10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission File Number: 000-52165

SAN JOAQUIN BANCORP
(Exact name of registrant as specified in its charter)

CALIFORNIA (State or other jurisdiction of incorporation or organization)	20-5002515 (I.R.S. Employer Identification No.)
1000 Truxtun Avenue, Bakersfield, California	93301
(Address of principal executive offices)	(Zip Code)

(661) 281-0360
(Registrant’s telephone number, including area code)

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 þ No ¨

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

Large accelerated filer ¨     Accelerated filer  þ     Non-accelerated filer ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

No par value Common Stock: 3,525,522 shares outstanding at April 27, 2007

SAN JOAQUIN BANCORP
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
INDEX
		PAGE
PART I	FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Balance Sheets
	March 31, 2007 and December 31, 2006	1
	Consolidated Statements of Income
	Three month periods ended March 31, 2007 and 2006	2
	Consolidated Statements of Cash Flows
	Three month periods ended March 31, 2007 and 2006	3
	Notes to Unaudited Consolidated Financial Statements	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	8
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.	CONTROLS AND PROCEDURES	24
PART II	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	26
ITEM 1A.	RISK FACTORS	26
ITEM 2.	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	26
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	26
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	26
ITEM 5.	OTHER INFORMATION	26
ITEM 6.	EXHIBITS	26

This quarterly report on Form 10-Q contains forward-looking statements about the Company for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our financial condition and results of operation or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may."

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors -- many of which are beyond our control or ability to predict-- could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors include, but are not limited to, certain credit, market, operational and liquidity risks associated with our business and operations, changes in business and economic conditions in California and nationally, changes in the interest rate environment, potential acts of terrorism and actions taken in response, volatility of rate sensitive deposits and assets, value of real estate collateral securing many of our loans, accounting estimates and judgments, compliance costs associated with the Company’s internal control structur e and procedures for financial reporting, changes in the securities markets, and inflationary factors. These risk factors are not exhaustive and additional factors that could have an adverse effect on our business and financial performance are set forth under “Risk Factors” and elsewhere in this quarterly report and in our most recent Annual Report on Form 10-K.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made. In addition, past operating results are not necessarily indicative of the results to be expected for future periods.

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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAN JOAQUIN BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
	March 31, 2007		December 31, 2006
ASSETS
Cash and due from banks	$ 31,772,000		$ 31,869,000
Interest-bearing deposits in banks		884,000	1,660,000
Federal funds sold		20,900,000	4,250,000
Total cash and cash equivalents		53,556,000	37,779,000
Investment securities:
Held-to-maturity (market value of $124,958,000 and
$138,315,000 at March 31, 2007 and December 31, 2006, respectively)		126,828,000	140,822,000
Available-for-sale		7,068,000	7,072,000
Total Investment Securities		133,896,000	147,894,000
Loans, net of unearned income		546,662,000	536,408,000
Allowance for loan losses		(8,602,000)	(8,409,000)
Net Loans		538,060,000	527,999,000
Premises and equipment		7,542,000	7,622,000
Investment in real estate		626,000	643,000
Interest receivable and other assets		26,929,000	26,993,000
TOTAL ASSETS	$ 760,609,000		$ 748,930,000
LIABILITIES
Deposits:
Noninterest-bearing	$ 176,323,000		$ 189,792,000
Interest-bearing		507,180,000	452,862,000
Total Deposits		683,503,000	642,654,000
Short-term borrowings		-	32,200,000
Long-term debt and other borrowings		17,095,000	17,098,000
Accrued interest payable and other liabilities		12,406,000	11,112,000
Total Liabilities		713,004,000	703,064,000
SHAREHOLDERS' EQUITY
Common stock, no par value - 20,000,000 shares authorized;
3,525,522 and 3,486,222 issued and outstanding
at March 31, 2007 and December 31, 2006, respectively		10,726,000	10,368,000
Additional paid-in capital		202,000	145,000
Retained earnings		38,249,000	36,986,000
Accumulated other comprehensive income (loss)		(1,572,000)	(1,633,000)
Total Shareholders' Equity		47,605,000	45,866,000
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 760,609,000		$ 748,930,000
See Notes to Unaudited Consolidated Financial Statements

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SAN JOAQUIN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
	Three Months Ended March 31
	2007	2006
INTEREST INCOME
Loans (including fees)	$ 11,414,000	$ 8,537,000
Investment securities	1,515,000	1,622,000
Fed funds & other interest-bearing balances	68,000	277,000
Total Interest Income	12,997,000	10,436,000
INTEREST EXPENSE
Deposits	5,358,000	3,321,000
Short-term borrowings	90,000	2,000
Long-term borrowings	304,000	114,000
Total Interest Expense	5,752,000	3,437,000
Net Interest Income	7,245,000	6,999,000
Provision for loan losses	225,000	230,000
Net Interest Income After Loan Loss Provision	7,020,000	6,769,000
NONINTEREST INCOME
Service charges & fees on deposits	210,000	196,000
Other customer service fees	279,000	292,000
Other	251,000	168,000
Total Noninterest Income	740,000	656,000
NONINTEREST EXPENSE
Salaries and employee benefits	2,367,000	2,277,000
Occupancy	243,000	216,000
Furniture & equipment	239,000	246,000
Promotional	150,000	158,000
Professional	389,000	239,000
Other	463,000	467,000
Total Noninterest Expense	3,851,000	3,603,000
Income Before Taxes	3,909,000	3,822,000
Income Taxes	1,694,000	1,616,000
NET INCOME	$ 2,215,000	$ 2,206,000
Basic Earnings per Share	$ 0.63	$ 0.64
Diluted Earnings per Share	$ 0.59	$ 0.60
See Notes to Unaudited Consolidated Financial Statements

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SAN JOAQUIN BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
	Three Months Ended March 31
	2007	2006
Cash Flows From Operating Activities:
Net Income	$ 2,215,000	$ 2,206,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for possible loan losses	225,000	230,000
Depreciation and amortization	216,000	213,000
Stock-based compensation expense	57,000	26,000
Tax benefit from stock-based compensation	(8,000)	(5,000)
Net Gain on sale of assets	(6,000)	(4,000)
Deferred income taxes	(183,000)	(121,000)
Amortization of investment securities' premiums
and discounts	(1,000)	3,000
Increase in interest receivable and other assets	696,000	147,000
Increase in accrued interest payable and other liabilities	1,294,000	1,269,000
Total adjustments	2,290,000	1,758,000
Net Cash Provided by Operating Activities	4,505,000	3,964,000
Cash Flows From Investing Activities:
Proceeds from maturing and called investment securities	13,999,000	25,096,000
Purchases of investment securities	-	(10,900,000)
Net increase in loans made to customers	(10,675,000)	(32,328,000)
Net additions to premises and equipment	(113,000)	(315,000)
Net Cash Applied to Investing Activities	3,211,000	(18,447,000)
Cash Flows From Financing Activities:
Net increase in demand deposits and savings accounts	39,846,000	47,250,000
Net increase (decrease) in certificates of deposit	1,003,000	833,000
Net (decrease) in short-term borrowings	(32,200,000)	-
Payments on long-term debt and other borrowings	(3,000)	(2,000)
Proceeds from long term debt and other borrowings	-	-
Cash dividends paid	(951,000)	(834,000)
Tax benefit from stock-based compensation	8,000	5,000
Proceeds from issuance of common stock	358,000	251,000
Net Cash Provided by Financing Activities	8,061,000	47,503,000
Net Increase in Cash and Cash Equivalents	15,777,000	33,020,000
Cash and cash equivalents, at beginning of period	37,779,000	26,445,000
Cash and Cash Equivalents, at End of Period	$ 53,556,000	$ 59,465,000
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits	$ 5,327,000	$ 3,306,000
Income taxes	$ -	$ -
See Notes to Unaudited Consolidated Financial Statements

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SAN JOAQUIN BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations

San Joaquin Bancorp (the “Company) is a California corporation registered as a bank holding company subject to the regulatory oversight of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended. The Company is headquartered in Bakersfield, California. In July 2006, the Company acquired all of the outstanding shares of San Joaquin Bank (the “Bank”). The Bank is an FDIC insured, California state-chartered bank, and a member of the Federal Reserve System that commenced operations in December 1980. The Bank has four operating locations. Three branches are in Bakersfield and one is in Delano, California. The Company's primary market area is Kern County, California.

In 1987, the Bank formed a subsidiary, Kern Island Company, to acquire, develop, sell or operate commercial or residential real property located in the Company's market area. In 1993, the Bank formed a limited partnership, Farmersville Village Grove Associates (a California limited partnership), to acquire and operate low-income housing projects under the auspices of the Rural Economic and Community Development Department (formerly Farmers Home Administration), United States Department of Agriculture. Kern Island Company is the 5% general partner and the Bank is the 95% limited partner.

During August 2006, San Joaquin Bancorp formed San Joaquin Bancorp Trust #1, a Delaware statutory business trust, for the purpose of completing a private placement of $10 million in floating rate trust preferred securities.

Basis of Consolidation

The consolidated financial statements include San Joaquin Bancorp and its wholly-owned subsidiaries with the exception of San Joaquin Bancorp Trust #1 (the “Trust”.) All financial information presented in these financial statements includes the operations of the Bank and its subsidiaries year-to-date and on a comparative basis in prior years. All material intercompany accounts and transactions have been eliminated in consolidation. The Trust was established for the purpose of issuing trust preferred securities. Based on the requirements of the Financial Accounting Standards Board Interpretation (FIN) 46R and accepted industry interpretation and presentation, the Trust has not been consolidated. Instead, the Company’s investment in the Trust is included in other assets on the balance sheet and junior subordinated debentures are presented in long-term debt.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required for audited financial statements. In the opinion of Management, the unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company’s consolidated financial position at March 31, 2007 and December 31, 2006, the results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three month periods ended March 31, 2007 and 2006.

Significant Accounting Policies

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

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties

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While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowances for losses on loans. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as well as other information included in the Company’s most recent Annual Report on Form 10-K. The results of operations for the three month periods ended March 31, 2007 and 2006 may not necessarily be indicative of the operating results for the full year.

Certain prior period amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivatives and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid financial instruments are single financial instruments that contain an embedded derivative. Under SFAS No. 155, entities can elect to record certain hybrid financial instruments at fair value as individual financial instruments. Prior to this amendment, certain hybrid financial instruments were required to be separated into two instruments — a derivative and host — and generally only the derivative was recorded at fair value. SFAS No. 155 also requires that beneficial interests in securitized assets be evaluated for either freestanding or embed ded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after January 1, 2007. Currently, the Company does not have any hybrid financial instruments.

In March 2006, FASB SFAS No. 156, Accounting for Servicing of Financial Assets—An Amendment of SFAS No. 140, was issued. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement of its servicing assets and servicing liabilities by class. An entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date. SFAS No. 156 permits an entity to reclassify certain available-for-sale securities to trading securities provided that they are identified in some manner as offsetting the entity’s exposure to changes in fair value of se rvicing assets or servicing liabilities subsequently measured at fair value. The provisions of SFAS No. 156 are effective for an entity as of the beginning of its first fiscal year that begins after September 15, 2006. Currently, the Company does not have any servicing assets or liabilities recorded on its books.

On July 13, 2006, FASB issued FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 (the "Interpretation"). FIN 48 clarifies SFAS No. 109, Accounting for Income Taxes, to indicate a criterion that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines of the Interpretation, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination by taxing authorities. The term “more likely than not” means a likelihood of more than 50 percent. The more-likely-than-not evaluation must consider the facts, circumstances, and information available at the report date.

FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying FIN 48 should be reported as an adjustment to retained earnings at the beginning of the period in which the Interpretation is adopted. The Company has reviewed all of its tax positions based on previously filed tax returns and expectations in future tax returns and has concluded that, based on the technical merits, it is more likely than not that all positions will be sustained upon examination by applicable taxing authorities. Therefore, no adjustments to the tax positions recorded in the financial statements are necessary with the implementation of FIN 48.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit

5

fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for the year beginning January 1, 2008, with early adoption permitted on January 1, 2007. The Company does not expect the adoption of this new standard in 2008 to have a material impact on its financial position or results of operations.

In September 2006, FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 123(R)". SFAS No. 158 requires the recognition of the funded status of the Company's benefit plans as a net liability or asset, which requires an offsetting adjustment to accumulated other comprehensive income in shareholders' equity. SFAS No. 158 further requires the Company to measure its benefit obligations as of the balance sheet date. The Company adopted these recognition and disclosure provisions of SFAS No. 158 effective December 31, 2006, which required recognition of the previously unrecognized transition obligation for the Company’s pension benefits and postretirement medical benefit program. SFAS No. 158 requires the Company to measure its benefit obligations as of the balance sheet date effective December 31, 2008. The Company currentl y uses a December 31 measurement date.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115. This standard permits entities to choose to measure many financial assets and liabilities and certain other items at fair value. An enterprise will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied on an instrument-by-instrument basis, with several exceptions, such as those investments accounted for by the equity method, and once elected, the option is irrevocable unless a new election date occurs. The fair value option can be applied only to entire instruments and not to portions thereof. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157, Fair Value Measurements. The Company will not elect early adoption of SFAS No. 159 and has no current plans for application after its effective date.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. The Company has historically focused on the impact of misstatements on the income statement, including the reversing effect of prior year misstatements. With a focus on the income statement, the Company’s analysis can lead to the accumulation of misstatements in the balance sheet. In applying SAB 108, the Company must also consider accumulated misstatements in the balance sheet. SAB 108 permits companies to initially apply its provisions by recording the cumulative effect of misstatements as adjustments to the balance sheet as of the first day of the fiscal year, with a n offsetting adjustment recorded to retained earnings, net of tax. As a result of the implementation, the Company corrected certain misstatements in prior year financial statements. These misstatements were not material for each of the years in which they were made, nor were they material on a cumulative basis.

Cash Dividend

The Board of Directors of the Bank declared a cash dividend of $0.27 per share, which was payable to shareholders of record as of February 28, 2007.

There are 20,000,000 shares of common stock, no par value, authorized. There were 3,525,522 and 3,486,222 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively. The Company also has 5,000,000 authorized shares of preferred stock, with 0 shares outstanding.

NOTE 2. STOCK COMPENSATION

Effective January 1, 2006, the Company adopted the new requirements of SFAS 123R on a prospective basis. Compensation expense was $57,000 and $26,000 for the three months ended March 31, 2007 and 2006, respectively.

NOTE 3. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has outstanding various commitments to extend credit which are not reflected in the financial statements, including loan commitments of approximately $197,314,000 and standby letters

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of credit of approximately $10,471,000, at March 31, 2007. However, all such commitments will not necessarily culminate in actual extensions of credit by the Company.

Approximately $72,463,000 of loan commitments outstanding at March 31, 2007 related to real estate loans. The remaining commitments primarily relate to revolving lines of credit or commercial loans or other unused commitments, and many of these commitments are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each potential borrower and the necessary collateral are evaluated on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are commitments written to guarantee the performance of a customer to another party. These guarantees are issued primarily relating to purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. Virtually all such commitments are collateralized.

NOTE 4. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised and converted into common stock.

There was no difference in the numerator used in the calculation of basic earnings per share and diluted earnings per share. The denominator used in the calculation of basic earnings per share and diluted earnings per share for each of the three month periods ended March 31 is reconciled as follows:

	Three Months Ended March 31
	2007	2006
Basic Earnings per Share:
Net Income	$2,215,000	$2,206,000
Weighted average common shares outstanding	3,512,000	3,436,000
Basic Earnings per Share	$0.63	$0.64
Diluted Earnings per Share:
Net Income	$2,215,000	$2,206,000
Weighted average common shares outstanding	3,512,000	3,436,000
Dilutive effect of outstanding options	216,000	248,000
Weighted average common shares outstanding - Diluted	3,728,000	3,684,000
Diluted Earnings per Share	$0.59	$0.60

NOTE 5. COMPREHENSIVE INCOME

The Company has adopted SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive income is equal to net income plus the change in “other comprehensive income,” (“OCI”) as defined by SFAS No. 130. This statement requires the Company to report income and (loss) from non-owner sources. The components of OCI include net unrealized gain or loss on interest-rate cap contracts (cash flow hedges) and available-for-sale investment securities and net gains or losses and prior service costs applicable to defined benefit post-retirement plans and other post-retirement benefits. All components of OCI are net of applicable taxes. FASB Statement No. 130 requires that an entity: (a) classify items of other comprehensive income by their nature in a financial statement, and (b) report the accumulated balance of other comprehensive income separately from common stock and retained earnings in the equity section of the balance sheet.

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	Three Months Ended March 31
	2007	2006
Net Income	$2,215,000	$2,206,000
Other Comprehensive Income, Net of Tax:
Unrealized gains (losses) arising during the period on cash flow hedges	7,000	9,000
Unrealized holding gains (losses) arising during the period on securities	-	(32,000)
Unamortized post-retirement benefit obligation	54,000	-
Other Comprehensive Income (loss)	61,000	(23,000)
Total comprehensive income	$2,276,000	$2,183,000

NOTE 6. POST RETIREMENT BENEFITS

In accordance with SFAS No.132 "Employers' Disclosures about Pensions and Other Post-Retirement Benefits", the Company provides the following interim disclosure related to its post-retirement benefit plan. The following table sets forth the effects of net periodic benefit cost for the three months ended March 31:

	2007	2006
Service Cost	$ 96,000	$ 90,000
Interest Cost	120,000	58,000
Amortization of Unrecognized Prior Service Costs	78,000	46,000
Amortization of Net Obligation at Transition	-	-
Amortization of Unrecognized (Gains) and Losses	21,000	-
Net Periodic Pension and Post-Employment Benefits Cost	$ 315,000	$ 194,000

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

This report contains forward-looking statements about the Company for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995, including statements with regard to descriptions of our plans or objectives for future operations, products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may."

Forward-looking statements, by their nature, are subject to risks and uncertainties. A number of factors -- many of which are beyond our control -- could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements and reported results should not be considered an indication of our future performance. Some of these risk factors include, among others, certain credit, market, operational and liquidity risks associated with our business and operations, changes in business and economic conditions in California and nationally, rising interest rates, potential acts of terrorism (which are beyond our control), volatility of rate sensitive deposits and assets, value of real estate collateral securing many of our loans, accounting estimates and judgments, compliance costs associated with the Company’s internal control structure and procedures for financial reporting. These r isk factors are not exhaustive and additional factors that could have an adverse effect on our business and financial performance are set forth under “Risk Factors” in Item 1A and elsewhere in our most recent annual report on Form 10-K.

Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date forward-looking statements are made.

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The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. The results of operations for the three-month periods ended March 31, 2007 and 2006 may not necessarily be indicative of the operating results for the full year.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates, assumptions, and judgments. These estimates, assumptions, and judgments are based upon historical experience and various other factors available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. In addition, GAAP itself may change from one previously acceptable method to another method.

The most significant accounting policies followed by the Company are presented in Note 1 to the unaudited consolidated financial statements and the audited consolidated financial statements and notes thereto as well as other information included in the Company’s most recent Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Overview

At March 31, 2007, we had total consolidated assets of $760,609,000, an increase of 1.6% compared to $748,930,000 at year-end 2006, total consolidated net loans of $538,060,000, an increase of 1.9% compared to $527,999,000 at year-end 2006, total consolidated deposits of $683,503,000, an increase of 6.4% over $642,654,000 at year-end 2006, and consolidated shareholders’ equity of $47,605,000, an increase of 3.8% compared to $45,866,000 at year-end 2006.

We reported quarterly net income of $2,215,000 for the first quarter of 2007. Net income increased $9,000, or 0.41%, over the $2,206,000 reported in the first quarter of 2006. Diluted earnings per share were $0.59 for the first quarter of 2007 and $0.60 for the first quarter of 2006. For the first quarter of 2007, the annualized return on average equity (ROAE) and return on average assets (ROAA) were 19.38% and 1.22%, respectively, compared to 21.90% and 1.36%, respectively, for the same period in 2006. During the first three months of 2007, total income exceeded total expenses primarily due to improvement in the ratio of average earning assets to total average assets and increased non-interest income from customer fees. Noninterest expenses increased moderately.

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The following table provides a summary of the major elements of income and expense for the periods indicated:

Condensed Comparative Income Statement (unaudited)

	Three Months Ended March 31
	2007	2006	% Change
Interest Income	$12,997,000	$10,436,000	24.54%
Interest Expense	5,752,000	3,437,000	67.36%
Net Interest Income	7,245,000	6,999,000	3.51%
Provision for Loan Losses	225,000	230,000	-2.17%
Net interest income after
provision for loan losses	7,020,000	6,769,000	3.71%
Noninterest Income	740,000	656,000	12.80%
Noninterest Expense	3,851,000	3,603,000	6.88%
Income Before Taxes	3,909,000	3,822,000	2.28%
Provision For Income Taxes	1,694,000	1,616,000	4.83%
Net Income	$ 2,215,000	$ 2,206,000	0.41%

Net Interest Income

Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, is the principal component of our earnings. The following two tables provide a summary of average earning assets and interest-bearing liabilities as well as the income or expense attributable to each item for the periods indicated.

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Distribution of Assets, Liabilities & Shareholders' Equity, Rates & Interest Margin

		Three Months Ended March 31
(dollars in thousands)		2007		2006
			Avg			Avg
	Avg Balance Interest		Yield	Avg Balance Interest		Yield
ASSETS
Earning assets:
Loans (1)	$ 532,907	$ 11,414	8.69%	$ 415,077 $	8,537	8.34%
Taxable investments	135,304	1,462	4.38%	155,570	1,599	4.17%
Tax-exempt investments(2)	4,624	53	4.65%	2,550	23	3.66%
Fed funds sold and other
interest-bearing balances	5,906	68	4.67%	25,286	277	4.44%
Total earning assets	678,741	12,997	7.77%	598,483	10,436	7.07%
Cash & due from banks	27,751			28,904
Other assets	27,460			21,800
Total Assets	$ 733,952			$ 649,187
LIABILITIES
Interest-bearing liabilities:
NOW & money market	$ 294,389	$ 3,225	4.44%	$ 282,661	2,374	3.41%
Savings	131,742	1,504	4.63%	100,599	739	2.98%
Time deposits	52,925	629	4.82%	27,594	208	3.06%
Other borrowings	22,882	394	6.98%	6,974	116	6.75%
Total interest-bearing liabilities	501,938	5,752	4.65%	417,828	3,437	3.34%
Noninterest-bearing deposits	173,856			186,628
Other liabilities	11,804			4,430
Total Liabilities	687,598			608,886
SHAREHOLDERS' EQUITY
Shareholders' equity	46,354			40,301
Total Liabilities and
Shareholders' Equity	$ 733,952			$ 649,187
Net Interest Income and
Net Interest Margin (3)		$ 7,245	4.33%	$ 6,999		4.74%

1)	Loan interest income includes fee income of $440,000 and $511,000 for the three months ended March 31, 2007 and 2006, respectively. Average balance of loans includes average deferred loan fees of $1,324,000 and $1,440,000 for the three months ended March 31, 2007 and 2006, respectively. The average balance of nonaccrual loans is not significant as a percentage of total loans and, as such, has been included in net loans. Certain loans in 2006 were partially exempt from state taxes, however, the income derived from these loans was not significant, therefore there have been no adjustments made to reflect interest earned on these loans on a tax-equivalent basis.
2)	The amount of tax-exempt securities that we hold is minimal and the amount derived from these securities is not significant, therefore there have been no adjustments made to reflect interest earned on these securities on a tax-equivalent basis.
3)	Net interest margin is computed by dividing net interest income by the total average earning assets.

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The following table sets forth changes in interest income and interest expense segregated for major categories of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume, and changes in rates. Changes not solely attributable to volume or rates have been allocated in proportion to the respective volume and rate components.

Summary of Changes in Interest Income and Expense
	Three Months Ended March 31
		2007 over 2006
(dollars in thousands)(unaudited)	Volume	Rate	Net Change
Interest-Earning Assets:
Loans, net of unearned income (1)	2,511	366	2,877
Taxable investment securities	(216)	79	(137)
Tax-exempt investment securities (2)	23	7	30
Fed funds sold and other interest-bearing balances	(222)	13	(209)
Total	2,096	465	2,561
Interest-Bearing Liabilities:
NOW and money market accounts	102	749	851
Savings deposits	274	491	765
Time deposits	259	162	421
Other borrowings	274	4	278
Total	909	1,406	2,315
Interest Differential	1,187	(941)	246

1)	Loan interest income includes fee income of $440,000 and $511,000 for the three months ended March 31, 2007 and 2006, respectively. Certain loans in 2006 were partially exempt from state taxes, however, the income derived from these loans was not significant, therefore there have been no adjustments made to reflect interest earned on these loans on a tax-equivalent basis.
2)	The amount of tax-exempt securities that we hold is minimal and the amount derived from these securities is not significant, therefore there have been no adjustments made to reflect interest earned on these securities on a tax-equivalent basis.

Net interest income, before provision for loan loss, was $7,245,000 for the quarter ended March 31, 2007 compared to $6,999,000 for the quarter ended March 31, 2006, an increase of $246,000, or 3.51% .

Interest Income - First quarter 2007 Compared to 2006

Total interest income for the quarter ended March 31, 2007 was $12,997,000 compared to $10,436,000 for the quarter ended March 31, 2006, an increase of $2,561,000 or 24.54% . Changes in interest income are the result of changes in the average balances and changes in average yields on earning assets. During the first quarter of 2007, total average earning assets were $678,741,000 compared to $598,483,000 during the first quarter of 2006, an increase of $80,258,000, or 13.41% . During the same period, the average rate paid on earning assets increased from 7.07% to 7.77%, or 70 basis points. Of the increase in interest income, $2,096,000 was due to variances in the volume of earning assets and $465,000 was due to variances in the average rate earned on earning assets. Loans were the component of earning assets that contributed the majority of the increase in interest income, which were partially offset by declines taxable investment securities and Federal Funds sold and other interest-bearing balances. Year-over-year, we experienced changes in average balances and average yields on these balances as follows:

During the first quarter of 2007, average loans, net of deferred fees and costs, were $532,907,000 compared to $415,077,000 during the first quarter of 2006, an increase of $117,830,000, or 28.39% . This increased volume of loans resulted in an increase in interest earned on average loans of $2,511,000 during the three months ended March 31, 2007, compared to the three months ended March 31, 2006. During this same time period, the average yield earned on

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average loans increased from 8.34% to 8.69% . This 35 basis point increase in average yield resulted in an increase of $366,000 in interest earned on average net loans during the first quarter of 2007 compared to the first quarter of 2006. The net result was an increase of $2,877,000 in interest earned on average net loans during the first quarter of 2007 compared with the same period of 2006.

Average taxable investment securities during the first quarter of 2007 were $135,304,000 compared to $155,570,000 during the same period of 2006, a decrease of $20,266,000, or 13.03% . This decrease in volume resulted in a decrease in interest earned on average taxable securities of $216,000 during the first quarter of 2007 compared to the first quarter of 2006. During the same period, average yield earned on average taxable securities increased by 21 basis points, resulting in an increase of $79,000 in interest earned on average taxable securities during the first quarter of 2007, compared to the same period of 2006. The net result was a decrease of $137,000 in interest earned on average taxable securities during the first quarter of 2007, compared to the first quarter of 2006.

The increase in interest earned on tax-exempt securities for March 31, 2007 compared to March 31, 2006 was $30,000, or 1.17%, of the total change in interest income. Average tax-exempt securities increased to $4,624,000 from $2,550,000 for a change of $2,074,000 or 81.33% . This volume increase accounted for $23,000 of the change in interest earned year over year. The average yield on tax-exempt securities increased from 3.66% to 4.65% accounting for the remainder of the increase in interest earned of $7,000 year over year.

During the first quarter of 2007, average Federal Funds sold and other interest-bearing balances were $5,906,000 compared to $25,286,000 during the same period of 2006, a decrease of $19,380,000, or 76.64% . This decrease in volume resulted in a decrease in interest earned of $222,000 during the first quarter of 2007 compared to the first quarter of 2006. During the same period, average yield earned on these balances increased by 23 basis points, resulting in an increase of $13,000 in interest income during the first quarter of 2007, compared to the same period of 2006. The net result was a decrease of $209,000 in interest earned on Federal Funds sold and other interest-bearing balances during the first quarter of 2007, compared to the first quarter of 2006.

Interest Expense - First quarter 2007 Compared to 2006

Total interest expense for the first quarter of 2007 was $5,752,000 compared to $3,437,000 for the first quarter of 2006, an increase of $2,315,000, or 67.36% . Changes in interest expense are the result of changes in the average balances and changes in average rates paid on interest-bearing liabilities. During the first quarter of 2007, total average interest-bearing liabilities were $501,938,000 compared to $417,828,000 during the first quarter of 2006, an increase of $84,110,000, or 20.13% . During the same period, the average rate paid on interest-bearing liabilities increased from 3.34% to 4.65%, or 131 basis points. Of the increase in interest expense, $909,000 was due to variances in the volume of interest-bearing liabilities and $1,406,000 was due to variances in the average rate paid on interest-bearing liabilities. Major components of interest-bearing liabilities include NOW and money market accounts, savings deposits, time deposits, and other borrowings. Year-over-year, we experienced changes in average balances and average yields on these balances as follows:

The average balance of NOW and money market accounts increased from $282,661,000 during the first quarter of 2006 to $294,389,000 during the first quarter of 2007, an increase of $11,728,000, or 4.15% . This increased volume of deposits resulted in an increase in interest expense of $102,000 during the first quarter of 2007 compared to the first quarter of 2006, while the 103 basis point increase in interest rates during the same period caused interest expense to increase by $749,000. The net result was an increase in interest expense on average NOW and money market accounts of $851,000 during the first quarter of 2007, compared to the first quarter of 2006.

Average savings deposits increased during the first quarter of 2007 to $131,742,000, compared to $100,599,000 during the first quarter of 2006, an increase of $31,143,000, or 30.96% . Because of the increase in average savings deposits, interest expense increased $274,000 during the first quarter of 2007, compared to the first quarter of 2006. Interest rates during this same period increased by 165 basis points, resulting in an increase in interest expense of $491,000 in the first quarter of 2007, compared to the first quarter of 2006. The net result was an increase of $765,000 in interest expense on average savings deposits during the first quarter of 2007 versus the first quarter of 2006.

Average time deposits during the first quarter of 2007 increased to $52,925,000, compared to $27,594,000 during the first quarter of 2006, an increase of $25,331,000, or 91.80% . This increase in average time deposits caused interest expense to increase by $259,000 in the first quarter of 2007 compared to the first quarter of 2006, and the 176 basis

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point increase in interest rates on average time deposits caused interest expense to increase by $162,000 during this same time period. These two factors resulted in the net increase in interest expense on average time deposits of $421,000 in the first quarter of 2007 compared to the first quarter of 2006.

Average other borrowings increased during the first quarter of 2007 to $22,882,000 compared to $6,974,000 during the first quarter of 2006, an increase of $15,908,000, or 228.10%. The increase in average other borrowings was primarily the result of an increase in junior subordinated notes in connection with the issuance of trust preferred securities in the third quarter of 2006. The increase in average other borrowings resulted in an increase in interest expense of $274,000 during the first quarter of 2007, compared to the first quarter of 2006, while a 23 basis point decrease in interest rates paid on average other borrowings caused interest expense to increase by $4,000 during this same year-over-year time period. The net result was an increase of $278,000 in interest expense on other borrowings during the first quarter of 2007 compared to the first quarter of 2006.

Net Interest Margin

The annualized net interest margin, net interest income divided by average earning assets, for the first quarter of 2007 was 4.33% compared to 4.74% for the first quarter of 2006, a decrease of 41 basis points. This decrease was primarily the result of an increased cost of funding such as interest rates paid on deposits and higher costing noncore funding sources including junior subordinated notes. The current competitive rate environment could, in Management’s view, exert continued pressure on net interest margin potentially resulting in a flat to slightly declining margin for the remainder of 2007.

Provision for Loan Losses

We made a $225,000 addition to the allowance for loan losses in the first quarter of 2007 compared to an addition of $230,000 in the first quarter of 2006. The provision for loan losses is based upon in-depth analysis, in which Management considers many factors, including the rate of loan growth, changes in the level of past due, nonperforming and classified assets, changing portfolio mix, overall credit loss experience, recommendations of regulatory authorities, and prevailing local and national economic conditions to establish an allowance for loan losses deemed adequate by Management. Based upon information known to Management at the date of this report, Management believes that these additions to the total allowance for loan losses allow the Company to maintain an adequate reserve to absorb losses inherent in the loan portfolio. The total allowance for loan losses was $8,602,000 at March 31, 2007, compared to $8,409,000 at De cember 31, 2006, an increase of $193,000, or 2.30% . The ratio of the allowance for loan losses to total loans, net of unearned income, was 1.57% at March 31, 2007 and December 31, 2006. For further information regarding our allowance for loan losses, see “Allowance for Loan Losses” discussion later in this item.

Noninterest Income

Noninterest income consists primarily of service charges on deposit accounts and fees for miscellaneous services. Noninterest income totaled $740,000 in the first quarter of 2007, which was an increase of $84,000, or 12.80%, over $656,000 in the first quarter of 2006. Service charges and fees on deposits increased $14,000 during the three months ended March 31, 2007 compared to the same period of 2006. Other customer service fees were down $13,000 in the first quarter of 2007 as compared to the first quarter of 2006. Other noninterest income increased $83,000 during the first quarter of 2007 compared to the first quarter of 2006. The increase in other noninterest income for the quarter was primarily due to increases in merchant card charges and dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

Noninterest Expense

As compared to the first quarter of 2006, noninterest expense increased $248,000, or 6.88%, to a total of $3,851,000 in the first quarter of 2007. Noninterest expense primarily consists of salary and employee benefits, occupancy and furniture and equipment expense, promotional expenses, professional expenses, and other miscellaneous noninterest expenses.

Salary and employee benefits increased $90,000, or 3.95%, to $2,367,000 during the first quarter of 2007 as compared to the first quarter of 2006. The increase in salary and employee benefits was due primarily to normal salary increases,

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and increases in net periodic costs of pensions and other post-employment benefits as compared to the prior year. Salary and employee benefits expense also includes additional compensation expense from granting of stock options under SFAS 123R of $57,000 and $26,000 for the three months ended March 31, 2007 and 2006, respectively.

Occupancy and furniture and equipment expense increased by $20,000, to $482,000 during the first quarter of 2007 compared to the first quarter of 2006.

Promotional expenses for the quarter ended March 31, 2007 were $150,000, a decrease of $8,000, or 5.06%, as compared to $158,000 in the same period in the prior year.

Professional expenses were $389,000 for the first quarter of 2007, an increase of $150,000, or 62.76% as compared to $239,000 in the first quarter of 2006. The increase in professional expense was primarily the result of increases in legal fees associated with regulatory compliance and reporting.

Other expenses for the first quarter of 2007 totaled $463,000, which was a decrease of $4,000 compared to $467,000 in the first quarter of 2006.

The efficiency ratio for the three month periods ended March 31, 2007 and 2006 were 48.23% and 47.07%, respectively.

Provision for Income Taxes

We recorded income tax expense of $1,694,000 in the first quarter of 2007 compared to $1,616,000 in the first quarter of 2006. The increase in the provision for income tax in the three month period ended March 31, 2007 was primarily due to increased nondeductible items of expense for tax purposes such as stock option expense on incentive stock options, disallowed interest expense to carry tax-exempt obligations, and other adjustments to tax accruals as compared to the same periods in the prior year. The effective tax rates for the three month periods ended March 31, 2007 and 2006 were 43.34% and 42.28%, respectively.

Securities

At March 31, 2007, held-to-maturity securities had a market value of $124,958,000 with an amortized cost basis of $126,828,000. On an amortized cost basis, the held-to-maturity investment portfolio decreased $13,994,000 from the December 31, 2006 balance of $140,822,000, a decrease of 9.9% . The decrease in the portfolio was primarily due to the maturity of U.S. Treasury securities which decreased $8,995,000 with the remaining decrease from Government Agency and mortgage-backed securities. The unrealized pretax loss on held-to-maturity securities at March 31, 2007 was $1,870,000, as compared to a loss of $2,507,000 at December 31, 2006. The unrealized pretax loss was caused by the general increase in interest rates on comparable financial instruments with similar remaining maturities. As a general rule, the market price of fixed rate investment securities will decline as interest rates rise. Inasmuch as these investment securitie s are classified as held-to-maturity, we expect to hold all such securities until they reach their respective maturity dates and, therefore, we do not anticipate recognizing any losses on these securities. During the first quarter of 2006, the Company reclassified all of its investments in municipal securities from held-to-maturity to available-for-sale. At March 31, 2007, available-for-sale securities had a market value of $7,068,000. The unrealized pretax loss on available-for-sale securities at March 31, 2007 was $74,000. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income in shareholders’ equity on an after-tax basis. We classify individual investments as available-for-sale based upon liquidity and capital needs at the time of purchase.

Loans

The ending balance for loans, net of unearned income at March 31, 2007 was $546,662,000, which was an increase of $10,254,000, or 1.91%, from the year-end 2006 balance of $536,408,000. Since year-end 2006, significant changes in our loan portfolio were as follows: real estate loans have increased from $451,608,000 at December 31, 2006 to $473,063,000 at March 31, 2007 (4.75%); and, commercial loans have decreased from $63,753,000 at December 31, 2006 to $53,271,000 at March 31, 2007 (16.44%) . Based on currently available economic data and related information, Management believes that loan demand for Kern County and the greater Bakersfield area will remain fairly constant throughout the remainder of 2007.

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Credit Risk

We assess and manage credit risk on an ongoing basis through a formal credit review program, internal monitoring and formal lending policies. We believe our ability to identify and assess risk and return characteristics of our loan portfolio is critical for profitability and growth. We emphasize credit quality in the loan approval process, active credit administration and regular monitoring. With this in mind, we have designed and implemented a comprehensive loan review and grading system that functions to monitor and assess the credit risk inherent in the loan portfolio.

Ultimately, the credit quality of our loans may be influenced by underlying trends in the national and local economic and business cycles. Our business is mostly concentrated in Kern County, California. Our economy is diversified between agriculture, oil, light industry, and warehousing and distribution. As a result, we lend money to individuals and companies dependent upon these industries.

We have significant extensions of credit and commitments to extend credit which are secured by real estate, totaling approximately $545,526,000 at March 31, 2007. Although we believe this real estate concentration has no more than the normal risk of collectibility, a substantial decline in the economy in general, a decline in real estate values in our primary market area in particular, or a substantial increase in interest rates could have an adverse impact on the collectibility of these loans. The ultimate recovery of these loans is generally dependent upon the successful operation, sale or refinancing of the real estate. We monitor the effects of current and expected market conditions and other factors on the collectibility of real estate loans. When, in our judgment, these loans are impaired, an appropriate provision for losses is recorded. The more significant assumptions we consider involve estimates of the following: lease, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in most instances, personal guarantees. Notwithstanding the foregoing, abnormally high rates of impairment due to general or local economic conditions could adversely affect our future prospects and results of operations.

In extending credit and commitments to borrowers, we generally require collateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow and from proceeds from the sale of selected assets of the borrowers. Our requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with our evaluation of the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property. We secure our collateral by perfecting our interest in business assets, obtaining deeds of trust, or outright possession among other means. Loan losses from lending transactions related to real estate and agriculture compare favorably with our loan losses on our loan portfolio as a whole.

We believe that our lending policies and underwriting standards will tend to mitigate losses in an economic downturn; however, there is no assurance that losses will not occur under such circumstances. Our loan policies and underwriting standards include, but are not limited to, the following:

• maintaining a thorough understanding of our service area and limiting investments outside of this area,
• maintaining an understanding of borrowers’ knowledge and capacity in their fields of expertise,
• basing real estate construction loan approval not only on salability of the project, but also on the borrowers’ capacity to support the project financially in the event it does not sell within the originally projected time period, and
• maintaining prudent loan-to-value and loan-to-cost ratios based on independent outside appraisals and ongoing inspection and analysis of our construction lending activities.

In addition, we strive to diversify the risk inherent in the construction portfolio by avoiding concentrations to individual borrowers and on any one project.

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Nonaccrual, Past Due, Restructured Loans and Other Real Estate Owned (OREO)

We generally place loans on nonaccrual status when they become 90 days past due as to principal or interest, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement and remaining principal is considered collectible or when the loan is both well secured and in the process of collection. Loans or portions thereof are charged off when, in our opinion, collection appears unlikely. The following table sets forth nonaccrual loans, loans past due 90 days or more and still accruing, restructured loans performing in compliance with modified terms and OREO at March 31, 2007 and December 31, 2006:

Nonaccrual, Past Due, Restructured Loans, and Other Real Estate Owned (OREO)

(data in thousands, except percentages)	March 31, 2007	December 31, 2006
Past due 90 days or more and still accruing:
Commercial	$        -	$        -
Real estate	51	-
Consumer and other	2	3
Nonaccrual:
Commercial	558	-
Real estate	3,059	150
Consumer and other	-	-
Restructured (in compliance with modified
terms)	-	-
Total nonperforming and restructured loans	3,670	153
Other real estate owned	626	643
Total nonperforming and restructured assets	$ 4,296	$ 796
Allowance for loan losses as a percentage of
nonperforming and restructured loans	234.39%	5496.08%
Nonperforming and restructured loans to total loans	0.67%	0.03%
Allowance for loan losses to nonperforming and
restructured assets	200.23%	1056.41%
Nonperforming and restructured assets to total assets	0.56%	0.11%

At March 31, 2007, there were nonperforming and restructured loans which totaled $3,670,000 compared to $153,000 at December 31, 2006, an increase of $3,517,000. The increase was due to an increase in loans placed on nonaccrual status. The increase in the amount of loans on nonaccrual status resulted from potential problem loans from a single customer. The loans are secured by various collateral including residential real estate and receivables. Based on information available at the date of this report, Management believes the risk of loss due to default is minimal; however, because of payment delays, the loan was placed on nonaccrual for reason of uncertainty of collecting interest in the near term. During the first quarter of 2007, we continued to closely monitor and actively pursue the collection of all loans classified as nonperforming. At March 31, 2007, nonperforming and restructured loans were 0.67% of total loans, compare d to 0.03% at December 31, 2006. The ratio of nonperforming and restructured assets to total assets was 0.56% at March 31, 2007 compared to 0.11% at December 31, 2006.

Under generally accepted accounting principles, a loan is considered impaired when, based on current information and events, it is probable that we may be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. Under some circumstances, a loan which is deemed impaired may still

17

perform in accordance with its contractual terms. Loans that are considered impaired are generally not placed on nonaccrual status unless the loan becomes 90 days or more past due.

At March 31, 2007 and December 31, 2006, there was no recorded investment in loans that were considered impaired under SFAS No. 114. Other than impaired loans and classified loans (discussed below), we are not aware of any other potential problem loans which were accruing and current at March 31, 2007, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms. In this report, the terms “impaired” and “classified” will not necessarily be used to describe the same loans. “Impaired” loans are those loans that meet the definition outlined in SFAS No. 114. “Classified” loans generally refer to those loans that have a credit risk rating of 6 through 8, as further discussed in the following section.

Generally, when a loan is placed on nonaccrual, it is the Company’s policy to apply payments against the principal balance of the loan until such time as full collection of the principal balance is expected. The amount of gross interest income that would have been recorded for nonaccrual loans for the three months ended March 31, 2007, if all such loans had been current in accordance with their original terms, was $94,000. The amount of interest income that was recognized on nonaccrual loans from all cash payments, including those related to interest owed from prior years, made during the three months ended March 31, 2007, totaled $0.

Classified Loans

We have established a system of evaluation of all loans in our loan portfolio. Based upon the evaluation performed, each loan is assigned a risk rating. This risk rating system quantifies the risk we believe we have assumed when entering into a credit transaction. The system rates the strength of the borrower and the facility or transaction, which provides a tool for risk management and early problem loan recognition.

For each new credit approval, credit review, credit extension or renewal or modification of existing facilities, the approving officers assign risk ratings utilizing an eight point rating scale. The risk ratings are a measure of credit risk based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. We assign risk ratings on a scale of 1 to 8, with 1 being the highest quality rating and 8 being the lowest quality rating. Loans rated an 8 are charged off.

The primary accountability for risk rating management resides with the account officer. The Credit Review Department is responsible for confirming the risk rating after reviewing all the credit factors independently of the account officer. The rating assigned to a credit is the one determined to be appropriate by the Credit Review Department.

The loans we consider “classified” are those that have a credit risk rating of 6 through 8. These are the loans and other credit facilities that we consider to be of the greatest risk to us and, therefore, they receive the highest level of attention by our account officers and senior credit management officers.

A loan that is classified may be either a “performing” or “nonperforming” loan. A performing loan is one wherein the borrower is making all payments as required by the loan agreements. A nonperforming loan is one wherein the borrower is not paying as agreed and/or is not meeting specific other performance requirements that were agreed to in the loan documentation.

The following table summarizes the Company’s classified loans for the periods indicated:

	March 31, 2007	December 31, 2006
Classified Loans	$ 5,696	$ 3,045
OREO	626	643
Total	$ 6,322	$ 3,688

At March 31, 2007, there was $6,322,000 in classified loans compared to $3,688,000 in classified loans at December 31, 2006, an increase of $2,634,000, or 71.42% . The change was primarily due to deterioration in the credit quality of

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the borrower and the receipt of payments on these loans. Classified Loans at March 31, 2007 include $3,617,000 in nonaccrual loans.

The loans and other credit facilities considered classified are also allocated a specific amount in the allowance for loan losses, as further explained in the “Allowance for Loan Losses” section herein.

Allowance for Loan Losses

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on our regular assessments of the probable losses inherent in the loan portfolio and to a lesser extent, unused commitments to provide financing. Determining the adequacy of the allowance is a matter of judgment, which reflects consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. Our methodology for measuring the appropriate level of the allowance relies on several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated reserve. The unallocated allowance contains amounts that are based on our evaluation of existing conditions that are not directly measured in the determination of the formula and specific allowances.

The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans and commitments. Changes in risk grades of performing and certain nonperforming loans other than classified loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and may be adjusted for other factors that, in our judgment, affect the collectibility of the portfolio as of the evaluation date. At March 31, 2007, the formula allowance was $5,415,000 compared to $6,013,000 at December 31, 2006.

In addition to the formula allowance calculated by the application of the loss factors to the standard loan categories, specific allowances may also be calculated. Quarterly, all significant classified loans are analyzed individually based on the source and adequacy of repayment and specific type of collateral, and an assessment is made of the adequacy of the formula reserve relative to the individual loan. A specific allocation either higher or lower than the formula reserve will be calculated based on the higher/lower-than-normal probability of loss and the adequacy of the collateral. At March 31, 2007, the specific allowance was $1,548,000 on a classified loan base of $5,696,000 compared to a specific allowance of $1,059,000 on a classified loan base of $3,045,000 at December 31, 2006.

At March 31, 2007 and December 31, 2006 there was $1,639,000 and $1,337,000, respectively, in the allowance for loan losses that was unallocated. In the opinion of Management, and based upon an evaluation of potential losses inherent in the loan portfolio, it is necessary to establish unallocated allowance amounts above the amounts allocated using the formula and specific allowance methods, based upon our evaluation of the following factors:

• The current national and local economic and business conditions, trends and developments, including the condition of various market segments within our lending area;
• Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;
• Changes in the nature, mix, concentrations and volume of the loan portfolio;
• The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in our current portfolio.

There can be no assurance that the adverse impact of any of these conditions on us will not be in excess of the combined allowance for loan losses as determined by us at March 31, 2007 and set forth in the preceding paragraph.

The allowance for loan losses totaled $8,602,000 or 1.57% of total loans at March 31, 2007, compared to $8,409,000 or 1.57% of total loans at December 31, 2006. At these dates, the allowance represented 234.45% and 5,496.08% of nonperforming and restructured loans, respectively.

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It is our policy to maintain the allowance for loan losses at a level considered adequate for risks inherent in the loan portfolio. Based on information currently available to Management, including economic factors, overall credit quality, historical delinquency and history of actual charge-offs, as of March 31, 2007, we believe that the allowance for loan losses is adequate. However, no prediction of the ultimate level of additional provisions to our allowance or loans charged off in future years can be made with any certainty.

The following table summarizes activity in the allowance for loan losses for the periods indicated:

	Three Months Ended March 31
	2007	2006
Beginning Balance	$ 8,409,000	$ 7,003,000
Provision charged to expense	225,000	230,000
Loans charged off	(38,000)	(4,000)
Recoveries	6,000	90,000
Ending Balance	$ 8,602,000	$ 7,319,000

Liquidity

Liquidity management refers to our ability to maintain cash flows that are adequate to fund our operations on an ongoing basis and to meet our debt obligations and other commitments on a timely and cost effective basis. Both assets and liabilities contribute to our liquidity position. Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity. We assess the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs.

Our sources of liquidity consist primarily of cash and balances due from bank, federal funds sold, unpledged marketable investment securities, overnight federal fund credit lines with correspondent banks, and Federal Home Loan Bank (FHLB) advances. At March 31, 2007, consolidated liquid assets totaled $68,633,000 or 9.03% of total assets as compared to $63,510,000, or 8.48% of total consolidated assets at December 31, 2006. The increase of $5,123,000 or 8.07% was due to additional funding from deposit growth and maturities of pledged investment securities. At March 31, 2007, liquid assets consisted of cash and balances due from banks, unpledged investment securities, and federal funds sold. In addition to liquid assets, we maintain short-term overnight federal fund credit lines with correspondent banks and FHLB advance credit lines. At March 31, 2007 and December 31, 2006, we had $15,000,000 available under these federal fund cre dit lines. At March 31, 2007, $0 was outstanding under these credit lines. Federal fund daily rates are based on market rates for short-term overnight funds and are due on demand. These are uncommitted lines under which availability is subject to funding needs of the issuing banks. At March 31, 2007 and December 31, 2006, the Company had borrowing availability from FHLB advances of $69,193,000 and $39,131,000, respectively. The Company had $0 in FHLB advances outstanding at March 31, 2007. This was a decrease from $32,200,000 outstanding at December 31, 2006. The decrease in advances outstanding was due to additional funding from deposit growth and maturities of investment securities. FHLB advances are available in both overnight and term. Rates are fixed under both advance types and are determined by market rates of comparable instruments.

The Company also has other options available should its funding needs increase beyond the maximum availability under current credit lines or in lieu of these lines. These include, but are not limited to, brokered deposits, other deposit programs, and public funds as other sources of liquidity. However, some of these options could increase the Company average cost of funds and impact the net interest margin.

We serve primarily a business and professional customer base and, as such, our deposit base is susceptible to economic fluctuations. Accordingly, we strive to maintain a balanced position of liquid assets to volatile and cyclical deposits.

Capital Resources

Our total shareholders’ equity was $47,605,000 at March 31, 2007, compared to $45,866,000 at December 31, 2006, an increase of $1,739,000, or 3.79% . The change is the result of the first three quarters’ earnings, issuance of capital

20

stock due to the exercise of stock options, the change in other comprehensive income or loss, and the payout of a cash dividend to shareholders in February, 2007.

The Board of Governors of the Federal Reserve System (“Board of Governors”) has adopted regulations requiring insured institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of common stockholders’ equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus intangible assets, identified losses and investments in certain subsidiaries, plus unrealized losses or minus unrealized gains on available for sale securities) to total assets. Institutions which have received the highest composite regulatory rating and which are not experiencing or anticipating significant growth are required to maintain a minimum leverage capital ratio of 3% Tier 1 capital to total assets. All other institutions are required to maintain a minimum leverage capital ratio of at least 100 to 200 basis points above the 3% minimum requirement.

The Board of Governors has also adopted a statement of policy, supplementing its leverage capital ratio requirements, which provides definitions of qualifying total capital (consisting of Tier 1 capital and Tier 2 supplementary capital, including the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets) and sets forth minimum risk-based capital ratios of capital to risk-weighted assets. Insured institutions are required to maintain a ratio of qualifying total capital to risk weighted assets of 8%, at least one-half (4%) of which must be in the form of Tier 1 capital.

The following table sets forth the Company’s and the Bank’s actual capital positions at March 31, 2007 and the minimum capital requirements for both under the regulatory guidelines discussed above:

			For Capital	To Be Categorized
	March 31, 2007	December 31, 2006	Adequacy Purposes	"Well Capitalized"
Tier 1 leverage ratio	8.07%	8.24%	4%	5%
Tier 1 capital to risk-weighted assets	9.34%	9.16%	4%	6%
Total risk-based capital ratio	11.54%	11.37%	8%	10%

We met the “well capitalized” ratio measures at March 31, 2007.

Subordinated Note

On April 5, 2004, the Bank issued a Six Million Dollar ($6,000,000) Floating Rate Subordinated Note (the “Subordinated Note”) in a private placement. The Subordinated Note, which was issued pursuant to a Purchase Agreement dated April 5, 2004 by and between the Bank and NBC Capital Markets Group, Inc., matures in 2019. The Bank may redeem the Subordinated Note, at par, on or after April 23, 2009, subject to compliance with California and federal banking regulations. The Subordinated Note resets quarterly and bears interest at a rate equal to the three-month LIBOR index plus a margin of 2.70% . The Subordinated Note is a capital security that qualifies as Tier 2 capital pursuant to capital adequacy guidelines.

Trust Preferred Securities

On September 1, 2006, San Joaquin Bancorp and San Joaquin Bancorp Trust #1, a Delaware statutory trust, entered into a Purchase Agreement with TWE, Ltd. for the sale of $10 million of floating rate trust preferred securities issued by the Trust and guaranteed by the Company.

On September 1, 2006, the Trust issued $10 million of trust preferred securities to TWE, Ltd. and $310,000 of common securities to the Company under an Amended and Restated Declaration of Trust, dated as of September 1, 2006. The trust preferred securities are guaranteed by the Company on a subordinated basis pursuant to a Guarantee Agreement, dated as of September 1, 2006.

The trust preferred securities have a floating annual rate, reset quarterly, equal to the three-month LIBOR plus 1.60% . The trust preferred securities are non-redeemable through September 30, 2011. Each of the trust preferred securities represents an undivided interest in the assets of the Trust.

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The Company owns all of the Trust's common securities. The Trust's only assets are the junior subordinated notes issued by the Company on substantially the same payment terms as the trust preferred securities. The Company's junior subordinated notes were issued pursuant to an Indenture, dated as of September 1, 2006.

The Federal Reserve Bank of San Francisco has advised the Company that the trust preferred securities are eligible as Tier 1 capital.

Off-Balance Sheet Items

As of March 31, 2007 and December 31, 2006, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk, except for the interest rate cap contracts and interest rate swap agreements described herein.

Derivatives

The use of derivatives allows the Company to meet the needs of its customers while reducing the interest rate risk associated with certain transactions. Currently, the Company uses interest rate cap contracts, which are cash flow hedges, and interest rate swap agreements, which are fair value hedges, to limit exposure to changes in interest rates. The Board has approved a hedging policy, and the Asset Liability Committee is responsible for ensuring that the Board is knowledgeable about general hedging theory, usage and accounting; and that based upon this understanding, approves all hedging transactions. The derivatives are carried at fair value and are included in other assets or other liabilities in the consolidated balance sheet if they have a positive or negative fair value, respectively.

Cash Flow Hedges

We entered into two interest rate cap contracts with a third party to manage the interest rate change risk that may affect the amount of interest expense of our deposits. The interest rate cap contracts qualify as derivative financial instruments. Under an interest rate cap contract, we agree to pay an initial fixed amount at the beginning of the contract in exchange for quarterly payments from the third party when the three-month LIBOR rate exceeds a certain fixed level.

The interest rate cap contracts are considered to be a hedge against changes in the amount of future cash flows associated with our interest expense for our deposits. Accordingly, the interest rate cap contracts are recorded at fair value in our consolidated balance sheet and the related unrealized gains or losses on these contracts are recorded in shareholders’ equity as a component of accumulated other comprehensive income. These deferred gains and losses are amortized as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in income. Over the twelve months ending December 31, 2007, the Company expects to amortize $61,000 of the unrealized loss as an adjustment to interest expense. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.

At March 31, 2007, we had interest rate cap contracts on $14,000,000 notional amount of indebtedness. Interest rate cap contracts with notional amounts of $7,000,000 and $7,000,000 have cap rates of 6.50%, and 6.00%, respectively. Notional amount of $14,000,000 outstanding contracts will mature on June 2, 2008. The net gain or loss on the ineffective portion of these interest rate cap contracts was not material for the quarter ended March 31, 2007, or for the year ended December 31, 2006.

Fair Value Hedges

The Company entered into interest rate swap agreements with a third party, to hedge against changes in fair value of certain fixed rate loans. The Company uses this as a means to offer fixed rate loans to customers, while maintaining a variable rate income that better suits the Company's needs. Under an interest rate swap agreement, the Company agrees to pay a fixed rate to the counter party while receiving a floating rate based on the 1-month LIBOR.

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The interest rate swap agreements are considered to be a hedge against changes in the fair value of certain fixed rate loans. The interest rate swap agreements are fair value hedges that qualify as derivative financial instruments under SFAS No. 133 and are accounted for under the short-cut method. These hedges are considered perfectly effective against changes in the fair value of the loan due to changes in the benchmark interest rate over its term. Accordingly, the hedges are recorded at fair value on the balance sheet and any changes in fair value of the swap is recognized currently in earnings and the offsetting gain or loss on the hedged assets attributable to the hedged risk is recognized currently in earnings.

As of March 31, 2007, we had interest rate swap agreements on $50,159,000 notional amount of indebtedness. At March 31, 2007, the fair value of the swaps was a liability of $1,185,000 and is included with other liabilities on the balance sheet. A corresponding fair value adjustment is included on the balance sheet with the hedged item. No portion of the interest rate swap agreements was ineffective for the three months ended March 31, 2007 or the year ended December 31, 2006; therefore, no gain or loss was recognized in earnings for these periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The goal for managing our assets and liabilities is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing ourselves to undue interest rate risk. Our Board of Directors has overall responsibility for our interest rate risk management policies. We have an Asset/Liability Management Committee (ALCO), which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The Company does not engage in trading activities to manage interest rate risk, however, the Board of Directors has approved, and the Company currently uses, derivatives to manage interest rate risk. These derivatives are discussed in Item 2 under the caption "Off-Balance Sheet Items." Interest rate risk is the most significant market risks affecting the Company. Management does not believe the Company faces other significant market risks such as foreign currency exchange ris ks, commodity risks, or equity price risks.

Asset and Liability Management

Asset Liability Management is the process of selecting and pricing assets and liabilities to improve performance and manage risk. Activities involved in asset/liability management include, but are not limited to, lending, accepting and placing deposits, investing in securities and issuing debt. Interest rate risk is the primary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities. To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contribute to earnings even in periods of volatile interest rates. The asset/liability management policy sets limits on the acceptable amount of variance in net income, net interest income and market value of equity.

The market values of assets or liabilities on which the interest rate is fixed will increase or decrease with changes in market interest rates. If the Company invests funds in a fixed rate long-term security and then interest rates rise, the security is worth less than a comparable security just issued because of the lower yield on the original fixed rate security. If the lower yielding security had to be sold, the Company would have to recognize a loss. Correspondingly, if interest rates decline after a fixed rate security is purchased, its value increases. Therefore, while the value of the fixed rate investment changes regardless of which direction interest rates move, the adverse exposure to “market risk” is primarily due to rising interest rates. This exposure is lessened by managing the amount of fixed rate assets and by keeping maturities relatively short. However, this strategy must be balanced against the need f or adequate interest income because variable rate and shorter fixed rate securities generally earn less interest than longer term fixed rate securities.

There is market risk relating to the Company’s fixed rate or term liabilities as well as its assets. For liabilities, the adverse exposure to market risk is to lower rates because The Company must continue to pay the higher rate until the end of the term.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes. Using computer modeling techniques, we are able to estimate the potential impact of changing interest rates on the Company's earnings. A balance sheet forecast is prepared using inputs of actual loan, securities and interest-bearing

23

liabilities (i.e., deposits and other borrowings) positions as the beginning base. The forecast balance sheet is processed against multiple interest rate scenarios. The scenarios include a 100, 200, and 300 basis point rising rate forecast, a flat rate forecast and a 100, 200, and 300 basis point falling rate forecast which take place within a one year time frame. The latest simulation forecast using March 31, 2007 balances and measuring against a flat rate environment, calculated that in a one-year horizon an increase in interest rates of 100 basis points may result in an increase of approximately $784,000 (2.40%) in net interest income. Conversely, a 100 basis point decrease may result in a decrease of approximately $605,000 (1.85%) in net interest income. The basic structure of the balance sheet has not changed significantly from the last simulation run.

The simulations of earnings do not incorporate any management actions which might moderate the negative consequences of interest rate deviations. Therefore, in Management’s view, they do not reflect likely actual results, but serve as conservative estimates of interest rate risk. Our risk profile has not changed materially from that at year-end 2006.

The Company has adequate capital to absorb any potential losses as described above as a result of a decrease in interest rates. Periods of more than one year are not estimated because it is believed that steps can be taken to mitigate the adverse effects of such interest rate changes.

Repricing Risk

One component, among others, of interest rate risk arises from the fact that when interest rates change, the changes do not occur equally for the rates of interest earned and paid because of differences in contractual terms of the assets and liabilities held. The Company has a large portion of its loan portfolio tied to the prime interest rate. If the prime rate is lowered because of general market conditions, e.g., other money-center banks are lowering their lending rates, these loans will be repriced. If the Company were at the same time to have a large portion of its deposits in long-term fixed rate certificates, net interest income would decrease immediately. Interest earned on loans would decline while interest expense would remain at higher levels for a period of time because of the higher rate still being paid on deposits.

A decrease in net interest income could also occur with rising interest rates. This exposure to “repricing risk” is managed by matching the maturities and repricing opportunities of assets and liabilities. This is done by varying the terms and conditions of the products that are offered to depositors and borrowers. For example, if many depositors want longer-term certificates while most borrowers are requesting loans with floating interest rates, the Company will adjust the interest rates on the certificates and loans to try to match up demand. The Company can then partially fill in mismatches by purchasing securities with the appropriate maturity or repricing characteristics.

Basis Risk

Another component of interest rate risk arises from the fact that interest rates rarely change in a parallel or equal manner. The interest rates associated with the various assets and liabilities differ in how often they change, the extent to which they change, and whether they change sooner or later than other interest rates. For example, while the repricing of a specific asset and a specific liability may fall in the same period of a gap report, the interest rate on the asset may rise 100 basis points, while market conditions dictate that the liability increases only 50 basis points. While evenly matched in the gap report, the Company would experience an increase in net interest income. This exposure to “basis risk” is the type of interest risk least able to be managed, but is also the least dramatic. Avoiding concentration in only a few types of assets or liabilities is the best insurance that the average interest re ceived and paid will move in tandem, because the wider diversification means that many different rates, each with their own volatility characteristics, will come into play. The Company has made an effort to minimize concentrations in certain types of assets and liabilities.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13(a)-15(e) as of the end of the period covered by this report. The Company’s chief

24

executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of this report date.

Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during the first quarter of 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or any subsidiary is a party or of which any of their property is subject, other than ordinary routine litigation incidental to the business of the Company or any subsidiary. None of the ordinary routine litigation in which the Company or any subsidiary is involved is expected to have a material adverse impact upon the financial position or results of operations of the Company or any subsidiary.

ITEM 1A. RISK FACTORS

The risk factors included in the Company's most recent Annual Report on Form 10-K have not materially changed.

In addition to the other information set forth in this report, you should carefully consider the factors, discussed in “Part I, ITEM 1A. Risk Factors” in our most recent Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may arise or become material in the future and materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

10.1	Amendment No. 1 To The San Joaquin Bancorp/Elvin G. Berchtold March 21, 2006 Non-Qualified Stock Option Agreement
10.2	Amendment No. 1 To The San Joaquin Bancorp/Elvin G. Berchtold 2002-2006 Non-Qualified Stock Option Agreements
10.3	Amendment No. 1 To The San Joaquin Bancorp/Robert B. Montgomery 2002-2006 Non-Qualified Stock Option Agreements
10.4	Board resolution approving the purchase of property from John Ivy
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 Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

May 9, 2007	SAN JOAQUIN BANCORP
	(Registrant)
	By: /s/ Stephen M. Annis -        Stephen M. Annis        Executive Vice President &        Chief Financial Officer        (Principal Financial and Accounting Officer)

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EX-10

AMENDMENT NO. 1
TO THE
SAN JOAQUIN BANCORP/ELVIN G. BERCHTOLD
MARCH 21, 2006 NON-QUALIFIED STOCK OPTION AGREEMENT

     WHEREAS, San Joaquin Bancorp (the "Bancorp") maintains the San Joaquin Bancorp 1999 Stock Incentive Plan (the “Plan”) for the benefit of its eligible Key Employees;

     WHEREAS, Bancorp and Elvin G. Berchtold (the “Optionee”) entered into a Non-Qualified Stock Option Agreement (the “Agreement”) for one-thousand, six hundred and fifty (1,650) shares on March 21, 2006 pursuant to the outside director grant provision in paragraph 16.2 of the Plan;

     WHEREAS, the Plan (in Section 5.6) and the Agreement (in Section 8) provide that Bancorp has the right to amend the Agreement; and

     WHEREAS, Bancorp has determined to amend the Agreement to provide that the option granted to Optionee under the Agreement shall become fully vested and exercisable on the date of the Optionee's retirement on or after age 85 or upon the Optionee's disability or death.

     NOW, THEREFORE, the Agreement is hereby amended effective as of April 18, 2007 as follows:

     Section 2 (Exercisability) is amended in the Agreement by adding a new sentence to the end of such section as follows:

     Notwithstanding the preceding provisions of this paragraph, upon the retirement of Optionee on or after age 85 or upon the disability or death of Optionee, this option shall be exercisable in full and not only as to those shares with respect to which installments, if any, have then accrued.

     To record this Amendment No. 1 to the Agreement, Bancorp has caused it to be executed on this 18 day of April 2007.

SAN JOAQUIN BANCORP

By /s/ Bruce Maclin
Bruce Maclin
Chairman of the Board

ACCEPTED:

/s/ Elvin G. Berchtold
Elvin G. Berchtold

April 18, 2007
Date

EX-10

AMENDMENT NO. 1
TO THE 
SAN JOAQUIN BANCORP/ELVIN G. BERCHTOLD
2002-2006 NON-QUALIFIED STOCK OPTION AGREEMENTS

     WHEREAS, San Joaquin Bancorp (the "Bancorp") maintains the San Joaquin Bancorp 1999 Stock Incentive Plan (the "Plan") for the benefit of its eligible Key Employees;

     WHEREAS, Bancorp and Elvin G. Berchtold (the "Optionee") entered into Non-Qualified Stock Option Agreements for one-thousand (1,000) shares in each of 2002, 2003, 2004, 2005 and 2006 pursuant to the outside director grant provision in paragraph 16.2 of the Plan (each referred to as an "Agreement and collectively as the "Agreements");

     WHEREAS, the Plan (in Section 15) and the Agreements (in Section 8) provide that Bancorp has the right to amend the Agreements; and

     WHEREAS, Bancorp has determined to amend the Agreements to provide that the option granted to Optionee under each of the Agreements shall become fully vested and exercisable on the date of the Optionee's retirement on or after age 85 or upon the Optionee's disability or death.

     NOW, THEREFORE, each of the Agreements is hereby amended effective as of February 13, 2007 as follows:

     Section 2 (Exercisability) is amended in each Agreement by adding a new sentence to the end of such section as follows:

     Notwithstanding the preceding provisions of this paragraph, upon the retirement of Optionee on or after age 85 or upon the disability or death of Optionee, this option shall be exercisable in full and not only as to those shares with respect to which installments, if any, have then accrued.

     To record this Amendment No. 1 to the Agreements, Bancorp has caused it to be executed on this 13 day of February 2007.

SAN JOAQUIN BANCORP

By /s/ Bruce Maclin

ACCEPTED:

/s/ Elvin G. Berchtold
Elvin G. Berchtold

April 10, 2007
Date

EX-10

AMENDMENT NO. 1
TO THE
 SAN JOAQUIN BANCORP/ROBERT B. MONTGOMERY
2002-2006 NON-QUALIFIED STOCK OPTION AGREEMENTS

     WHEREAS, San Joaquin Bancorp (the "Bancorp") maintains the San Joaquin Bancorp 1999 Stock Incentive Plan (the "Plan") for the benefit of its eligible Key Employees;

     WHEREAS, Bancorp and Robert B. Montgomery (the "Optionee") entered into Non-Qualified Stock Option Agreements for one-thousand (1,000) shares in each of 2002, 2003, 2004, 2005 and 2006 pursuant to the outside director grant provision in paragraph 16.2 of the Plan (each referred to as an "Agreement and collectively as the "Agreements");

     WHEREAS, the Plan (in Section 15) and the Agreements (in Section 8) provide that Bancorp has the right to amend the Agreements; and

     WHEREAS, Bancorp has determined to amend the Agreements to provide that the option granted to Optionee under each of the Agreements shall become fully vested and exercisable on the date of the Optionee's retirement on or after age 85 or upon the Optionee's disability or death.

     NOW, THEREFORE, each of the Agreements is hereby amended effective as of February 13, 2007 as follows:

     Section 2 (Exercisability) is amended in each Agreement by adding a new sentence to the end of such section as follows:

     Notwithstanding the preceding provisions of this paragraph, upon the retirement of Optionee on or after age 85 or upon the disability or death of Optionee, this option shall be exercisable in full and not only as to those shares with respect to which installments, if any, have then accrued.

     To record this Amendment No. 1 to the Agreements, Bancorp has caused it to be executed on this 13 day of February 2007.

SAN JOAQUIN BANCORP

By /s/ Bruce Maclin

ACCEPTED:

/s/ Robert B. Montgomery
Robert B. Montgomery

April 10, 2007
Date

EX-10

Exhibit 10.4

The Board discussed relocation of John Ivy’s primary residence from Texas to California and agreed to purchase the house in Texas to facilitate the move. Upon a motion duly made by Robert Montgomery and seconded by Rogers Brandon, it was unanimously approved to purchase John Ivy’s Texas house for $381,000 based on a recent appraisal.

EX-31

Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Bruce Maclin, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of San Joaquin 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 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 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 control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control 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 control over financial reporting.

Date: May 9, 2007

/S/ BRUCE MACLIN
Bruce Maclin
Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen M. Annis, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of San Joaquin 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 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 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 control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal control 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 control over financial reporting.

Date: May 9, 2007

/S/ STEPHEN M. ANNIS
Stephen M. Annis
Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of San Joaquin Bancorp (the “Company”) on Form 10-Q for the quarter ended March 31, 2007, as filed with the Securities and Exchange Commission, each of the undersigned, in the capacities and on the date indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/ BRUCE MACLIN
Bruce Maclin
Chief Executive Officer
(Principal Executive Officer)
May 9, 2007

/S/ STEPHEN M. ANNIS
Stephen M. Annis
Chief Financial Officer
(Principal Financial and Accounting Officer)
May 9, 2007