10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q/A

Amendment No. 1

xQUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

oTRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For transition period                       to                    

Commission File Number: 000-51901

Santa Lucia Bancorp

(Exact name of registrant as specified in its charter)

California	35-2267934
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

7480 El Camino Real, Atascadero, CA 93422

(Address of principal executive offices)

805-466-7087

(Registrant’s telephone number)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Title of Class: Common Stock, no par value; shares outstanding as of April 30, 2010: 2,003,131.

Santa Lucia Bancorp

Index

		Page
Explanatory Note		3
Part I – Financial Information
Item 1.	Consolidated Financial Statements (unaudited except year end)
	Consolidated Balance Sheets March 31, 2010 and December 31, 2009	4
	Consolidated Statements of Income for three months ended March 31, 2010 and March 31, 2009	5
	Consolidated Statements of Cash Flows for three months ended March 31, 2010 and March 31, 2009	6
	Consolidated Statement of Stockholders’ Equity for three months ended March 31, 2010 and the year ended December 31, 2009	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	30
Part II—Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults upon Senior Securities	32
Item 4.	(Removed and Reserved)	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signatures		32
Exhibit Index		33
Certifications

2

Santa Lucia Bancorp

Quarterly Report on Form 10-Q/A for the period ended March 31, 2010

EXPLANATORY NOTE

Santa Lucia Bancorp (“we,” “our,” “us” or the “Company”), parent of Santa Lucia Bank (the “Bank”), is filing this Amendment to its quarterly report on Form 10-Q for the period ended March 31, 2010, originally filed on May 12, 2010, in order to restate previously reported results for this period.  The Company previously announced its intentions to file this Form 10-Q/A on Form 8K filed on August 16, 2010 and the affects of this 10-Q/A have already been included in the results reflected on Form 10-Q and related Form 10-Q/A filed on August 30, 2010, for the period ended June 30, 2010.  This restatement of the quarterly results for March 2010 is necessary for the following reasons:  to reflect an additional provision to our allowance for loan losses of $7.3 million and to increase the valuation allowance for deferred tax assets by $1.1 million.  Additionally, we identified additional loans which are being retroactively reflected as nonaccrual loans.

The increase in the provision for loan losses for the quarter ended March 31, 2010, resulting from this restatement, is the consequence of two significant factors:

·based on consultation with the Federal Reserve Bank in connection with a recently concluded examination, among other things, to enhance the Bank’s process for determining, documenting and recording an adequate allowance for loan losses (the “ALLL”) and provide more directional consistency relative to underlying trends in the portfolio (e.g. trends in nonaccrual loans, trends in loan losses, trends in past due loans, and trends in classified and other problem loans), the Bank has reviewed its methodology for calculating the ALLL and, working closely with the Bank’s regulators, determined that the revised, methodology that is still subject to further analysis, should be adopted and reflected in the quarterly results for March 31, 2010, and

·as a result of the determination to restate the March results, in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 855, “ Subsequent Events ,” the Bank reassessed its evaluation of potential impairment losses required by ASC Topic 310, “ Receivables, ” the Company evaluated current information available about problem loans, including new information about the valuation of the underlying loan collateral or information about the financial condition of borrowers, and determined that increases expected to be made to the ALLL in June should be included in this restatement of quarterly results for March 31, 2010.

Furthermore, as a result of the increase in the Company’s reported losses, we increased the valuation allowance on deferred tax assets to 100% of the related deferred tax asset because the benefit of such assets is dependent on future taxable income. This resulted in an increase in deferred tax expense of approximately $1.1 million for the quarter ended March 31, 2010.

Finally, in evaluating ASC Topic 855, “Subsequent Events”, the Company increased the amount of loans previously identified as nonaccrual loans by approximately $10.7 million as of March 31, 2010, because these loans were either placed on nonaccrual or charged off subsequent to March 31, 2010.

As a result of the changes noted above and as reflected in this Form 10-Q/A, the Company recognized a net loss of approximately $9.1 million (or $4.57 diluted loss per share) for the quarter rather than the previously reported net loss of $0.7 million (or $0.38 diluted loss per share).

Further discussion regarding the Bank’s ALLL methodology, nonaccrual and other problem loans, and the assessment of the valuation allowance for deferred tax assets can be found in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.  While we are amending only certain portions of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, for convenience and ease of future reference, we are filing the entire Quarterly Report for the quarter ended March 31, 2010, on this Form 10-Q/A.

3

PART I - FINANCIAL INFORMATION

ITEM I - Financial Statements

Santa Lucia Bancorp

Consolidated Balance Sheets

(in thousands)

	31-Mar-10			31-Dec-09
	(unaudited)
	Restated (1)
Assets
Cash and due from banks	$	5,714		$	6,588
Federal funds sold	8,700			2,500
Total cash and cash equivalents	14,414			9,088
Securities available for sale	39,729			40,990
Loans, net	191,551			198,099
Premises and equipment, net	8,096			8,223
Deferred income tax asset	—			1,429
Cash surrender value of life insurance	5,438			5,391
Federal Reserve Bank and Federal Home Loan Bank stock, at cost	1,643			1,643
Other Real Estate Owned	1,122			428
Accrued interest and other assets	5,250			4,632
Total Assets	$	267,243		$	269,923
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	68,886		$	69,850
Interest-bearing demand and NOW accounts	14,375			14,215
Money market	41,651			37,396
Savings	27,917			27,478
Time certificates of deposit of $100,000 or more	55,323			52,146
Other time certificates	37,138			37,638
Total Deposits	245,290			238,723
Short-term borrowings	—			—
Long-term debt	5,988			6,155
Accrued interest and other liabilities	2,112			2,015
Total Liabilities	253,390			246,893
Commitments and contingencies	—			—
Shareholders’ equity
Preferred Stock - Series A	3,849			3,839
Common stock - no par value; authorized 20,000,000 shares; Issued and outstanding, 2,003,031 shares at March 31, 2010 and 1,961,334 shares at December 31, 2009	10,665			10,350
Additional Paid-in Capital	847			814
Retained earnings (Accumulated Deficit)	(1,766		)	7,698
Accumulated other comprehensive income-net unrealized gains on available-for-sale securities, net of taxes	258			329
Total shareholders’ equity	13,853			23,030
Total liabilities and shareholders’ equity	$	267,243		$	269,923

(1) Refer toExplanatory Note on page 3 of this document

(see accompanying notes)

4

Santa Lucia Bancorp

Consolidated Statements of Income

(in thousands except per share data)

	For the three month period ending
	31-Mar-10			31-Mar-09
	(unaudited)			(unaudited)
	Restated (1)
Interest Income
Interest and fees on loans	$	3,023		$	3,050
Federal funds sold	1			—
Investment securities	314			413
	3,338			3,463
Interest expense
Time certificates of deposit of $100,000 or more	253			279
Other deposits	377			391
Short-term borrowings	—			38
Long-term debt	34			57
	664			765
Net interest income	2,674			2,698
Provision for credit losses	8,748			240
Net interest income after provision for loan losses	(6,074		)	2,458
Noninterest income
Service charges and fees	120			121
Gain on sale of investment securities	—			92
Other income	93			110
	213			323
Noninterest expense
Salaries and employee benefits	1,380			1,380
Occupancy	158			167
Equipment	144			165
Professional services	137			153
Data processing	119			132
Office related expenses	104			102
Marketing	81			101
Regulatory assessments	111			45
Directors’ fees and expenses	89			88
Other	97			98
	2,420			2,431
Earnings (losses) before income taxes	(8,281		)	350
Income taxes	807			119
Net Earnings (Loss)	$	(9,088	)	$	231
Per Common Share Data
Net Earnings (Loss) - basic	$	(4.57	)	$	0.10
Net Earnings (Loss) - diluted	$	(4.57	)	$	0.10

(see accompanying notes)

(1) Refer toExplanatory Note on page 3 of this document

5

Santa Lucia Bancorp

Consolidated Statements of Cash Flow

(in thousands)

	(For the three month period ended)
	31-Mar-10			31-Mar-09
	Restated (1)
Cash flows from operating activities:
Net earnings (loss)	$	(9,088	)	$	231
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	144			157
Provision for loan losses	8,748			240
Stock-based compensation expense	33			34
Gain on sale of investment securities	—			(92		)
Other items, net	918			753
Net cash provided by operating activities	755			1,323
Cash flows from investing activities:
Proceeds from maturities of investment securities	5,131			2,634
Proceeds from sale of investment securities	—			2,555
Purchases of investment securities	(4,000		)	(4,000		)
Net change in loans	(2,895		)	(9,263		)
Purchases of bank premises and equipment	(16		)	(527		)
Net cash (used) by investing activities	(1,780		)	(8,601		)
Cash flows from financing activities:
Net change in deposits	6,568			8,234
Net change in borrowings	(167		)	(166		)
Dividends paid on Preferred Stock	(50		)	(31		)
Cash dividends paid Common Stock	—			(481		)
Net cash provided by financing activities	6,351			7,556
Net increase in cash and cash equivalents	5,326			278
Cash and cash equivalents at beginning of year	9,088			8,220
Cash and cash equivalents at end of year	$	14,414		$	8,498
Supplemental disclosure of cash flow information:
Interest paid	$	668		$	796
Income taxes paid	$	—		$	—
Transfer of loans to Other Real Estate Owned	$	694		$	464

(see accompanying notes)

(1) Refer toExplanatory Note on page 3 of this document

6

Santa Lucia Bancorp

Consolidated Statement of Shareholders’ Equity

(in thousands except shares outstanding)

For year ending December  31, 2009 and the period ending March 31, 2010

											(Accumulated
											Deficit)			Accumulated
	Comprehensive					Common Stock			Additional		Retained			Other
	Income					Shares			Paid-in		Earnings			Comprehensive
	Restated			Preferred Stock		Outstanding	Amount		Capital		Restated (1)			Income
Balance at December 31, 2008				$	3,799,003	1,923,053	$	9,894,507	$	676,734	$	10,682,922		$	497,531
Dividends Preferrred Stock											(181,111		)
Cash dividends - $0.25 per share											(480,763		)
Stock Dividend - 2%						38,281	455,161				(455,161		)
Cash in lieu for fractional shares											(2,142		)
Accretion on Preferred Stock				40,199							(40,199		)
Stock Option Compensation Expense									136,272
Comprehensive Income:
Net earnings (losses) for the year	$	(1,825,475	)								(1,825,475		)
Change in unrealized gain on available-for-sale securities, net of taxes of $210,949	(300,441		)											(300,441		)
Less reclassification adjustment for gains included in net income, deferred of tax of ($92,761)	132,114													132,114
Refund TARP expenses									759
Total Comprehensive Income	$	(1,993,802	)
Balance at December 31, 2009				$	3,839,202	1,961,334	$	10,349,668	$	813,765	$	7,698,071		$	329,204
Dividend Preferred Stock											(50,000		)
Stock Dividend - 2%						39,096	293,220				(293,220		)
Cash in lieu for fractional shares											(1,385		)
Accretion on Preferred Stock				10,050							(10,050		)
Exercise of Stock Options						2,701	21,681				(21,681		)
Stock Option Compensation Expense									33,320
Comprehensive Income:
Net earnings for the year	$	(9,088,481	)								(9,088,481		)
Change in unrealized gain on available-for-sale securities, net of taxes of $50,143	(71,416		)											(71,416		)
Total Comprehensive Income	$	(9,159,897	)
Balance at March 31, 2010				$	3,849,252	2,003,131	$	10,664,569	$	847,085	$	(1,766,746	)	$	257,788

(1) Refer toExplanatory Note on page 3 of this document

7

SANTA LUCIA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

Note 1 Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements of Santa Lucia Bancorp (the “Company”) and its subsidiary Santa Lucia Bank (the “Bank”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC).  Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.  Nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.  These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2009 Annual Report as filed on Form 10K.

In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim consolidated financial statements and the results of its operations for the interim period ended March 31, 2010, have been included.  The results of operations for interim periods are not necessarily indicative of the results for a full year.  Certain reclassifications were made to prior year’s presentations to conform to the current year these reclassifications had no material impact to the Company’s previously reported financial statements.

Note 2 Loans and Related Allowance for Loan Losses:

A summary of loans as of March 31, 2010 and December 31, 2009 is as follows:

	(in thousands)
	31-Mar-10			31-Dec-09
	Restated
Real estate - construction	$	38,208		$	47,458
Real estate - other	119,230			111,183
Commercial	44,405			41,744
Consumer	1,653			1,783
Gross Loans	203,496			202,168
Deferred loan fees	(719		)	(683		)
Allowance for loan losses	(11,226		)	(3,386		)
Net Loans	$	191,551		$	198,099

The Bank’s loan portfolios consist primarily of loans to borrowers within the 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.  When real estate is taken as collateral, advances are generally limited to a certain percentage of the appraised value of the collateral at the time the loan is made, depending on the type of loan, the underlying property and other factors.

The Bank’s allowance for loan losses as a percentage of total loans was 5.52% as of March 31, 2010, including the  increase resulting from the effects of this restatement on Form 10-Q/A, and reflects an increase from 1.67% as of December 31, 2009, see Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on the “Allowance for Loan Losses”. Management believes that the allowance for loan losses at March 31, 2010 is adequate after considering the above factors. Although management believes the allowance for loan loss is adequate, there is no assurance that at any given period the Company will not sustain charge-offs that are substantial in relation to the size of the allowance.

8

Concentration of Credit Risk.  As of March 31, 2010, real estate served as the principal source of collateral with respect to approximately 77.4% of our loan portfolio, of which, 58.0% is considered commercial real estate (CRE).  Within the makeup of our CRE, approximately 46.4% of our commercial term loans are granted for owner use, which is repaid from the cash flow of the owner’s business.  We believe that this factor coupled with the diversification of business types, location, conservative underwriting and loss history further mitigates the risk in our CRE portfolio.  The Bank targets commercial term loans for owners use as it supports the local business economy.  The Bank believes that owner occupied properties do not carry the same risk as commercial strip centers and other income properties with higher vacancy factors that rely on third parties for repayment.

The Bank also targets experienced local builders that are active in residential construction for owner’s use, spec construction and small-scale residential construction projects.  The Bank originates loans on a limited number of large projects and 46.7% of our construction loans are in owner occupied residential construction and commercial properties for owner use.

A continued decline in current economic conditions and the declining interest rates have had an effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general.

Note 3 Commitments and Contingencies:

The Bank’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 March 31, 2010 and 2009 amounts to approximately $42,921,000 and $54,433,000 respectively, of which approximately $1,510,000 and $2,758,000 are related to standby letters of credit, respectively.  The Bank uses the same credit policies in these commitments as 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.

Because of the nature of its activities, the Company and Bank are from time to time subject to pending and threatened legal actions, which arise out of the normal course of their business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Note 4 Earnings Per Share:

Basic earnings per share are based on the weighted average number of shares outstanding before any dilution from common stock equivalents.  Diluted earnings per share reflect 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 shares in the earnings of the entity.

The following is a reconciliation of the net income and shares outstanding to the income and number of shares used to compute EPS (in thousands, except share data):

Three Months Ending
31-Mar-10				Three Months Ending
Restated				31-Mar-09
Income			Shares	Income			Shares
(Numerator)			(Denominator)	(Numerator)			(Denominator)
$	(9,088	)		$	231
(60		)		(41		)
			2,001,961				1,923,053
(9,148		)	2,001,961	190			1,923,053
			44,849				10,605
$	(9,148	)	2,046,810	$	190		1,933,658

9

Common stock equivalents for the three months ending March 31, 2010 have been excluded from the calculation of diluted earnings (loss) per share since their effect was anti-dilutive.

Note 5 Stock Based Compensation:

The Company has two stock option plans, which are fully described in Note K in the Bank’s Annual Report on Form 10-K.  The Company recognizes 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. The cost is recognized over the period which an employee is required to provide services in exchange for the award, generally the vesting period.

Note 6 Fair Value Measurement:

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

·Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date

·Level 2 — Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

·Level 3 —Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1).

Collateral-Dependent Impaired Loans:  The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants (Level 3).

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount of fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

10

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at March 31, 2010 and December 31, 2009.

	Fair Value Measurements as of March 31, 2010 using
	Level 1		Level 2		Level 3		Total
					(Restated)
Assets and liabilities measured at fair value on a recurring basis
Assets:
Securities Available for Sale	$	39,290,355	$	—	$	—	$	39,290,355
Assets measured at fair value on a non-recurring basis
Collateral-Dependent Impaired Loans, Net of Specific Reserves	$	—	$	—	$	17,471,053	$	17,471,053
Other Real Estate Owned	$	—	$	—	$	1,122,232	$	1,122,232

	Fair Value Measurements as of December 31, 2009 using
	Level 1		Level 2		Level 3		Total
Assets and liabilities measured at fair value on a recurring basis
Assets:
Securities Available for Sale	$	40,989,899	$	—	$	—	$	40,989,899
Assets measured at fair value on a non-recurring basis
Collateral-Dependent Impaired Loans, Net of Specific Reserves	$	—	$	—	$	6,407,114	$	6,407,114
Other Real Estate Owned	$	—	$	—	$	428,000	$	428,000

Collateral-dependent impaired loans has a net carry value of $17,471,053 which is made up of the loan balance, net of specific reserves of $3,142,405 at March 31, 2010, compared to $6,407,114 at December 31, 2009.

Other real estate owned had a net carrying amount of $1,122,232, which is made up of the outstanding balance of $1,122,232, net of valuation allowance of $0.00 at March 31, 2010 compared to $428,000 at December 31, 2009.

As a result of this restatement on Form 10-Q/A, the Company reassessed its collateral dependent impaired loans and increased the previously reported approximately $13.1 million by $4.3 million, with related specific reserves of $3.1 million.

11

Note 7 Investment Securities:

The amortized cost, carrying value and estimated fair values of investment securities available for sale as of March 31, 2010 and December 31, 2009 are as follows:

	March 31, 2010
	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		losses			fair value
Securities Available for Sale:
U.S. government and agency securities	$	21,818,742	$	137,415	$	(11,700	)	$	21,944,457
States and political subdivisions	3,206,751		98,511		(3,765		)	$	3,301,497
Mortgage-backed securities	10,721,901		291,914		(44,226		)	$	10,969,589
GNMA Securities	3,542,961		—		(29,361		)	$	3,513,600
	$	39,290,355	$	527,840	$	(89,052	)	$	39,729,143

	December 31, 2009
	Amortized		Unrealized		Unrealized			Estimated
	cost		gains		losses			fair value
Securities Available for Sale:
U.S. government and agency securities	$	21,824,979	$	217,016	$	(8,531	)	$	22,033,464
States and political subdivisions	3,714,014		95,484		(5,416		)	3,804,082
Mortgage-backed securities	11,240,354		294,505		(31,845		)	11,503,014
GNMA Securities	3,650,205		—		(866		)	3,649,339
	$	40,429,552	$	607,005	$	(46,658	)	$	40,989,899

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 $12,427,000 at March 31, 2010 and $12,368,000 at December 31, 2009.  During 2009 the Company had proceeds from the sale of $5,176,324 in Mortgage Backed Securities and gross gains of $224,875.  The Company has not sold any securities in 2010.

The amortized cost and estimated fair value of debt securities at March 31, 2010, 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	$	7,311,897	$	7,449,575
Due after one year through five years	19,816,198		20,037,086
Due after five years through ten years	9,282,252		9,380,545
Due after ten years	2,880,008		2,861,937
	$	39,290,355	$	39,729,143

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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 March 31, 2010, and December 31, 2009 are as follows:

	Less than twelve months				Over twelve months					Total
	Unrealized		Estimated		Unrealized			Estimated		Unrealized			Estimated
	loss		fair value		loss			fair value		loss			fair value
March 31, 2010:
U.S. government and agency securities	$	—	$	—	$	(11,700	)	$	2,191,954	$	(11,700	)	$	2,191,954
States and political subdivisions	—		—		(3,765		)	294,989		(3,765		)	294,989
Mortgage-backed securities	—		—		(44,226		)	4,984,610		(44,226		)	4,984,610
GNMA Securities	—		—		(29,361		)	2,146,600		(29,361		)	2,146,600
	$	—	$	—	$	(89,052	)	$	9,618,153	$	(89,052	)	$	9,618,153

	Less than twelve months					Over twelve months					Total
	Unrealized			Estimated		Unrealized			Estimated		Unrealized			Estimated
	loss			fair value		loss			fair value		loss			fair value
December 31, 2009:
U.S. government and agency securities	$	(8,531	)	$	3,995,450	$	—		$	—	$	(8,531	)	$	3,995,450
States and political subdivisions	—			—		(5,416		)	290,678		(5,416		)	290,678
Mortgage-backed securities	(31,845		)	3,038,225		—			—		(31,845		)	3,038,225
GNMA Securities	—			—		(866		)	198,720		(866		)	198,720
	$	(40,376	)	$	7,033,675	$	(6,282	)	$	489,398	$	(46,658	)	$	7,523,073

As of March 31, 2010, the Company had 8 investment securities where the total estimated fair market value had decreased 0.69% from amortized cost.  Unrealized losses on the eight securities have not been recognized into income because the issuer bonds are of high credit quality (rated AAA), management does not intend to sell and it is not likely that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates.  The fair value is expected to recover as the bonds approach maturity.

Note 8 Fair Value 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.

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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 discussed in Note 6.  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 March 31, 2010 and December 31, 2009 are summarized as follows:

	March 31, 2010				December 31, 2009
	Carrying		Market		Carrying		Market
	value		value		value		value
Financial Assets:
Cash and cash equivalents	$	5,714,000	$	5,714,000	$	6,588,396	$	6,588,396
Fed Funds sold	8,700,000		8,700,000		2,500,000		2,500,000
Investment securities	39,729,000		39,729,000		40,989,899		40,989,899
Loans receivable, net (restated)	191,551,000		192,621,000		198,098,998		195,723,998
Cash surrender value of life insurance	5,438,000		5,438,000		5,390,410		5,390,410
Federal Reserve Bank and FHLB stock	1,643,000		1,643,000		1,643,400		1,643,400
Accrued interest receivable and other assets	5,250,000		5,250,000		6,060,528		6,060,528
Financial Liabilities:
Time deposits	$	92,461,000	$	92,682,000	$	89,782,887	$	90,088,000
Other deposits	152,829,000		146,187,000		148,939,637		145,844,637
Other borrowings	—		—		—		—
Long-term debt	5,988,000		5,988,000		6,154,932		6,154,932
Accrued interest and other liabilities	2,112,000		2,112,000		2,015,491		2,015,491

Note 9 Recently Issued Accounting Pronouncements:

In February 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.  The amendments remove the requirement for an SEC registrant to disclose the date through which subsequent events were evaluated as this requirement would have potentially conflicted with SEC reporting requirements.  Removal of the disclosure requirement is not expected to affect the nature or timing of subsequent events evaluations performed by the Company.  This ASU became effective upon issuance.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  ASU 2010-06 which added disclosure requirements about significant transfers into and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of the valuation techniques and inputs used to measure fair value was

14

required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  The adoption of these provisions of this ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.  See Note 6 and 7 to the Consolidated Financial Statements for the disclosures required by this ASU.

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted.  This provision of the ASU is effective for the Company’s reporting period ending March 31, 2011. As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.

Note 10  Stock Dividend:

On March 31, 2010, the Company declared a two percent (2%) stock dividend on the Company’s common stock to the shareholders on record as of that date and payable on April 23, 2010.  All per share data in the financial statements and footnotes have been adjusted to give retroactive effect of this dividend.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Santa Lucia Bancorp (the “Company”) (OTC Bulletin Board: SLBA) is a California corporation organized in 2006 to act as the holding company for Santa Lucia Bank (the “Bank”), a four office bank serving San Luis Obispo and northern Santa Barbara Counties.

The following is management’s discussion and analysis of the major factors that influenced our financial performance for the three months ended March 31, 2010.  This analysis should be read in conjunction with the Company’s 2009 Annual Report as filed on Form 10-K and with the unaudited financial statements and notes as set forth in this report.  Unless the context requires otherwise, the terms “Company,” “us,” “we,” and “our” refers to Santa Lucia Bancorp on a consolidated basis.

FORWARD LOOKING INFORMATION

Certain statements contained in this Quarterly Report on Form 10-Q (“Report”), including, without limitation, statements containing the words “estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,” “could,” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements relate to, among other things, our current expectations regarding future operating results, net interest margin, strength of the local economy, and allowance for credit losses.  Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following: general economic and business conditions in the areas in which the Company operated,  the ongoing financial crises and recession in the United States, California and foreign financial markets and the response of federal and state regulators and governments thereto,  the increase in nonperforming loans and the decrease in real estate values collateralizing many of the Company’s loans, demographic changes, competition, fluctuations in interest rates, changes in business strategy or developmental plans, changes in federal and state banking laws or regulations , worsening credit quality, availability of capital to fund company’s business and other factors discussed in Item 1A.  Risk Factors of the company’s 2009 Annual Report as filed on Form 10-K.  Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

This discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.

EXECUTIVE OVERVIEW

General

The highlights for the quarter ended March 31, 2010  were as follows  (please note that given the results of the fourth quarter of 2009, the Company has added certain comparative information for that period as well as for the first quarter of 2009 for a more complete comparison of the Company performance):

·For the first quarter of 2010, the Company reported a net loss applicable to common shareholders of $9.1 million or $4.57 per diluted common share.  This compares to a net loss applicable to common shareholders of $1,944,000 or $1.02 per diluted common share for the linked quarter ended December 31, 2009.  For the first quarter of 2009, the Company showed a net profit applicable to common shareholders of $231,000 or $0.10 per diluted common share.

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·Net (loss) for the three month period ending March 31, 2010 was primarily the result of the $8.7 million provision to the allowance for loan losses coupled with income tax expense of $807 thousand associated with an increase in the valuation allowance on deferred tax assets.

·After consultation with the FRB, the allowance for loan losses increased to $11.2 million or 5.52% of total loans as of March 31, 2010 compared to $3.4 million or 1.67% at December 31, 2009 and $2.1 million or 1.08% at the end of the first quarter of 2009. Non-performing loans increased to $20.2 million as of March 31, 2010 compared to $6.4 million at December 31, 2009 and $1.1 million for the first quarter ended 2009. Non-performing loans totaled 9.95% of total gross loans as of March 31, 2010, compared to 0.53% as of the same period in 2009 and 3.17% as of December 31, 2009. Net charge offs were $908,000 for the first quarter of 2010, $3,776,000 in the fourth quarter of 2009 and $418,000 in the first quarter of 2009, respectively.

·Net interest margin fell to 4.35% for the period, compared to 4.65% for the same period in 2009 and 4.49% for the quarter ended December 31, 2009, primarily due to drops in average loan and investments yields during the quarter of  32 basis points and 128 basis points, respectively, when compared with the year earlier quarter.

·Total shareholders’ equity decreased to $13,853,000 as of March 31, 2010 compared to $23,030,000 at December 31, 2009 and $25,294,000 for the same period in 2009.  The Company’s capital ratios at March 31, 2010, result in the Bank being considered “adequately capitalized” for regulatory purposes.  The capital ratios for March 31, 2010 were as follows: Tier 1 Capital to Average Assets 6.52%; Tier 1 Capital to Risk-Weighted Assets 8.36%; and Total Capital to Risk-Weighted Assets 9.71%.

·The Company declared a 2% stock dividend to all shareholders of record as of March 31, 2010 reflecting the Board’s 2009 decision to issue a stock dividend rather than a cash dividend during these difficult economic times.  This compares to a $0.25 per share cash dividend that was paid in the same period for 2009.

·Total loans net of unearned income increased slightly to $202,777,000 as of March 31, 2010 compared to $201,485,000 at December 31, 2009 and $197,323,000 as of March 31, 2009.

·Total deposits increased $6,567,000 or 2.8% from $238,723,000 at December 31, 2009 to $245,290,000 at March 31, 2010 compared to $220,551,000 at March 31, 2009.

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SELECTED FINANCIAL INFORMATION

	(in thousands, except share data and ratios)
	Unaudited
	Three Months Ended
	March 31,						%
	2010			2009			Change
Summary of Operations:
Interest Income	$	3,338		$	3,463		-3.61	%
Interest Expense	664			765			-13.20	%
Net Interest Income	2,674			2,698			-0.89	%
Provision for Loan Loss	8,748			240			3545.00	%
Net Interest Income After Provision for Loan Losses	(6,074		)	2,458			-347.11	%
Noninterest Income	213			323			-34.06	%
Noninterest Expense	2,420			2,431			-0.45	%
Income Before Income Taxes	(8,281		)	350			-2466.00	%
Income Taxes	807			119			578.15	%
Net Income	$	(9,088	)	$	231		-4034.20	%
Cash Dividends Paid	$	—		$	481		-100.00	%
Cash Dividends Paid Preferred Stock	$	50		$	31		61.29	%
Per Common Share Data:
Net Income - Basic	$	(4.57	)	$	0.10		-4670.00	%
Net Income - Diluted	$	(4.57	)	$	0.10		-4670.00	%
Dividends	$	—		$	0.250		-100.00	%
Book Value	$	4.89		$	11.07		-55.83	%
Common Outstanding Shares:	2,003,131			1,923,053			4.16	%
Statement of Financial Condition Summary:
Total Assets	$	267,243		$	260,039		2.77	%
Total Deposits	245,290			220,551			11.22	%
Total Net Loans	191,551			195,191			-1.86	%
Allowance for Loan Losses	11,226			2,132			426.55	%
Total Shareholders’ Equity	13,853			25,294			-45.23	%
Selected Ratios:
Return on Average Assets	-13.43		%	0.36		%	-3803.40	%
Return on Average Equity	-157.91		%	3.61		%	-4472.72	%
Net interest margin	4.35		%	4.65		%	-6.45	%
Average Loans as a Percentage of Average Deposits	84.58		%	91.17		%	-7.22	%
Allowance for Loan Losses to Total Loans	5.52		%	1.08		%	13.68	%
Tier I Capital to Average Assets - “Bank Only”	6.52		%	11.11		%	-41.31	%
Tier I Capital to Risk-Weighted Assets - “Bank Only”	8.36		%	13.07		%	-36.04	%
Total Capital to Risk-Weighted Assets - “Bank Only”	9.71		%	14.45		%	-32.80	%
Tier I Capital to Average Assets - “Bancorp”	6.94		%	11.76		%	-40.99	%
Tier I Capital to Risk-Weighted Assets - “Bancorp”	8.89		%	13.85		%	-35.81	%
Total Capital to Risk-Weighted Assets - “Bancorp”	10.24		%	15.23		%	-32.76	%

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KEY FACTORS IN EVALUATING FINANCIAL CONDITION AND OPREATING PERFORMANCE

As a publicly traded community bank holding company, we focus on several key factors including:

·Return to our shareholders

·Return on average assets

·Asset quality

·Asset growth

·Operating efficiency

Return to our shareholders.  Our return to our shareholders is measured in the form of return on average equity, or ROAE.  Our net income (loss) decreased to ($9.1) million for the quarter ended March 31, 2010 from $231 thousand for the same period in 2009.  The primary reason for the decrease in earnings and EPS was the additional allocation to the loan loss provision of $8.7 million.  Basic and diluted earnings per share for the quarter ended March 31, 2010 were ($4.57), and ($4.57), respectively, which compares to $0.10 and $0.10 for the quarter ended March 31, 2009.  As a result of the significant loss in 2010, ROAE for the quarter ending March 31, 2010, decreased to –157.91% compared to 3.61% for the same period in 2009.

Comparing information from the linked fourth quarter of 2009 to the first quarter of 2010 was as follows:  net loss applicable to common shareholders for the first quarter of 2010 was ($9.1) million or ($4.57) per diluted common share compared to a net loss for the fourth quarter of 2009 of ($1.9) million or ($1.02) per diluted common share.  The provision for loan losses in the first quarter of 2010 was $8.7 million compared to $3.9 million made during the fourth quarter of 2009.  Net interest income for the first quarter of 2010 was $ 2,674,000 compared to $2,640,000 for the fourth quarter of 2009.

Return on Average Assets.  Our return on average assets, or ROAA, is a measure we use to compare our performance with other bank’s and bank holding companies.  ROAA for the quarter ended March 31, 2010 was - -13.43% which declined significantly from 0.36% for the same period in 2009 primarily due to the additional allocation to the loan loss provision.  ROAA was -0.69% for the quarter ended December 31, 2009.

Asset Quality.  For all bank’s and bank holding companies, asset quality has a significant impact on overall financial condition and results of operations.  Asset quality is measured in terms of nonperforming loans and assets as a percentage of total assets and net charge-offs as a percentage of average loans.  These measures are key elements in estimating the future earnings of a company. There were 37 non-performing loans totaling $20.2 million as of March 31, 2010 compared to eight loans totaling $6.4 million at December 31, 2009 and $1.1 million at March 31, 2009.  Nonperforming loans as a percentage of total loans increased to 9.95% as of March 31, 2010, compared to 3.17% at December 31, 2009 and 0.53% as of March 31, 2009, due primarily to the decline in the current market values coupled with the decline in customer cash flows. Charged off loans for the three months ended March 31, 2010 was $960 thousand or 0.47% compared to $4.4 million or 2.17% at December 31, 2009 and $418 thousand or 0.21% at March 31, 2009.  The Company had two Other Real Estate Owned properties at March 31, 2010 totaling $1.1 million or 0.55%, $428 thousand or 0.31% at December 31, 2009 and $418 thousand or 0.23% at March 31, 2009. Allowance for loan losses increased to $11.2 million as of March 31, 2010 compared to $2.1 million at March 31, 2009 and $3.4 million as of December 31, 2009. The allowance as a percentage of total loans was 5.52% at March 31, 2010, 1.67% at December 31, 2009 and 1.08% at March 31, 2009, respectively. As explained in the Explanatory Note to the Form 10-Q/A, the Company increased the amount of loans previously identified as nonaccrual loans by approximately $10.7 million as of March 31, 2010, because these loans were either placed on nonaccrual or charged off subsequent to March 31, 2010.  During the quarter ended June 30, 2010, approximately $3.5 million in loan charge-offs were recognized, which reduced the level of the allowance and nonaccrual loans in that quarter.

Asset Growth.  Total assets at March 31, 2010, of $267.2 million decreased slightly from $269.9 million at December 31, 2009, and increased slightly from $260.0 million as of March 31, 2009.  Net loans decreased $6.6 million to $191.5 million at March 31, 2010 compared to $198.1 million at December 31, 2009, primarily as a result of the increase in the allowance for loan losses.  Total deposits increased to $245.3 million as of March 31, 2010 compared to $238.7 million as of December 31, 2009 and $220.6 million as of March 31, 2009. This increase of $24.7 million or 11.22% is primarily due to the increase in money market and time deposits over $100 thousand when comparing March 31, 2010 to March 31, 2009.

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Operating Efficiency.  Operating efficiency is the measure of how efficiently earnings, before taxes and provision for loan losses, are generated as a percentage of revenue; a lower ratio is more “efficient”.  Our efficiency ratio increased to 83.8% for the first three months of 2010 compared to 80.50% for the same period in 2009 and 81.8% at December 31, 2009.  This is due to a decrease in the bank’s net interest margin.  Net interest income before provision decreased 0.89% to $2.7 million for the three months ended March 31, 2010, while operating expenses decreased 0.45% or $11 thousand to $2.42 million for the quarter ended March 31, 2010 from $2.43 million for the year earlier quarter and $2.6 million for the quarter ended December 31, 2009.

Economic Conditions

The Company believes that the local economies, in which it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continue to decline as the loss of jobs increase, businesses cash flows continue to decline as well as the real estate market. Residential real estate prices have continued to decline and the vacancy rates in commercial properties have increased in our markets. Recent indications show the (not seasonally adjusted) unemployment rate within California as of March 31, 2010 of 13.0% compared to December 31, 2009 of 12.1% this is up 7.44%. Competition for deposits continues to be very strong both from traditional sources as well as alternative investments such as mutual funds, money market accounts and the stock market.  The Bank’s growth in the loan portfolio net of payoffs and charge offs reflects increased demand for commercial and real estate loans and a decrease in construction loans.

The following sections set forth a discussion of the significant operating changes, business trends, financial condition, earnings, capital position and liquidity that occurred, in the three months ended March 31, 2010 compared with the three months ended March 31, 2009.

RESULTS OF OPERATIONS

Net Income

Our net loss of ($9.1) million for the three months ended March 31, 2010, reflects a significant drop from the net income of $231 thousand in the like period of 2009. The decrease in earnings is largely attributable to the significant increase of approximately $8.5 million in the provision for loan losses for the three months ended March 31, 2010, and partially results from the increase in income tax expense of almost $700 thousand compared to the prior year.

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.

The following table presents for the periods indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest earnings assets, as well as interest expense and rates paid on average interest bearing liabilities.

20

AVERAGE BALANCE SHEET INFORMATION

	For the three months ending March 31,
	2010							2009
	Average					Yield/		Average					Yield/
	Balance			Interest		Rate		Balance			Interest		Rate
	(in thousands)
Assets:
Loans	$	202,387		$	3,023	5.97	%	$	193,981		$	3,050	6.29	%
Investment securities	39,437			314		3.18	%	37,046			413		4.46	%
Federal funds sold	4,223			1		0.09	%	966			—		0.00	%
Interest-earning deposits with other institutions	—			—		—		—			—		—
Total average interest-earning assets	246,047			3,338		5.43	%	231,993			3,463		5.97	%
Other assets	28,035							25,014
Less allowance for loan losses	(3,481		)					(2,281		)
Total average assets	$	270,601						$	254,726
Liabilities and Shareholders’ Equity:
Interest Bearing liabilities:
Deposits
Interest-bearing demand - NOW	$	14,097		$	11	0.31	%	$	13,137		$	10	0.30	%
Money Market	40,340			163		1.62	%	28,149			132		1.88	%
Savings	27,277			17		0.25	%	26,304			16		0.24	%
Time certificates of deposit	91,768			439		1.91	%	73,476			512		2.79	%
Total average interest-bearing deposits	173,482			630		1.45	%	141,066			670		1.90	%
Short-term borrowings	67			—		0.00	%	7,291			38		2.08	%
Long-term borrowings	6,140			34		2.21	%	6,807			57		3.35	%
Total interest-bearing liabilities	179,689			664		1.48	%	155,164			765		1.97	%
Demand deposits	65,797							71,706
Other liabilities	2,094							2,269
Shareholders’ equity	23,021							25,587
Total average liabilities and shareholders’ equity	$	270,601						$	254,726
Net interest income				$	2,674						$	2,698
Net interest margin						4.35	%						4.65	%

Net interest income decreased 0.89% for the quarter ended March 31, 2010 as compared to the same period in 2009, as decreasing yields on earning assets, and the slower effect of re-pricing higher cost of funds combined to decrease our net interest margin.  The yield on interest-earning assets decreased to 5.43% for the current quarter, as compared to 5.74% in the immediately preceding quarter and 5.97% a year ago.  The cost of total interest-bearing liabilities decreased to 1.48% for the current quarter, as compared to 1.82% in the immediately preceding quarter and 1.97% a year ago. Net interest margin for the three months ended March 31, 2010 was 4.35% compared to 4.65% for the three months ended March 31, 2009, primarily due to drops in average loan and investment yields during the quarter of 32 basis points and 119 basis points, respectively when compared with the year earlier period.   This represents a decrease of 30 basis points or 6.45%.

The table below indicates an increase in the fed fund portfolio from 0.42% of average earning assets as of March 31, 2009 to 1.72% as of March 31, 2010.  The table also indicates a decrease in the loan portfolio from 83.62% of average earning assets at March 31, 2009 to 82.26% at March 31, 2009 and 82.55% at December 31, 2009 and an increase in the investment portfolio from 15.96% to 16.02% when comparing March 31, 2009 to March 31, 2010.

21

	(dollars in thousands)
			Percent of				Percent of
	March		Earning		March		Earning
	2010		Assets		2009		Assets
Federal Funds Sold	4,223		1.72	%	966		0.42	%
Loans	$	202,387	82.26	%	$	193,981	83.62	%
Investments	39,437		16.02	%	37,046		15.96	%
Total Average Earning Assets	$	246,047	100.00	%	$	231,993	100.00	%

For the three months ended March 31, 2010, the average prime rate was 3.25%, the average Fed Fund rate was .09%, and the yield on the investment portfolio averaged 3.18%.  During the three months ended March 31, 2009 the average prime rate was 3.25%, the average Fed Fund rate was 0.10%, and the Bank’s investment portfolio posted an average yield of 4.46%.

Deposit interest expense for the three months ended March 31, 2010 totaled $630 thousand, which reflects a decrease of $43 thousand compared to the three months ended December 31, 2009 and $40 thousand or 5.97% over the like period in 2009.  The decrease in deposit interest expense was due to the declining interest rates despite the fact that there was an increase in interest bearing deposits.  The schedule shown below indicates that average interest bearing savings and time deposits increased $19.2 million or 19.31% from March of 2009 to March of 2010.  During the same period, average non interest bearing deposits decreased $5.9 million or 8.24%.

	(dollars in thousands)
	March		March		Dollar			Percent
	2010		2009		Variance			Variance
Average noninterest bearing deposits	65,797		71,706		$	(5,909	)	-8.24	%
Average interest bearing demand deposits	54,437		41,286		13,151			31.85	%
Average interest bearing savings and time	119,045		99,780		19,265			19.31	%
Total Deposits	$	239,279	$	212,772	$	26,507		12.46	%

The average deposit cost of funds for the three months ended March 31, 2010 decreased 45 basis points from 1.90% in March of 2009 to 1.45% in March of 2010.  The Company anticipates a continued decrease in its deposit cost of funds during the balance of this year as higher cost fixed rate deposits mature and re-price at market rates.

Noninterest Income

Noninterest income for the three months ended March 31, 2010 was $213 thousand compared to $323 thousand for the same period in 2009.  That represents a decrease of $110 thousand or 34.06%, which is primarily due to the gain on sale of securities realized in 2009 of $92 thousand compared to zero in first quarter of 2010.

Service charges on deposit accounts for the three months ended March 31, 2010 totaled $120 thousand, which represents a decrease of $1 thousand or 0.83% compared to $121 thousand in the same period of 2009.

Other noninterest income for the three months ended March 31, 2010 was $93 thousand compared to $110 thousand for a decrease of $17,000 or 15.45% compared to the same period of 2009, primarily due the reduction in mortgage referral fees collected.

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Noninterest Expenses

Salary and employee benefits for the three months ended March 31, 2010 and March 31, 2009 totaled $1.38 million.

Occupancy expense for the three months ended March 31, 2010 totaled $158 thousand, which reflects a decrease of $9 thousand or 5.39% compared to $167 thousand over the same period in 2009. This was primarily due to the reduction maintenance on buildings.

Equipment expense for the three months ended March 31, 2010 totaled $144 thousand, which reflects a decrease of $21 thousand or 12.73% compared to $165 thousand over the same period in 2009. This was primarily due to fully depreciated equipment.

Professional services for the three months ended March 31, 2010 totaled $137 thousand, which reflects a decrease of $16 thousand or 10.46% compared to $153 thousand over the same period in 2009. This is primarily due to the reduction of legal fees.

Data processing expense for the three months ended March 31, 2010 totaled $119 thousand which reflects a decrease of $13 thousand or 9.85% compared to $132 thousand from the same period in 2009. This is primarily due to the extension of our data processing service contract rate.

Office related expense for the three months ended March 31, 2010 totaled $104 thousand, which reflects an increase of $2 thousand or 1.96% compared to $102 thousand over the same period in 2009.  This was primarily due to an increase in stationery and supplies.

Marketing related expense for the three months ended March 31, 2010 totaled $81 thousand which reflects a decrease of $20 thousand 19.80% compared to $101 thousand over the same period in 2009.  The decrease is primarily due to the reduction in advertising expense.

Regulatory assessment fees for the period ending March 31, 2010 were $111 thousand, which reflects an increase of $66 thousand or 146.67% compared to $45 thousand over the same period in 2009. This was primarily due to the increase in the Federal Deposit Insurance special assessment fees assessed on all banks, the increase in regular assessment fees and the company’s participation in the TLGP Transaction Account Guarantee Program.

Director expense for the three months ended March 31, 2010 totaled $89 thousand, which reflects an increase of $1 thousand or 1.14% over the like period in 2009.

Other expense for the three months ended March 31, 2010 totaled $97 thousand which reflects a decrease of $1 thousand or 1.02% over the same period in 2009

Income Taxes

As a result of the increase in the Bank’s reported losses, we have increased the valuation allowance on deferred tax assets to 100% of the related deferred tax asset because the benefit of such assets is dependent on future taxable income.  As discussed in the “EXPLANATORY NOTE” above, the effect of this increase to the valuation allowance was retroactively restated to the quarter ended March 31, 2010.  As a result, income tax expense for the quarter ending March 31, 2010, was $807,000 despite the pre-tax losses reported.  As the Company implements plans to return to profitability, future operating earnings, if any, would benefit from significant net operating loss carryforwards.

Loan Related Data

As discussed in the Explanatory Note to this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the quarter ending March 31, 2010.  These adjustments to restate March results affected the loan portfolio primarily because of the significant increase in the allowance for loan losses and the identification of a number of additional loans as nonaccrual loans, which was necessary because these loans were either placed on nonaccrual or charged off subsequent to March 31, 2010.  Further discussion of the loan portfolio, the allowance for loan losses and nonaccrual loans considers these adjustments to March results, as restated.

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While the Bank has continued to experience demand for new loans, certain existing loans have been adversely affected by the decline in the local economy.  The impact of the economy has been especially difficult for our borrowers with real estate secured loans, which constituted 77.4% of total loans at March 31, 2010.  Of this number, 58% were commercial real estate loans.  This compares to 78.5% and 79.2% for loans secured by real estate as of December 31, 2009 and March 31, 2009, respectively.  Commercial real estate loans comprised 45.0% and 56.2% of real estate secured loans as of those periods, respectively.

In general, collateral values have declined as real estate values have fallen in our markets throughout the periods covered by this Report and several borrowers, including some with long borrowing histories and relationships with the Bank have experienced difficulty in meeting contractual payments obligations.  This has resulted in write downs of certain loans as underlying collateral values have deteriorated as well as the restructuring of other loans as borrowers experience reductions in cash flow available to service their debt.  Other loans have become non-performing and the Bank is pursuing various legal remedies including foreclosure.

The Bank had 37 non-performing loans totaling $20.2 million as of March 31, 2010 (9.95% of total gross loans) compared to eight non performing loans totaling $6.4 million at December 31, 2009 (3.2% of total net loans) and three non-performing loans totaling $1.1 million as of March 31, 2009 (0.5% of total net loans).  The increase in non-performing loans as of March 31, 2010 was a result of the current economic downturn and a continued reduction in real estate collateral values.  For loans that were considered to be impaired, the Bank determined the fair value of the real estate collateral and charged off the portions of such loans considered uncollectible based on these analyses.

The Bank experienced net charge-offs of $908,000 in the first quarter of 2010, $3,776,000 in the fourth quarter of 2009 and $418,000 for the first quarter of 2009. As explained in the Explanatory Note to this Form 10-Q/A, additional loans have been identified as nonaccrual at March 31, 2010, because they were charged-off subsequent to March 31; during the quarter ended June 30, 2010, loan charge-offs totaled approximately $3.5 million.

On a comparative basis, problem loan and loan related data are detailed in the following tables:

	March			December			March
	2010			2009			2009
	Restated
Charge offs	$	960		$	4,386		$	418
Recoveries	52			2			—
OREO	1,122			428			464
Nonaccrual Loans	20,245			6,407			1,058
Accruing loans over 90 days past due	—			—			—
Allowance for Loan Loss	11,226			3,386			2,132
Period-end Gross Loans	203,496			202,168			197,996
	March			December			March
	2010			2009			2009
Ratio comparison to Period-end Gross Loans to
Charge offs	0.47		%	2.17		%	0.21		%
Recoveries	0.03		%	0.00		%	0.00		%
OREO	0.55		%	0.21		%	0.23		%
Nonaccrual Loans	9.95		%	3.17		%	0.53		%
Accruing loans over 90 days past due	0.00		%	0.00		%	0.00		%
Allowance for Loan Loss	5.52		%	1.67		%	1.08		%

The Bank’s credit portfolio continues to be reviewed by our outside loan review firm on a monthly basis as well as the regular and enhanced review and ongoing evaluation of the loan portfolio by the Bank’s lending staff. It is management’s belief that although the additional controls are in place, there is no assurance with the current economic conditions, loss of jobs and declining market values on real estate that other existing long term lending relationships may decline causing the Company to charge off and write down loans to fair value and place additional loans on nonaccrual status.  Additionally, more current information about the Bank’s loan portfolio and the related allowance for loan losses may be found in the Form 10-Q and related Form 10-Q/A filed on August 30, 2010, for the periods ended June 30, 2010.

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Allowance for Loan Losses

As discussed in the Explanatory Note to this Form 10-Q/A, certain adjustments have been made to restate previously reported results for the quarter ending March 31, 2010.  The adjustments to restate March results affected the disclosures about the allowance for loan losses and nonaccrual loans because:

·based on consultation with the Federal Reserve Bank in connection with a recently concluded examination, among other things, to enhance the Bank’s process for determining, documenting and recording an adequate allowance for loan losses (the “ALLL”) and provide more directional consistency relative to underlying trends in the portfolio (e.g. trends in nonaccrual loans, trends in loan losses, trends in past due loans, and trends in classified and other problem loans), the Bank has reviewed its methodology for calculating the ALLL and, working closely with the Bank’s regulators, determined that the revised, methodology that is still subject to further analysis, should be adopted and reflected in the quarterly results for March 31, 2010, and

·as a result of the determination to restate the March results, in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 855, “ Subsequent Events ,” the Bank reassessed its evaluation of potential impairment losses required by ASC Topic 310, “ Receivables, ” the Company evaluated current information available about problem loans, including new information about the valuation of the underlying loan collateral or information about the financial condition of borrowers, and determined that increases expected to be made to the ALLL in June should be included in this restatement of quarterly results for March 31, 2010.

Further discussion of the Company’s ALLL and nonaccrual loans, below, considers these adjustments to March results, as restated.

The Bank made a $8.7 million addition to its ALLL during the three month period ending March 31, 2010 compared to $240 thousand in the first quarter 2009. The provision for the quarter ended December 31, 2009 was $3.9 million.  The ALLL at March 31, 2010, was 5.52% of total loans, compared to 1.67% at December 31, 2009 and 1.08% at March 31, 2009. The significant increase in the level of the ALLL to total loans in March 2010 is partially the result of  enhancements to the ALLL methodology and partially to account for the loan charge-offs that were taken in the quarter ended June 2010, which totaled approximately $3.5 million, and reduced the ALLL in the second quarter.

The Bank evaluates the ALLL based upon an individual analysis of specific categories of loans, specific categories of classified loans and individual classified assets.  The adequacy of the ALLL 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.  Based on the analysis performed by the Bank and its outside loan review firm, both believe that the allowance for loan loss at March 31, 2010 is adequate.

The ALLL represents management’s best estimate of losses inherent in the existing loan portfolio.  The ALLL 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 qualitative factors: changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups; the level of classified and nonperforming loans and the results of regulatory examinations.  Consideration is also given to the possible effects of changes in lending policies and procedures; the experience and depth of lending management and staff; concentrations, and changes in underlying collateral values.  For loans not considered to be impaired, management uses historical loss experience coupled with the previously mentioned qualitative factors to determined estimated reserves.

Impaired loans are analyzed on a loan by loan basis due to the unique characteristics of each loan.  Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments 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 contractual interest rate set in the loan agreement.  Collateral-dependent loans are measured for impairment based on the fair value of the collateral.  A loan is considered collateral dependent if the repayment of the loan is expected to be provided solely by the underlying

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collateral.  The fair value of the underlying collateral is generally determined by utilizing an appraisal of the collateral discounted for estimated costs to sell.

Nonaccrual Loans

The Bank had 37 nonaccrual loans totaling $20.2 million as of March 31, 2010, compared to three nonaccrual loans totaling $1.0 million at March 31, 2009.  20 of these are commercial loans to 10 borrowers totaling $5.1 million, with four of the loans supported by government guarantees from either Cal Coastal or SBA reducing the Bank’s exposure to $4.2million.  These loans were written down an aggregate of $280 thousand prior to quarter end.  These loans are secured predominately with business assets and/or real estate.  The Bank is working with the borrowers where possible and has obtained legal counsel where necessary to maximize repayment.

Nonperforming real estate secured loans consists of 17 loans totaling $15.2 million, which were written down a total of $617 thousand prior to quarter end.  There are 6 loans within this category totaling $2.6 million secured by 1-4 family residences.  The first is for an individual’s personal residence.  The Bank is working with legal counsel and is proceeding through the foreclosure process.  The second loan is a home equity line of credit with payments being made as agreed.  Three of the loans have been restructured with the borrowers meeting the revised payment requirement.  The Bank is working with legal counsel on the remaining loan to determine the appropriate legal action.  Five commercial income properties are included within this category totaling $2.6 million.  The Bank accepted a deed in lieu of foreclosure on one of the properties and subsequently transferred it to Other Real Estate Owned at its fair market value.  The second commercial property is making payments on a restructured basis.   The Bank has initiated foreclosure proceedings on another commercial property in this category. There are 6 loans secured by land totaling $10 million.  An offsite development loan for a mixed use property was placed on nonaccrual as of December 31, 2009.  The Bank continues to work with the borrowers to move this project forward.  The Bank placed a mixed use property loan on nonaccrual as of March 31, 2010.  The borrowers continue to make payments in accordance with the loan agreement.  There are two residential land loans that are currently listed for sale.  There is one land loan secured by commercial property that is currently being analyzed for extension.  The final property in this category for an offsite development project is one the Bank has a participation interest in with the property being located outside the Bank’s service area.  A portion of the Bank’s collateral totaling $694 thousand was transferred to OREO during the quarter.  The originating Bank is working to obtain a release from the bankruptcy court so that foreclosure can be completed on the remaining collateral properties as well as pursuing legal action for collection from both the borrower and guarantors.

OREO

At March 31, 2010 the company had two Other Real Estate Owned properties totaling $1.1 million compared to one property at December 31, 2009 totaling $428 thousand and $667 thousand as of March 31, 2009.  The first property is a single family residence totaling $428 thousand that is actively being marketed for sale at this time with no loss anticipated.  The second relates to land and has been subsequently written down in the second quarter of 2010 by $203 thousand to $491 thousand.

Other Borrowings

On March 31, 2010 the Company had no borrowings with Federal Home Loan Bank or its correspondent banks.

Trust Preferred Securities

On April 28, 2006, the Company issued $5,155,000 in Trust Preferred securities.  The issue was priced at 1.48% over the quarterly adjustable 3-month LIBOR.  The issue was written for a term of 30-years, with an option to redeem in whole or part at par anytime after the fifth year.  The Company contributed $3,000,000 to the Bank.  The Company paid $22 thousand in interest expense during the three month period ending March 31, 2010.

On August 31, 2010, the Company elected to defer interest payments on the trust preferred securities in accordance with and allowable under the indenture agreement and does not anticipate resuming those interest payments in the near term.  The indenture agreement allows the Company to continue to elect deferment for up to 20 calendar quarters without being in default.  During this deferral period, the indenture agreement prohibits us from paying dividends on our common and preferred stock.  The Company elected this deferral period in order to provide us more flexibility as we strategize to improve the operations and capital position of the Company; however, the election to defer payments on our trust

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preferred securities could adversely affect our business operations, financial condition, results of operations and prospects.

Subordinated Debt

During the Third Quarter of 2003, the Bank completed a private placement of subordinated debentures (“notes”) to augment its Tier II 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 Bank’s directors and senior officers.

The $2.0 million in notes have a floating rate of interest, which is reset quarterly, equal to the prime rate published in the western edition of the Wall Street Journal plus 1.5%.  The initial rate for the notes was 5.5%.  The current balance and rate as of March 31, 2010, is $833 thousand at 4.75%.  Quarterly principal payments of $166,678 began in the third quarter of 2008 and will continue over the next two years. The notes mature in June 2011.

Capital

Total shareholders’ equity at March 31, 2010 totaled $13.9 million compared to $23.0 million at December 31, 2009. The decrease is due primarily the net loss reported of $9.1 million. as well as the effects from the payment of the preferred stock dividend.  The preferred stock dividend is paid directly from capital, not from expenses; therefore, preferred stock dividends reduce capital directly and reduce EPS on common stock.

As part of the United States Treasury’s Capital Purchase Program, the Company entered into a Purchase Agreement on December 19, 2008 with the United States Department of Treasury, where the Company agreed to issue and sell 4,000 shares of the Company’s Series A Preferred Stock and a warrant to purchase 38,869 shares of the Company’s Common Stock for an aggregate purchase price of $4,000,000 in cash.  The Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price equal to $15.436 (adjusted for the 2.0% stock dividend declared on March 17, 2010) per share of the Common Stock.  In addition to the Company’s election to defer interest payments on its Trust Preferred Securities (see above), the Company intends to stop declaring and paying dividends on its Preferred Stock; however, dividends will continue to cumulate pursuant to the terms of the Purchase Agreement.

The primary source of our funds from which the Company services its debt and pays its obligations and dividends is existing working capital and the receipt of dividends from the Bank.   Based on the financial condition of the Company and the Bank, various statutes and regulations may limit the ability of the Company to pay dividends on its preferred stock or other equity securities and may limit the availability of dividends to the Company from the Bank.  These limitations may adversely affect our business operations, financial condition, results of operations and prospects.  If the Company fails to pay dividends on Series A Preferred Stock for a total of six quarters, whether or not consecutive, the U.S. Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu  with the Series A Preferred Stock. These directors would serve on the Company’s Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

Regulatory capital adequacy requirements state that the Bank must maintain minimum ratios to be categorized as “well capitalized” or “adequately capitalized.”  The Company is not subject to similar regulatory capital requirements because its consolidated assets do not exceed $500 million, the minimum asset size criteria for bank holding companies subject to those requirements. The Bank’s actual capital ratios and the required ratios for a “well capitalized” and “adequately capitalized” bank are as follows:

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	Regulatory Minimum Ratio		“Well Capitalized” Minimum Ratio		March 2010		December 2009
Tier I Capital to Average Assets - “Bank Only”	4.0	%	5.0	%	6.5	%	9.7	%
Tier I Capital to Risk-Weighted Assets - “Bank Only”	4.0	%	6.0	%	8.4	%	11.9	%
Total Capital to Risk-Weighted Assets - “Bank Only”	8.0	%	10.0	%	9.7	%	13.2	%
Tier I Capital to Average Assets - “Bancorp”	4.0	%	5.0	%	6.9	%	10.3	%
Tier I Capital to Risk-Weighted Assets - “Bancorp”	4.0	%	6.0	%	8.9	%	12.5	%
Total Capital to Risk-Weighted Assets - “Bancorp”	8.0	%	10.0	%	10.2	%	13.9	%

At March 31, 2010, the Bank is considered “adequately capitalized”, because one ratio does not meet the test for “well capitalized”. The other two ratios meet the minimum required to be considered “well capitalized.” The Bank is considering alternatives to enhance its capital ratios to the “well capitalized” level, including strategies to reduce total assets, initiatives to improve core operating earnings, and strategies to raise capital.

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our ALCO Committee and Board of Directors.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet instruments.

Our primary sources of liquidity are derived from financing activities that include the acceptance of customer deposits, federal fund purchase lines and a Federal Home Loan Bank advance line.  The Bank currently has two credit lines with FHLB totaling $43.6 million.  The Bank’s current Liquidity policy is to maintain a liquidity ratio of not less than 20.0% based on regulatory formula. As of March 31, 2010 the Bank had a liquidity ratio of 22.5% compared to 19.0% at March 31, 2009 and 20.9% at December 31, 2009.

Interest Rate Sensitivity

The Bank closely follows the maturities and re-pricing opportunities of both assets and liabilities to reduce gaps in interest spreads.  An analysis is performed quarterly to determine the various interest sensitivity gaps, the economic value of equity and earnings at risk.  The reports indicate that the Bank is asset sensitive, meaning that when interest rates change, assets (loans) will re-price faster than short-term liabilities (deposits).  With a decrease in the prime lending rate loans re-price faster than the deposits.

The asset liability management reports as of March 31, 2010 indicate that the Bank has an actual dollar risk exposure of $136,000 if interest rates fall 100 basis points.  This represents a 1.2% risk to interest income.

Interest Income and Expense Under Rate Shock

	-200bp			-100bp			0bp			+100bp			+200bp
Net Interest Income
Earnings at Risk	$	(34	)	$	109		$	0		$	35		$	199
Percent of Risk	(0.3		)%	1.0		%	0.0		%	0.3		%	1.8		%

Assumptions are inherently uncertain and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income.  Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategy.

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Critical Accounting Policies

This discussion should be read in conjunction with the unaudited consolidated financial statements of the Company, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited financial statements, including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Bank’s Form 10-K for the year ended December 31, 2009.

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 values 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.

Deferred Compensation Liabilities

Management estimates the life expectancy of the participants and the accrual methods used to accrue compensation expense.  If individuals or their beneficiaries outlive their assumed expectancies the amounts accrued for the payment of their benefits will be inadequate and additional charges to income will be required.

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ITEM 3 QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. Management uses various asset/liability strategies to manage the re-pricing characteristics of the Company’s earning assets and funding liabilities to ensure that exposure to interest rate fluctuations is within its guidelines of acceptable risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of the Company’s securities are used to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.

Interest rate risk is addressed by our Asset Liability Management Committee (“ALCO”) which is comprised of senior management officers of the bank. The ALCO monitors interest rate risk by analyzing the potential impact on the net equity value and net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s balance sheet in part to maintain, within acceptable ranges, the potential impact on net equity value and net interest income despite fluctuations in market interest rates.

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

ITEM 4T CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, including the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report.  Based upon, and as of the date of that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the disclosures controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There was no change in the Company’s internal controls over financial reporting during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Based on the need to revise the unaudited consolidated financial statements for the quarter ended March 31, 2010, as explained in this Form 10-Q/A, management and the audit committee have taken steps to evaluate internal controls and have concluded their design is adequate.

In designing and evaluating disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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PART II  — OTHER INFORMATION

ITEM 1.  Legal Proceedings.

The Company is involved in various legal proceedings occurring in the ordinary course of business which, in aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

ITEM 1A.  Risk Factors.

We Are Subject to Various Regulatory Requirements and Expect to Be Subject to Future Regulatory Restrictions and Enforcement Actions

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we are subject to increased regulatory scrutiny, and expect to become subject to potential enforcement actions. Such enforcement actions could place limitations on our business and adversely affect our ability to implement our business plans, including our growth strategy. Even though the Bank is adequately capitalized, the regulatory agencies have the authority to place certain restrictions on our operations for example, if the regulatory agencies were to impose such a restriction, we would likely have limitations on our lending activities. The regulatory agencies also have the power to limit the rates paid by the Bank to attract retail deposits in its local markets. We also may be required to reduce our levels of non-performing assets within specified time frames. These time frames might not necessarily result in maximizing the price that might otherwise be received for the underlying properties. In addition, if such restrictions were also imposed upon other institutions that operate in the Bank’s markets, multiple institutions disposing of properties at the same time could further diminish the potential proceeds received from the sale of these properties. If any of these or other additional restrictions are placed on us, it may limit the opportunities and strategies we may deploy to improve our operations.

In this regard, the FRB recently completed its regularly scheduled examination of the Bank. Based on discussions with the FRB following the examination, we presently expect to receive a formal agreement or enforcement order from the FRB requiring us to take certain steps to further strengthen the Bank, such as reducing the level of classified assets, increasing capital levels, and addressing other criticisms from the examination. We already are developing strategies and taking actions to address such issues.

Our Level of Classified Assets Expose Us to Increased Lending Risk. Further, if Our Allowance for Loan Losses is Insufficient to Absorb Losses in Our Loan Portfolio, Our Earnings Could Decrease

At June 30, 2010, loans that we have categorized as doubtful, substandard or special mention totaled $39.0 million, representing 19.3% of total loans. If these loans do not perform according to their terms and the collateral is insufficient to pay any remaining loan balance, we may experience loan losses, which could have a material effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. At June 30, 2010, our allowance for loan losses totaled $7.7 million, which represented 3.8%% of total loans and 43.4% of non-performing loans. We believe that our allowance for loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and their probability of making payment, as well as the value of real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, significant factors we consider include loss experience in particular segments of the portfolio, trends and absolute levels of classified loans, trends and absolute levels in delinquent loans, trends in risk ratings, trends in industry charge-offs by particular segments and changes in existing general economic and business conditions affecting our lending areas and the national economy. If our assumptions are incorrect, our allowance for loan losses may be insufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance could materially decrease our net income. Our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

31

ITEM 2.  Unregistered Sale of Equity Securities and Use of Proceeds.

None.

ITEM 3.  Defaults Upon Senior Securities.

Not applicable.

ITEM 4.  (Removed and Reserved)

ITEM 5.  Other Information

Not applicable.

ITEM 6.  Exhibits

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SANTA LUCIA BANCORP

Date: September 13, 2010
	/s/ John C. Hansen
	John C. Hansen
	President and Chief Executive Officer (Principal Executive Officer)

Date: September 13, 2010
	/s/ Margaret A. Torres
	Margaret A. Torres
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

32

EXHIBIT INDEX

Exhibit
Sequential
Number	Description
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, John C. Hansen, Principal Executive Officer, certify that:

1.I have reviewed this quarterly report on Form 10-Q/A  of Santa Lucia Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)  and 15d-15 (f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls which over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	September 13, 2010
		/s/ John C. Hansen
		John C. Hansen
		President and Chief Executive Officer
		Principal Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Margaret A. Torres, Principal Financial Officer, certify that:

1.     I have reviewed this quarterly report on Form 10-Q/A of Santa Lucia Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)  and 15d-15 (f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b). Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance  regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and audit committee of the registrant’s board of directors (or persons performing the equivalent function);

a) all significant deficiencies and material weaknesses in the design or operation of internal controls which over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:	September 13, 2010
		/s/ Margaret A. Torres
		Margaret A. Torres
		Executive Vice President and Chief Financial Officer
		Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies pursuant to 18 U.S.C. Section 1350 in his capacity of President and Principal Executive Officer of Santa Lucia Bancorp (the “Company”) that, to my knowledge, (a) the Quarterly Report of the Company on Form 10-Q/A for the period ended March 31, 2010 fully complies with the requirements of Section 13(a) and 15(a) of the Securities Exchange Act of 1934 and (b) that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Date:	September 13, 2009
		/s/ John C. Hansen
		John C. Hansen
		President and Executive Officer
		Principal Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Santa Lucia Bancorp, and will be retained by Santa Lucia Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies pursuant to 18 U.S.C. Section 1350 in his capacity of Executive Vice President and Principal Financial Officer of Santa Lucia Bancorp (the “Company”) that, to my knowledge, (a) the Quarterly Report of the Company on Form 10-Q/A for the period ended March 31, 2010 fully complies with the requirements of Section 13(a) and 15(a) of the Securities Exchange Act of 1934 and (b) that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Date:	September 13, 2010
		/s/ Margaret A. Torres
		Margaret A. Torres
		Executive Vice President and Chief Financial Officer
		Principal Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Santa Lucia Bancorp, and will be retained by Santa Lucia Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.