,262,313

Noninterest income
Service charges and fees	583,445		615,917		602,809
Dividends on cash surrender value of life insurance	222,071		138,181		132,319
Mortgage fees	—		48,487		94,972
Gain (loss) on sale of investment securities	—		—		(5,877		)
Other income	265,798		207,676		227,727
	1,071,314		1,010,261		1,051,950
Noninterest expense
Salaries and employee benefits	5,259,456		4,743,094		4,241,897
Occupancy	627,685		664,482		565,467
Equipment	666,003		691,028		583,772
Professional services	426,667		538,282		465,661
Data processing	488,636		468,211		439,591
Office expenses	362,057		359,588		374,478
Marketing	422,914		407,638		397,907
Regulatory assessments	64,436		63,851		65,793
Directors’ fees and expenses	328,801		263,444		261,338
Messenger and courier expenses	156,870		148,335		143,834
Other	225,445		241,571		268,705
	9,028,970		8,589,524		7,808,443
Earnings before income taxes	4,936,819		5,630,271		4,505,820

Income taxes	1,934,000		2,242,000		1,759,000
Net earnings	$	3,002,819	$	3,388,271	$	2,746,820

Per share data:

Net earnings – basic	$	1.55	$	1.77	$	1.46

Net earnings – diluted	$	1.51	$	1.68	$	1.38

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

Santa Lucia Bancorp and Subsidiary

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Cash flows from operating activities:
Net earnings	$	3,002,819		$	3,388,271		$	2,746,820
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	652,290			669,159			556,907
Provision for loan losses	—			240,000			300,000
Amortization of investment securities	—			5,450			32,240
Loss (gain) on sale of investment securities	—			—			5,877
Deferred income taxes	(201,000		)	(147,000		)	(25,000		)
Dividends in cash value of life insurance	(222,071		)	(138,181		)	(132,319		)
Other items, net	1,101,676			(1,131,715		)	(432,992		)
Net cash provided by operating activities	4,333,714			2,885,984			3,051,533

Cash flows from investing activities:
Proceeds from maturities of investment securities.	14,202,010			18,962,594			11,007,571
Proceeds from sale of investment securities	—			—			6,016,550
Purchases of investment securities	(26,658,965		)	(19,391,969		)	(2,001,378		)
Purchase of Federal Reserve Bank and Federal Home Loan Bank stock	—			(155,550		)	(194,450		)
Net change in loans	3,060,979			(17,357,365		)	(27,277,292		)
Purchases of bank premises and equipment	(262,590		)	(466,782		)	(347,532		)
Proceeds from sale of bank premises and equipment	—			—			—
Proceeds from (purchase of) life insurance	(1,485,000		)	—			132,255
Proceeds from sale of other real estate owned	—			—			—
Net cash used in investing activities	(11,143,566		)	(18,409,072		)	(12,664,276		)

Cash flows from financing activities:
Net change in deposits	(270,074		)	6,109,373			12,011,229
Proceeds and tax benefit from exercise of stock options	164,275			372,781			416,562
Stock repurchases	(853,351		)	—			—
Net (repayments) proceeds from borrowings	5,900,000			(345,000		)	5,500,000
Cash dividends paid	(871,112		)	(767,587		)	(729,550		)
Net cash provided by financing activities	4,069,738			5,369,567			17,198,241
Net increase (decrease) in cash and cash equivalents	(2,740,114		)	(10,153,521		)	7,585,498
Cash and cash equivalents at beginning of year	10,139,526			20,293,047			12,707,549

Cash and cash equivalents at end of year	$	7,399,412		$	10,139,526		$	20,293,047

Supplemental disclosure of cash flow information:
Interest paid	$	4,824,138		$	3,415,383		$	1,957,610
Income taxes paid	$	1,865,000		$	2,415,000		$	1,720,000
Cashless exercise of stock options	$	120,554		$	48,034		$	32,515

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

Santa Lucia Bancorp and Subsidiary

Consolidated Statement of Shareholders’ Equity

Years Ended December 31, 2007, 2006 and 2005

														Accumulated
				Common Stock					Additional					Other
	Comprehensive			Shares					Paid-in		Retained			Comprehensive
	Income			Outstanding			Amount		Capital		Earnings			Income
Balance at January 1, 2005				$	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 loss 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 or $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		)

Cash dividends – $0.45 per share											(871,112		)
Exercise of stock options, including the realization of tax benefits of $19,000				29,247			284,829		19,000		(120,554		)
Repurchase and retirement of stock				(32,471		)					(853,351		)
Stock Option Compensation Expense									122,645

Comprehensive Income:
Net earnings for the year	$	3,002,819									3,002,819
Change in unrealized loss on available-for-sale securities, net of taxes of $328,353	467,654													467,654
Total Comprehensive Income	$	3,470,473
Balance at December 31, 2007				1,924,873			$	9,851,392	$	358,203	$	10,782,741		$	196,510

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

Santa Lucia Bancorp and Subsidiary

NOTES TO FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –

The consolidated financial statements include the accounts of Santa Lucia Bancorp and its wholly owned subsidiary Santa Lucia Bank (the “Bank”), collectively referred to herein as the “Company.” All significant intercompany transactions have been eliminated.

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the Unites States of America and prevailing practices within the banking industry. A summary of the significant accounting policies consistently applied in preparation of the accompanying financial statements follows:

Nature of Operations – The Company has been organized as a single operating segment and maintains four branches in the San Luis Obispo and northern Santa Barbara Counties. The Company’s primary source of revenue is interest income from loans to customers. The Company’s customers are predominantly small and middle-market businesses and individuals.

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

Presentation of Cash Flows – For the 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 day periods.

Cash and Due From Banks – Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. The Bank was in compliance with the reserve requirements as of December 31, 2007 and 2006.

The Company periodically maintains amounts due from banks that exceed federally insured limits. The Company has not experienced any losses in such accounts.

Investment Securities – Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

Investments not classified as trading securities nor as held-to-maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders’ equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method.

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

Provision and Allowance for Loan Losses – The determination of the balance in the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount which, in management’s judgment, is adequate to provide for potential credit losses after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience and such other factors as deserve current recognition in estimating credit losses. The provision for loan losses is charged to expenses.

The Company considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans.

Interest and Fees on Loans – Interest income is accrued daily as earned on all loans. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on 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 previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

Premises and Equipment – Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and forty years for buildings. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Other Real Estate Owned – Other real estate owned represents real estate acquired through foreclosure and is carried at the lower of the recorded investment in the property or its fair value. Prior to foreclosure, the value of the underlying loan is written down to the fair market value of the real estate to be acquired by a charge to the allowance for credit losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income, are included in other expenses.

Income Taxes – Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carryforwards depends on having sufficient taxable income of an appropriate character within the carryforward periods.

The Company has adopted Financial Accounting Standards Interpretation No. 48 (“Fin 48”), Accounting for Uncertainty in Income Taxes. Fin 48 clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Management believes that all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial statements. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Advertising Costs – The Company expenses the costs of advertising in the period incurred.

Comprehensive Income – Beginning in 1998, 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 its components. Changes in unrealized gain or loss on available-for-sale securities net of income taxes is the only component of accumulated other comprehensive income for the Company.

Financial Instruments – In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note M. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

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

Stock-Based Compensation – The Company has adopted SFAS No. 123(R) “Shared-Based Payment.” This Statement generally requires entities to recognize the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on the grant-date fair value of those awards. This cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period.

Change in Accounting Principle – The Company adopted SFAS No. 123 (R) on January 1, 2006 using the “modified prospective method.” Under this method compensation expense is recognized using the fair-value method for all new stock option awards as well as any existing awards that are modified, repurchased or cancelled after January 1, 2006 and prior periods are not restated. In addition, the unvested portion of previously awarded options outstanding as of January 1, 2006 will also be recognized as expense over the requisite service period based on the fair value of those options as previously calculated at the grant date under the pro-forma disclosures of SFAS No. 123. The fair value of each grant is estimated using the Black-Scholes option pricing model. During 2007 and 2006 the Company recognized pre-tax stock-based compensation expense of $122,645 and $63,558, respectively, as a result of adopting SFAS No. 123 (R).

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

Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant 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 would have changed to the pro forma amounts indicated below:

	2005
Net income:
As reported	$	2,746,820
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		)
Pro Forma	$	2,703,384
Per share:
Net Income - Basic)
As Reported	$	1.46
Pro Forma	$	1.44
Net Income - Diluted
As Reported	$	1.38
Pro Forma	$	1.36

Disclosure about Fair Value of Financial Instruments – SFAS No. 107 specifies the disclosure of the estimated fair value of financial instruments. The Company’s estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies.

However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates are not necessarily indicative of the amounts the Company could have realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the balance sheet date and, therefore, current estimates of fair value may differ significantly from the amounts presented in the accompanying notes.

New Accounting Pronouncements – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, effective for the Company January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement defines fair value, establishes a fair value hierarchy that distinguishes between valuations obtained from sources independent of the entity and those from the entity’s own observable inputs that are not corroborated by observable market data. SFAS No. 157 expands disclosures about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The disclosures focus on the inputs used to measure fair value, and for recurring fair value measurements using significant unobservable inputs, the effect of the measurements on earnings or changes inn net assets for the period. The Company is currently assessing the impact of this pronouncement on its financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS 159 are elective; however, the amendments to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale or trading securities. For financial instruments elected to be accounted for at fair value, an entity will report the unrealized gains and losses in earnings. SFAS 159 is effective as the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact of this pronouncement on its financial statements.

In September 2006, the FASB ratified the FASB’s Emerging Issues Task Force (or EITF) consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” and in March 2007 the FASB ratified EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” The EITF’s consensus on both of these issues focuses on the accounting for arrangements in which a company has agreed to share a portion of the value of the insurance policy with the employee. These arrangements are referred to as “split-dollar” arrangements. Entities with split-dollar life insurance policies will have to accrue, for years beginning after December 15, 2007, liabilities and associated expense for those insurance benefits under the same rules that apply when such benefits are provided by means other than life insurance. The provisions of the consensus would be applied through a cumulative effect adjustment to retained earnings with the option of retrospective application. The Company has estimated the charged to retained earnings effective January 1, 2008 to be approximately $196,000 net of taxes.

Reclassification – Certain reclassifications have been made in the 2006 and 2005 financial statements to conform to the presentation used in 2007. These reclassifications had no impact on the Company’s previously reported financial statements.

NOTE B – INVESTMENT SECURITIES – The amortized cost, carrying value and estimated fair values of investment securities available for sale as of December 31, are as follows:

	December 31, 2007
	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		(losses)			fair value
U.S. Government and Agency Securities	$	24,097,314	$	243,699	$	—		$	24,341,013
States and Political Subdivisions	6,527,226		30,399		(50,333		)	6,507,292
Mortgage-Backed Securities	25,148,131		207,770		(97,050		)	25,258,851
	$	55,772,671	$	481,868	$	(147,383	)	$	56,107,156

	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

The carrying value of investment securities pledged to secure public funds, borrowings and for other purposes as required or permitted by law amounts to approximately $14,025,000 and $14,316,000 at December 31, 2007 and 2006, respectively. During 2007 and 2006 the Bank had no proceeds from the sale of available for sale securities. During 2005 the Bank had proceeds from the sale of available for sale securities of $6,016,550, gross gains of $1,298 and gross losses of $7,175.

The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Mortgage-backed securities are classified in accordance with their estimated lives. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations.

	Amortized		Estimated
	cost		fair value
Securities available-for-sale:
Due in one year or less	$	12,494,840	$	12,538,473
Due after one year through five years	31,965,384		32,203,159
Due after five years through ten years	8,314,172		8,349,895
Due after ten years	2,998,275		3,015,629
	$	55,772,671	$	56,107,156

The gross unrealized loss and related estimated fair value of investment securities that have been in a continuous loss position for less than twelve months and over 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
	losses			value		losses			value		losses			value
December 31, 2007:
U.S. Government & Agency Securities	$	—		$	—	$	—		$	—	$	—		$	—
States and Political Subdivisions	(22,168		)	968,403		(28,165		)	2,224,642		(50,333		)	3,193,045
Mortgage-Backed Securities	(4,626		)	2,971,470		(92,424		)	7,118,850		(97,050		)	10,090,320
	$	(26,794	)	$	3,939,873	$	(120,589	)	$	9,343,492	$	(147,383	)	$	13,283,365

	Less than					Over
	Twelve Months					Twelve Months					Total
				Estimated					Estimated					Estimated
	Unrealized			fair		Unrealized			fair		Unrealized			fair
	losses			value		losses			value		losses			value
December 31, 2006:
U.S. Government & Agency Securities	$	(2,954	)	$	4,000,971	$	(73,645	)	$	6,924,317	$	(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

As of December 31, 2007, the Company has 21 investment securities where estimated fair market value had decreased 1.13% from amortized cost. Management evaluates investment securities for other-than-temporary impairment taking into consideration the extent and length of time the fair value has been less than cost, the financial condition of the issuer and whether the Bank has the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2007, no declines are deemed to be other than temporary.

NOTE C – LOANS – The Bank’s loan portfolio consists primarily of loans to borrowers within San Luis Obispo and northern Santa Barbara Counties, California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank’s market areas. As a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in those industries.

The composition of the loan portfolio at December 31, is as follows:

	2007			2006
Real estate – construction	$	47,819,615		$	55,307,210
Real estate – other	81,895,109			78,757,513
Commercial	38,016,713			36,406,663
Consumer	1,237,325			1,603,836
	168,968,762			172,075,222
Deferred loan fees	(675,858		)	(741,054		)
Allowance for loan losses	(1,673,410		)	(1,653,695		)
	$	166,619,494		$	169,680,473

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

Transactions in the allowance for credit losses are summarized as follows:

	2007			2006			2005
Balance at beginning of year	$	1,653,695		$	1,470,261		$	1,200,036
Provision charged to expense	—			240,000			300,000
Loans charged off	(60,779		)	(84,002		)	(46,355		)
Recoveries on loans previously charged off	80,494			27,436			16,580
Balance at end of year	$	1,673,410		$	1,653,695		$	1,470,261

The following is a summary of the investment in impaired loans, the related allowance for loan losses, income recognized and information pertaining to nonaccrual and past due loans as of December 31:

	2007		2006		2005

Recorded investment in impaired loans	$	2,175,694	$	—	$	134,872

Related allowance for loan losses	$	144,000	$	—	$	—

Average recorded investment in impaired loans	$	591,000	$	250,000	$	459,000

Interest income recognized for cash payments	$	—	$	3,045	$	28,581

Total nonaccrual loans	$	2,175,694	$	—	$	134,872

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 to certain executive officers, directors and the businesses with which they are associated. All such loans and commitments to lend were made under terms which are consistent with the Bank’s normal lending policies.

The following is an analysis of the activity of all such loans:

	2007			2006
Beginning balance	$	3,734,153		$	2,976,502
Credits granted, including renewals	5,515,322			2,797,483
Repayments	(4,484,643		)	(2,039,832		)
	$	4,764,832		$	3,734,153

Undisbursed loans amount to approximately $894,712 and $2,337,163 at December 31, 2007 and 2006, respectively.

Deposits from related parties held by the Bank at December 31, 2007 and 2006 amounted to $2,367,291 and $3,323,903, respectively.

NOTE E – PREMISES AND EQUIPMENT – The composition of premises and equipment at December 31 is as follows:

	2007		2006
Premises	$	7,497,978	$	7,411,967
Furniture, fixtures and equipment	3,990,273		4,149,808
	11,488,251		11,561,775
Less accumulated depreciation	4,650,509		4,334,333
	6,837,742		7,227,442
Land	2,030,765		2,030,765
	$	8,868,507	$	9,258,207

NOTE F – DEPOSITS – At December 31, 2007, the scheduled maturities of time deposits are as follows:

Due in one year	$	64,801,857
Due in one to three years	6,188,863
Due after three years	853,474
	$	71,844,194

NOTE G – SHORT-TERM BORROWINGS – The Bank has two borrowing arrangements with the Federal Home Loan Bank of San Francisco. The first allows the Bank to borrow up to approximately $41 million against which the Bank has pledged approximately $100 million of its real estate secured loans. The second arrangement allows the Bank to borrow up to approximately $12 million against which the Bank has pledged approximately $12 million of its investment securities.

The Bank may also borrow up to $5,900,000 overnight on an unsecured basis from two correspondent banks.

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

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

The Company also purchased a 3% minority interest in Santa Lucia Bancorp (CA) Capital Trust. The balance of the equity of Santa Lucia Bancorp (CA) Capital Trust is comprised of mandatorily redeemable preferred securities.

NOTE I – INCOMETAXES – The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:

	2007		2006
Deferred liabilities:
Tax over book depreciation	$	425,000	$	493,000
Market value adjustment on investment securities	138,000		—
Other	111,000		107,000
Total deferred tax liabilities	674,000		600,000
Deferred tax assets:
Allowance for loan losses	673,000		673,000
Deferred compensation plans	498,000		390,000
Market value adjustment on investment securities	—		190,000
State taxes	191,000		224,000
Net loss carryforward	41,000		55,000
Other	85,000		9,000
Total deferred tax assets	1,488,000		1,541,000
Net deferred tax assets	$	814,000	$	941,000

The provision for income taxes consists of the following:

	2007			2006			2005
Currently payable	$	2,135,000		$	2,389,000		$	1,784,000
Deferred taxes (benefits)	(201,000		)	(147,000		)	(25,000		)
	$	1,934,000		$	2,242,000		$	1,759,000

The principal sources of deferred income taxes and the tax effect of each are as follows:

	2007			2006			2005
Tax over book depreciation	$	(68,000	)	$	6,000		$	173,000
Provision for loan losses	—			(75,000		)	(118,000		)
State taxes	33,000			(75,000		)	(46,000		)
Net loss carryforward	14,000			14,000			14,000
Deferred compensation plans	(108,000		)	(42,000		)	(41,000		)
Other	(72,000		)	(25,000		)	(7,000		)
Net deferred taxes	$	(201,000	)	$	(147,000	)	$	(25,000	)

As of December 31, 2007, the Bank had federal net operating loss carryforwards available to reduce future taxable income of approximately $163,000. These net operating loss carryforwards expire in 2010. The 1995 merger with Central Coast National Bank resulted in an ownership change as defined in the Internal Revenue Code Section 382. Accordingly, the utilization of the net operating loss will be subject to the limitations prescribed in Section 382.

As a result of the following items, the total tax expense was different from the amount computed by applying the statutory income tax rate to earnings before income taxes:

	2007					2006					2005
Federal “expected” tax	$	1,679,000		34.0	%	$	1,914,000		34.0	%	$	1,532,000		34.0	%
State franchise tax, net	347,000			7.0		396,000			7.0		318,000			7.0
Tax exempt income	(122,000		)	(2.5	)	(80,000		)	(1.3	)	(82,000		)	(1.8	)
Other	30,000			0.6		12,000			0.2		(9,000		)	(0.2	)
Total expense	$1,934,000			39.1	%	$2,242,000			39.9	%	$1,759,000			39.0	%

The Company is subject to Federal income tax and California franchise tax. Federal income tax returns for the years ended December 31, 2006, 2005 and 2004 are open to audit by the Federal authorities and California returns for the years ended December 31, 2006, 2005, 2004 and 2003 are open to audit by state authorities.

NOTE J – EMPLOYEE PROFIT SHARING AND DEFERRED COMPENSATION – The Bank sponsors a 401 (k) plan for the benefit of its employees. In 1994 the Bank also approved the creation of an Employee Stock Ownership Plan for the benefit of its employees. Contributions to these plans are determined by the Board of Directors. For income tax purposes, the annual contribution is limited to 15% of the compensation of eligible employees. The Bank contributed $203,000 in 2007, $210,000 in 2006, and $240,000 in 2005, to the Employee Stock Ownership Plan. The Bank contributed $57,000 to the 401 (k) plan in 2007 and $50,000 in 2006. There were no contributions to the 401 (k) plan in 2005.

The Bank has entered into deferred compensation agreements with key officers and board members. Under these agreements, the Bank is obligated to provide, upon retirement, a lifetime benefit for the officers and directors. The annual benefits ranging from $25,000 to $75,000 for key officers and $4,000 to $6,000 for directors. The estimated present value of future benefits to be paid is being accrued over the period from the effective date of the agreements until the expected retirement dates of the participants. The expense incurred and amount accrued for this plan for the years ended December 31, 2007, 2006, and 2005 totaled $292,385, $131,454, and $120,715, respectively. The Bank is a beneficiary of life insurance policies that have been purchased as a method of financing the benefits under the agreements.

NOTE K – STOCK OPTIONS – The Company sponsors one compensatory incentive and non-qualified stock option plan which provides certain key employees and the Board of Directors with the option to purchase shares of common stock, and one Equity Based Compensation Plan which provides certain key employees and the Board of Directors with the award of any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Share Unit, Performance Share Award, Dividend Equivalent, or any combination thereof. In 1999, the Bank adopted a stock option plan (the 2000 plan) under which up to 360,000 shares of the Bank’s common stock may be issued to directors, officers, and key employees. In 2006, the Company adopted the 2006 Equity Based Compensation Plan (the Plan), which the maximum number of shares of common stock that may be awarded under this Plan shall not exceed 200,000 shares, including 38,200 shares rolled over from the Company’s 2000 Stock Option Plan. Option prices may not be less 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 the date of grant. The Company recognized stock-based compensation costs of $122,645 and $63,558 and related tax benefits of $18,450 and $7,193 for 2007 and 2006, respectively.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions:

	2007			2006			2005
Risk-free rates	4.65		%	4.77		%	3.75		%
Expected volatility	20.00		%	20.00		%	17.00		%
Expected dividened yield	1.40		%	1.40		%	2.10		%
Expected term	6.0 years			6.0 years			6.5 years
Weighted-average grant date fair value	$	6.72		$	6.43		$	4.47

A summary of the status of the Company’s fixed stock option plan as of December 31, 2007 and changes during the year then ended is presented below:

	December 31, 2007
			Weighted-		Weighted-
			Average		Average	Aggregate
			Exercise		Remaining	Intrinsic
	Shares		Price		Contractual Term	Value
Outstanding at the beginning of the year	243,176		$	15.55
Granted	34,000		26.15
Exercised	(36,916	)	10.23
Foreited or expired	(16,500	)	23.04
Outstanding at the end of the year	223,760		17.48		6.5 years	$	1,730,000
Options Exercisable	126,260		$	13.04	4.9 years	$	1,518,000

The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005 were approximately $638,000, $539,000, and $760,000 respectively. As of December 31, 2007 there was $503,000 of total unrecognized compensation cost related to the outstanding stock options that will be recognized over a weighted average period of 2.4 years.

NOTE L – EARNINGS PER SHARE (EPS) – The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:

	December 31, 2007
	Income		Shares
	(Numerator)		(Denominator)
Net income	$	3,002,819
Average shares outstanding			1,933,231
Used in Basic EPS	3,002,819		1,933,231
Dilutive effect of outstanding stock options			59,823
Used in Diluted EPS	$	3,002,819	1,993,054

	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

NOTE M – COMMITMENTS AND CONTINGENCIES – The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those commitments. Commitments to extend credit (such as the unfunded portion on lines of credit and commitments to fund new loans) as of December 31, 2007 and 2006 amounts to approximately $57,326,000 and $56,557,000, respectively, of which approximately $4,286,000 and $2,603,000 are related standby letters of credit, respectively. The Company uses the same credit policies in these commitments as is done for all of its lending activities. As such, the credit risk involved in these transactions is essentially the same as that involved in extending loan facilities to customers.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. The majority of the Company’s commitments to extend credit and standby letters of credit are secured by real estate.

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

NOTE N – FAIR VALUES OF FINANCIAL INSTRUMENTS – The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Financial Assets – The carrying amounts of cash, short term investments, due from customers on acceptances, and bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with banks. The fair values of investment securities, including available for sale, are generally based on quoted market prices. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available.

Financial Liabilities – The carrying 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 is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available for debt with similar terms and remaining maturities.

Off-Balance Sheet Financial Instruments – The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair values of these financial instruments are not deemed to be material.

The estimated fair value of financial instruments at December 31, 2007 and 2006 are summarized as follows:

	December 31, 2007				December 31, 2006
	Carrying		Market		Carrying		Market
	Value		Value		Value		Value
Financial Assets:
Cash and cash equivalents	$	7,399,412	$	7,399,412	$	10,139,526	$	10,139,526
Investment securities	56,107,156		56,107,156		42,778,417		42,778,417
Loans receivable, net	166,619,494		167,422,617		169,680,473		170,091,100
Cash surrender value of life insurance	5,005,376		5,005,376		3,336,076		3,336,076
Federal Reserve Bank FHLB Stock	1,453,850		1,453,850		1,397,700		1,397,700
Accrued interest receivable	1,465,402		1,465,402		1,559,551		1,559,551
Financial Liabilities:
Time deposits	$	71,844,194	$	72,612,333	$	65,917,714	$	65,838,613
Other deposits	140,874,184		141,374,184		147,070,738		147,070,738
Other borrowings	5,900,000		5,900,000		—		—
Long-term debt	7,155,000		7,155,000		7,155,000		7,155,000
Accrued interest and other liabilities	1,677,551		1,677,551		1,457,716		1,457,716

NOTE O – REGULATORY MATTERS – The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2007, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2007, the most recent notification from the Federal Reserve Bank (FRB) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Company’s and Bank’s actual capital amounts and ratios (dollar amounts in thousands):

									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, 2007:

Company
Total Capital
(to Risk-Weighted Assets)	$	29,075	14.6	%	$	15,912	8.0	%	$	19,890	10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)	$	26,147	13.2	%	$	7,956	4.0	%	$	11,934	6.0	%
Tier 1 Capital
(to Average Assets)	$	26,147	10.5	%	$	9,794	4.0	%	$	12,243	5.0	%

Bank
Total Capital
(to Risk-Weighted Assets)	$	27,410	13.8	%	$	15,888	8.0	%	$	19,860	10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)	$	24,482	12.3	%	$	7,944	4.0	%	$	11,916	6.0	%
Tier 1 Capital
(to Average Assets)	$	24,482	9.9	%	$	9,941	4.0	%	$	12,427	5.0	%

As of December 31, 2006:

Company
Total Capital
(to Risk-Weighted Assets)	$	27,872	14.4	%	$	14,026	8.0	%	$	17,533	10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)	$	24,563	12.7	%	$	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	%

The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the Bank’s undivided profits or the Bank’s net income for its last three fiscal years less the amount of any distribution made by the Bank to shareholders during the same period.

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

NOTE P – HOLDING COMPANY – On April 3, 2006 Santa Lucia Bancorp acquired all the outstanding shares of Santa Lucia Bank by issuing 1,909,837 shares of common stock in exchange for the surrender of all outstanding shares of the Bank’s common stock. There was no cash involved in this transaction. The acquisition was accounted for like a pooling of interest and the consolidated financial statements contained herein have been restated to give full effect to this transaction.

Santa Lucia Bancorp has no significant business activities other than its investment in Santa Lucia Bank and its investment and related borrowings from Santa Lucia (CA) Capital Trust as discussed in Note H. Accordingly, no separate financial information on the Company is provided.

SANTA LUCIA BANCORP

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

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

SANTA LUCIA BANCORP EXECUTIVE OFFICERS
LARRY H. PUTNAM	PRESIDENT AND CHIEF EXECUTIVE OFFICER
JOHN C. HANSEN	EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER

SANTA LUCIA BANK

EXECUTIVE OFFICERS
LARRY H. PUTNAM	Chief Executive Officer
JOHN C. HANSEN	President and Chief Operating Officer
JAMES M. COWAN	Executive Vice President, Chief Credit Officer

SENIOR VICE PRESIDENTS
MELODEE FONTANA	Senior Vice President, Operations Administrator
ROBERT COVARRUBIAS	Senior Vice President, Manager

VICE PRESIDENTS
TERI DAVIS	Vice President, Loan Officer
SHARON SATTERTHWAITE	Vice President, Controller
LEAH T. WEST	Vice President, Manager
JIM KELLEY	Vice President, Loan Officer
MICHAEL W. McKENZIE	Vice President, Manager
LARRY WOMACK	Vice President, Loan Officer
JAMES P. BURUBELTZ	Vice President, Loan Officer
RICHARD ALLEN	Vice President, Loan Officer
JULIE A. JOSLIN	Vice President, Cashier

ASSISTANT VICE PRESIDENTS
JENNIFER BASSI GINDER	Assistant Vice President, Operations Officer
KRISTIE KELLER	Assistant Vice President, Central Operations
KIM DONALDSON	Assistant Vice President, Operations Officer
CHERYL MUMFORD	Assistant Vice President, Operations Officer
RYUN McCRORY	Assistant Vice President, Loan Officer
J. DARREN BARNES	Assistant Vice President, Loan Officer
REGINA M. SHELDON	Assistant Vice President, Loan Officer

OFFICERS
KAREN SAMPSON	Assistant Operations Officer
STELLA MARTINEZ	Assistant Operations Officer
ROBERT McCONAGHY	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
LISA GALLO, WEDBUSH MORGAN SECURITIES – LAKE OSWEGO, OR		503/675-3100 or 866/491-7828
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, McADAMS WRIGHT RAGEN – PORTLAND, OR		503/922-4888 or 866/662-0351

MEMBER FDIC

			Santa Lucia Bancorp
			7480 El Camino Real
			Atascadero, California 93422

2007			Stock Symbol – SLBA.OB

			Santa Lucia Bank
			7480 El Camino Real
			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

Quarter Ended 2007	Low		High
December 31	$	23.25	$	26.25
September 30	25.00		29.00
June 30	26.00		28.99
March 31	26.00		29.00

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

	/s/ Larry H. Putnam
	Larry H. Putnam
	President and Chief Executive Officer