Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, ~~2009~~2010.

o ¨ 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 000-51901

SANTA LUCIA BANCORP

(Name of small business issuer in its charter)

State of California		35-2267934
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7480 El Camino Real, Atascadero,		California 93422
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number (805) 466-7087

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

Securities registered under Section 12(g) of the Exchange Act:

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o¨ No x

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

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

~~Check~~Indicate ifby ~~there~~check ismark noif disclosure of delinquent filers inpursuant ~~response~~ to Item 405 of Regulation S-BK ~~contained~~(§5229.405 inof this ~~form~~chapter) is not contained herein, and ~~no disclosure~~ will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o ¨.

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, ~~2009~~2010 (last day of the registrant’s most recently completed second fiscal quarter ) was $139,~~350~~101,~~673~~575.

As of ~~March 10~~February 25, ~~2010~~2011, the Registrant had 12,~~964~~003,~~035~~131 shares of Common Stock outstanding.

The information required in Part III, Items 10 through 14 isare incorporated ~~herein~~ ~~from~~by reference to the ~~Registrant~~registrant’s definitive proxy statement for the ~~2010~~2011 annual meeting of shareholders ~~previously filed pursuant to Regulation 14A and Part II, Items 6 -8 of the 2009 Annual Report to Shareholders filed as an exhibit hereto~~.

Table of Contents

TABLE OF CONTENTS

PART I
ITEM 1.	BUSINESS	23
ITEM 1A.	RISK FACTORS	18
ITEM 1B.	UNRESOLVED STAFF COMMENTS	30
ITEM 2.	PROPERTIES	2030
ITEM 3.	LEGAL PROCEEDINGS	2130
ITEM 4.	(REMOVED AND RESERVED)	30
PART II		21
ITEM 5.	MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	2131
ITEM 6.	SELECTED FINANCIAL DATA	33
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2334
ITEM 7A.	QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	2356
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	2388
ITEM 9A	CONTROLS AND PROCEDURES	2488
ITEM 9B.	OTHER INFORMATION	2489
PART III		25
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	2589
ITEM 11.	EXECUTIVE COMPENSATION	2589
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	2589
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	2589
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	2589
PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	2590
SIGNATURES		3297
EXHIBIT INDEX		3498

~~Table of Contents~~PART I

~~PART~~Certain Istatements contained in this Annual Report on Form 10-K (“Annual Report”), including, without limitation, statements containing the words “estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,” “could,” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements relate to, among other things, our current expectations regarding future operating results, credit quality, net interest margin, strength of the local economy, and allowance for credit losses. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, the ongoing financial crisis and recession in the United States, California and foreign financial markets, the recovery, and bank regulatory and government response thereto, the increase in nonperforming loans and the decrease in real estate values collateralizing many of the Bank’s loans, demographic changes, competition, fluctuations in interest rates, changes in business strategy or developmental plans, changes in governmental regulations, credit quality, the availability of capital to fund the expansion of the Company’s business, and other factors referenced in the Company’s reports filed pursuant to the Exchange Act. These and other important factors are detailed in this report, including in “Item 1A Risk Factors.” When relying on forward-looking statements to make decisions with respect to our company, investors and others are cautioned to consider these and other risks and uncertainties. The company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

~~Certain~~ITEM statements contained in this Annual Report on Form 10-K (“Annual Report”), including, without limitation, statements containing the words “estimate,” “believes,” “anticipates,” “intends,” “may,” “expects,” “could,” and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 19341. ~~These~~ forward-looking statements relate to, among other things, our current expectations regarding future operating results, net interest margin, strength of the local economy, and allowance for credit losses. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, the ongoing financial crisis and recession in the United States, California and foreign financial markets, and bank regulatory and government response thereto, the increase in nonperforming loans and the decrease in real estate values collateralizing many of the Bank’s loans, demographic changes, competition, fluctuations in interest rates, changes in business strategy or developmental plans, changes in governmental regulations, credit quality, the availability of capital to fund the expansion of the Company’s business, and other factors referenced in the Company’s reports filed pursuant to the Exchange Act. These and other important factors are detailed in this report, including in “Item 1A Risk Factors.” When relying on forward-looking statements to make decisions with respect to our company, investors and others are cautioned to consider these and other risks and uncertainties. The company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.BUSINESS

~~ITEM 1. BUSINESS~~General

~~General~~Santa Lucia Bancorp (the “Company”) is a California corporation organized April 3, 2006 to act as the holding company for its wholly owned subsidiary Santa Lucia Bank (the “Bank”), collectively referred to herein as the “Company”. At that time shareholders of the Bank became shareholders of the Company on a one share for one share basis.

~~Santa~~The ~~Lucia~~Bank ~~Bancorp (the “Company”)~~ is a California banking corporation . The Bank was organized ~~April~~as a national banking association on December 319, ~~2006~~1984 toand ~~act~~commenced asoperations on August 5, 1985. On May 30, 1997, the ~~holding~~Bank ~~company~~converted ~~for~~from ~~its~~a ~~wholly~~national ~~owned subsidiary~~bank ~~Santa~~to ~~Lucia~~a ~~Bank~~California (state chartered bank licensed by the ~~“Bank~~California Department of Financial Institutions (DFI”). As a California state member bank, ~~collectively~~the ~~referred~~Bank is subject to ~~herein~~primary assupervision, examination and regulation by the DFI and the Board of Governors of the Federal Reserve System (“~~Company~~FRB”). AtThe ~~that~~Bank ~~time~~is ~~shareholders~~also subject to certain other federal laws and regulations. The deposits of the Bank ~~became~~are ~~shareholders~~insured ofby the ~~Company~~Federal onDeposit aInsurance Corporation (“~~unless~~FDIC”) ~~otherwise~~up ~~noted,~~to ~~one share~~the ~~for~~applicable ~~one~~limits ~~share” basis~~thereof.

~~The~~At ~~Bank is a California banking corporation. The Bank was organized as a national banking association on~~ December 1931, ~~1984 and commenced operations on August 5~~2010, ~~1985. On~~ ~~May 30, 1997,~~ the ~~Bank converted~~Company ~~from~~had aapproximately ~~national bank to a California state chartered bank licensed by the California Department of Financial Institutions (DFI”)~~$249. As8 amillion ~~California~~in ~~state member bank~~assets, ~~the~~$176.8 ~~Bank is~~million ~~subject~~in tonet ~~primary supervision~~loans, ~~examination and regulation by the DFI and the Board of Governors of the Federal Reserve System (“FRB”)~~$233. ~~The~~9 ~~Bank~~million isin ~~also~~deposits, ~~subject to certain other federal laws~~ and ~~regulations~~$7. ~~The deposits~~5 ofmillion ~~the~~in ~~Bank~~stockholders’ ~~are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the applicable limits thereof~~equity.

AtOn ~~December~~April 3126, ~~2009~~2006, the Company ~~had~~formed ~~approximately~~Santa ~~$269.9~~Lucia ~~million in~~(CA) ~~assets,~~Capital ~~$198~~Trust (“Trust”).1 Trust ~~million~~is ina ~~net~~statutory ~~loans,~~business ~~$238~~trust formed under the laws of Delaware used to facilitate the issuance of the trust preferred securities.7 The ~~million~~Trust inis ~~deposits~~a wholly owned, ~~and~~non-financial, ~~$23.0 million~~non-consolidated insubsidiary ~~stockholders’~~of ~~equity~~the Company.

OnOther ~~April 26,~~than ~~2006,~~holding the ~~Company~~shares ~~formed Santa Lucia Bancorp (CA) Capital Trust (“Trust”). Trust is a statutory business trust formed under the laws~~ of ~~Delaware used to facilitate~~ the ~~issuance~~Bank, of the ~~trust~~Company ~~preferred~~conducts ~~securities. The~~no ~~Trust~~significant ~~is a wholly owned, non-financial, non-consolidated subsidiary of the Company~~activities.

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

~~Banking~~The Bank is headquartered in Atascadero, with branch offices in Paso Robles, Arroyo Grande and Santa Maria. The Bank conducts a commercial banking business in San Luis Obispo and northern Santa Barbara Counties, including accepting demand, savings and time deposits, and making commercial, real estate, SBA, agricultural, credit card, and consumer loans. It also offers installment note collection, provides ATM and internet banking access, issues cashiers checks and money orders, sells travelers checks, and provides bank-by-mail, night depository, safe deposit boxes, and other customary banking services. The Bank does not offer trust services or international banking services and does not plan to do so in the near future.

The Bank is headquartered in Atascadero, with branch offices in Paso Robles, Arroyo Grande and Santa Maria. The Bank conducts a commercial banking business in San Luis Obispo and northern Santa Barbara Counties, including accepting demand, savings and time deposits, and making commercial, real estate, SBA, agricultural, credit card, and consumer loans. It also offers installment note collection, provides ATM and internet banking access, issues cashiers checks and money orders, sells travelers checks, and provides bank-by-mail, night depository, safe deposit boxes, and other customary banking services. The Bank does not offer trust services or international banking services and does not plan to do so in the near future.3

The Bank’s operating policy since its inception has emphasized small business commercial banking. Most of the Bank’s customers are retail customers, and small to medium-sized businesses. The Bank takes real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery, equipment and accounts receivable as collateral for loans. The areas in which the Bank has directed virtually all of its lending activities are (i) commercial loans, (ii) installment, (iii) construction loans, and (iv) other real estate loans or commercial loans secured by real estate. As of December 31, 2010, these four categories accounted for approximately 18.2%, 0.9%, 20.2% and 60.7%, respectively, of the Bank’s loan portfolio. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

~~Table~~Most of the Bank’s deposits are attracted by local promotional activities and advertising in the local media. A material portion of the Bank’s deposits have not been obtained from a single person or a few persons, the loss of any one or more of which would have a materially adverse effect on the business of the Bank. As of December 31, 2010, the Bank had approximately 9,800 demand deposit accounts consisting of non-interest bearing (demand), interest-bearing demand and money market accounts with balances totaling $123.2 million, for an average balance per account of approximately $12,571; 4,310 savings accounts with balances totaling $28.1 million, for an average balance per account of approximately $6,520; and 2,313 time certificate of deposit accounts with balances totaling $82.6 million, for an average balance per account of ~~Contents~~approximately $37,711.

The ~~Bank’s~~principal ~~operating~~sources ~~policy since its inception has emphasized small business commercial banking. Most~~ of the Bank’s ~~customers~~revenues are ~~retail~~(i) interest ~~customers,~~ and ~~small~~fees toon ~~medium-sized businesses. The Bank takes real estate~~loans, ~~listed~~(ii) interest ~~and unlisted~~on ~~securities~~investments, ~~savings~~(iii) service ~~and~~charges ~~time~~on ~~deposits,~~deposit ~~automobiles~~accounts, ~~machinery, equipment~~fees ~~and~~on ~~accounts~~mortgage ~~receivable as collateral for~~ loans. ~~The~~and ~~areas~~other incharges ~~which the~~and ~~Bank has directed virtually all of its lending activities are (i) commercial loans~~fees, ~~(ii) installment, (iii) construction loans,~~ and (iv) ~~other real~~miscellaneous ~~estate~~income. ~~loans~~For orthe ~~commercial~~year ~~loans~~ended ~~secured by real estate. As of~~ December 31, ~~2009~~ 2010, these ~~four~~sources ~~categories~~comprised ~~accounted for approximately 20.6~~81%, ~~0.9~~8%, ~~23.~~8% and ~~54.8~~ 3%, respectively, of the Bank’s ~~loan~~total ~~portfolio.~~operating ~~See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations~~income.”

~~Most~~The ofBank ~~the~~has ~~Bank’s~~not ~~deposits~~engaged ~~are~~in ~~attracted~~any bymaterial ~~local~~research ~~promotional~~ activities ~~and~~relating ~~advertising~~to inthe development of new services or the ~~local~~improvement ~~media~~of existing bank services. AThere ~~material~~has ~~portion~~been no significant change in the types of services offered by the Bank~~’s deposits~~ ~~have~~since ~~not~~its ~~been~~inception ~~obtained~~except ~~from~~as afollows: ~~single~~The ~~person~~Bank orpreviously introduced a ~~few~~telephone ~~persons,~~banking service named “Telebanking” which permits the ~~loss of~~customer ~~any~~to ~~one~~obtain orinformation ~~more~~and ofperform other services over the telephone; an internet banking system named “EZLink,” which ~~would~~offers ~~have~~online abanking ~~materially~~and ~~adverse~~computer ~~effect~~bill onpayment; ~~the business~~home equity lines of ~~the~~credit; ~~Bank.~~business Asequipment ofleasing; ~~December 31,~~and ~~2009~~home mortgage loans. In addition, the Bank ~~had~~introduced ~~approximately 9,714~~its ~~demand~~new ~~deposit~~health ~~accounts~~savings ~~consisting~~account ofin ~~non-interest~~2005. ~~bearing~~The ~~(demand), interest-bearing~~Bank ~~demand~~has ~~and~~no ~~money~~present ~~market~~plans ~~accounts~~to ~~with~~add ~~balances~~any ~~totaling~~new line of business that will require the investment ~~$121,461,000,~~of ~~for~~a anmaterial ~~average~~amount ~~balance~~of ~~per~~total ~~account~~assets. Most of ~~approximately~~the ~~$12,504; 4,224~~Bank’s ~~savings~~business ~~accounts~~originates ~~with~~from ~~balances~~San ~~totaling~~Luis ~~$27~~Obispo and northern Santa Barbara Counties,~~478,000,~~ ~~for~~and anthere ~~average balance~~is ~~per~~no ~~account~~emphasis on foreign sources and application of ~~approximately~~funds. $6The Bank’s business,~~505;~~ ~~and~~based 2upon performance to date,~~378~~ ~~time~~does ~~certificate~~not appear to be seasonal. Management of ~~deposit~~ ~~accounts~~the ~~with~~Bank ~~balances~~is ~~totaling~~unaware ~~$89~~of any material effect upon the Bank’s capital expenditures,~~783,000,~~ ~~for~~earnings anor ~~average~~competitive ~~balance~~position ~~per account~~as ofa ~~approximately~~result ~~$37~~of federal,~~756~~ state or local environmental regulations.

The ~~principal sources of the~~ Bank’s ~~revenues~~holds ~~are~~no ~~(i) interest and fees on loans~~patents, ~~(ii) interest~~licenses ~~on investments,~~ (~~iii) service charges on deposit accounts, fees on mortgage loans and~~ other ~~charges~~than ~~and~~licenses ~~fees,~~obtained ~~and~~from ~~(iv) miscellaneous income.~~bank ~~For~~regulatory ~~the year ended December 31~~authorities), ~~2009,~~franchises ~~these~~or ~~sources comprised 82%, 10%, 7% and 1%, respectively, of the Bank’s total operating income~~concessions.

The Bank has not engaged in any material research activities relating to the development of new services or the improvement of existing bank services. There has been no significant change in the types of services offered by the Bank since its inception except as follows: The Bank previously introduced a telephone banking service named “Telebanking” which permits the customer to obtain information and perform other services over the telephone; a internet banking system named “EZLink,” which offers online banking and computer bill payment; home equity lines of credit; business equipment leasing; and home mortgage loans. In addition, the Bank introduced its new health savings account in 2005. The Bank has no present plans to add any new line of business that will require the investment of a material amount of total assets. Most of the Bank’s business originates from San Luis Obispo and northern Santa Barbara Counties, and there is no emphasis on foreign sources and application of funds. The Bank’s business, based upon performance to date, does not appear to be seasonal. Management of the Bank is unaware of any material effect upon the Bank’s capital expenditures, earnings or competitive position as a result of federal, state or local environmental regulations.Employees

~~The~~As of December 31, 2010, the Bank ~~holds~~had noa ~~patents,~~total ~~licenses~~of ~~(other~~81 ~~than~~full-time ~~licenses~~equivalent ~~obtained~~employees. ~~from bank~~The ~~regulatory~~Bank ~~authorities),~~believes ~~franchises~~that orits ~~concessions~~employee relations are satisfactory. The Company has no salaried employees.

~~Employees~~Local Economic Climate

AsThe ofCompany ~~December 31~~believes that the local economies in which it operates, ~~2009~~Atascadero, ~~the~~Paso ~~Bank~~Robles, ~~had~~Arroyo aGrande, ~~total~~and ofSanta 84Maria ~~full-time equivalent~~continue ~~employees.~~to ~~The~~decline ~~Bank~~as ~~believes~~unemployment ~~that~~remains ~~its~~high, ~~employee~~business ~~relations~~cash ~~are satisfactory. The~~flows ~~Company~~continue ~~has~~to ~~no salaried~~be ~~employees~~weak, and the real estate market remains unstable.

~~Local Economic~~The ~~Climate~~state of California’s recent unbalanced budget continues to affect state employee’s monthly wages. Recent indications show the (not seasonally adjusted) unemployment rate within California as of March 31, 2010 of 13.0% compared to December 31, 2009 of 12.1%, an increase of 7.44%. However, both San Luis Obispo and Santa Barbara Counties have unemployment rates well below the State and National averages.

~~The~~Beacon ~~economy~~Economics inis ~~the~~a ~~Company’s~~Los ~~service~~Angeles, ~~area~~California is based ~~primarily~~economics ~~on agriculture,~~research ~~tourism~~firm, ~~light~~is ~~industry,~~forecasting ~~oil~~that ~~and~~total ~~retail~~nonfarm ~~trade. Services~~employment ~~supporting~~growth ~~these~~will ~~industries~~be ~~have also~~sluggish ~~developed~~ in the ~~areas~~short-term, ofpossibly ~~medical,~~slowing ~~financial~~slightly ~~and~~in ~~educational services~~early 2011. ~~The~~ ~~population~~Employment ofwill ~~San~~likely ~~Luis Obispo~~find ~~County~~legs ~~and~~in ~~the~~2012 ~~City~~as ofemployers ~~Santa~~begin ~~Maria~~to ~~(in~~experience ~~northern~~stronger ~~Santa~~and ~~Barbara~~sustained ~~County) totaled~~profits. Beacon ~~approximately~~expects ~~270,000~~the ~~and~~unemployment 86rate,~~000~~ ~~respectively,~~which ~~according~~fell tofrom ~~economic data~~its ~~provided~~peak ~~by State~~ of ~~California census~~10. ~~Access~~7% to ~~numerous~~9.9% ~~recreational~~in ~~activities,~~August ~~including lakes~~2010, ~~mountains and~~will ~~beaches,~~continue ~~provided~~to adrop ~~relatively~~over ~~stable~~the ~~tourist~~next ~~industry~~few ~~from~~years. By ~~many areas including~~ the ~~Los~~end ~~Angeles/Orange~~of ~~County~~2012 ~~basin,~~ the ~~San~~rate ~~Francisco~~will ~~Bay~~have ~~area~~dropped ~~and the~~below ~~San~~8%, ~~Joaquin~~and ~~Valley. Principally~~by ~~due to~~ the ~~diversity~~end of 2015, the ~~various~~rate ~~industries~~will inalmost ~~the~~reach ~~Company’s service area~~6%, ~~both counties~~according ~~have experienced a decline in tourism as travelers continue~~ to ~~attempt to~~Beacon ~~conserve resources~~Economics.

~~Table~~ The University of ~~Contents~~California Santa Barbara Economic Forecast Project reports that the local real estate markets will at best California show signs of slow growth averaging 1.0% to 2.0% in 2011. New construction projects, even retail sites, are being developed in the San Luis Obispo County and expansion plans for the county’s prisons will certainly create jobs, especially in the construction field where they are critically needed.

According to Beacon Economics, the housing market in the San Luis Obispo ~~County~~region ~~Outlook~~has ~~Economic~~also ~~Forecast, copyrighted~~begun ~~and~~to ~~published~~find bysome ~~The~~balance ~~University~~over ofthe ~~California~~past ~~(Santa~~few ~~Barbara)~~quarters, although the rebound remains quite fragile. While falling home ~~sales~~ ~~volume~~prices ~~during~~have ~~the~~dramatically ~~first~~increased ~~two~~home ~~quarters~~affordability, ~~fell~~there ~~3.3%~~are many remaining issues in ~~2009,~~the ~~median~~mortgage ~~home prices~~market that need to be worked out. Foreclosure activity in San Luis Obispo County ~~decreased~~last ~~33.0%~~peaked ~~between~~at 256 units in the ~~second~~4th ~~quarters~~quarter of ~~2007~~ ~~and~~ 2009, ~~median~~before ~~price~~falling ~~for~~back ~~existing~~to ~~single-family~~224 ~~homes~~units ~~with~~by ~~half~~the of2nd ~~that decline~~quarter ~~occurring~~of ~~since~~2010. Compared to the ~~second~~2nd quarter of ~~2008~~2009, foreclosures have risen by 13.4% ~~Single~~in San Luis Obispo County. Beacon Economics is currently forecasting that home prices will stabilize and flatten over the short-~~family~~run ~~homes~~despite ~~sold during~~recent price gains. But once the ~~first~~troubled ~~two~~inventory ~~quarters~~is ofprocessed, ~~2009~~the ~~increased~~region will return to more normal price growth in 2012, driven primarily by ~~1.2%.~~income ~~The~~and ~~declining~~population ~~prices~~ growth rather than by excess debt burdens and ~~weak~~price-to-income ratios at more than double their historic norm. Home sales ~~continue~~will toremain ~~slow~~soft in the ~~pace~~near ofterm ~~new~~but ~~home~~by ~~construction. Sales~~mid-2011, ofsales ~~foreclosed~~in ~~real~~San ~~estate~~Luis ~~have~~Obispo ~~affected and~~should ~~will~~start ~~affect~~to accelerate as problems in the mortgage market ~~values~~are inworked ~~both~~through ~~counties~~and labor markets and incomes improve further.

~~2009 proved to be another challenging year not only on the national level~~However, ~~but~~weakness ~~within~~in the ~~state~~commercial ~~of California~~real ~~and~~estate more specifically our primary market area. As the U.S. housing market continued to wane throughout 2009 and economic growth began to significantly slow, the ability of borrowers to satisfy their obligations to the financial sector ~~began~~is tostill ~~languish~~intensifying. ~~These~~ ~~among~~The ~~other~~decline ~~factors placed severe stress on the U.S. financial system, leading to a crisis of confidence, further downturn~~ in ~~economic growth and unprecedented volatility in~~ the ~~U.S.~~labor ~~equity and credit markets. Our primary~~ market ~~area~~ has ~~historically~~ ~~enjoyed~~produced a ~~more~~rapid ~~stable~~decline ~~level~~in ofdemand economic activity; however, we believe these more macro level concerns have become more evident within our market area. Recent indications show the (preliminary data not seasonally adjusted) unemployment rate within California to be approximately 12.1%. This is up approximately 2.8% from the 9.3% reported at December 2008. Within our primary market area, recent indications show the unemployment rate within San Luis Obispo and Santa Barbara counties to be approximately 9.4% and 9.3%, respectively. This represents increases of approximately 2.8% and 3.0% from the 6.6% and 6.3% reported for ~~San~~office ~~Luis Obispo~~ and ~~Santa~~industrial ~~Barbara counties~~space ~~at December 2008. During 2009 both Santa Barbara County~~ and ~~San~~many ~~Luis~~retail ~~Obispo~~store ~~County continued to experience record foreclosures and delinquencies in both commercial and residential properties~~closings. ~~The UCSB Forecast Project reports that for North Santa Barbara County including Santa Maria for 2010 continued job losses, foreclosures, delinquencies and business failures will continue through 2010.~~

The Company believes that the local economies, in which it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continue to be negatively affected as the loss of jobs increases and ~~businesses~~business cash flows continue to decline causing the rise of delinquencies and foreclosures in the loan portfolio.

Competition

The banking and financial services business in California generally, and in the Company’s service area specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.

The Company’s business is concentrated in its service area, which encompasses primarily San Luis Obispo and northern Santa Barbara Counties. In order to compete with other financial institutions in its service area, the Company relies principally upon local advertising programs; direct personal contact by officers, directors, employees, and shareholders; and specialized services such as courier pick-up and delivery of non-cash banking items. The Company emphasizes to its customers the advantages of dealing with a locally owned and community oriented institution. The Company also seeks to provide special services and programs for individuals in its primary service area who are employed in the agricultural, professional and business fields, such as loans for equipment, furniture, tools of the trade or expansion of practices or businesses. Larger banks may have a competitive advantage because of higher lending limits and major advertising and marketing campaigns. They also perform services, such as trust services, international banking, discount brokerage and insurance services that the Company is not authorized or prepared to offer currently. The Company has made arrangements with its correspondent banks and with others to provide such services for its customers.

Commercial banks compete with savings and loan associations, credit unions, other financial institutions, securities brokerage firms, and other entities for funds. For instance, yields on corporate and government debt securities and other commercial paper affect the ability of commercial banks to attract and hold deposits. Commercial banks also compete for loans with savings and loan associations, credit unions, consumer finance companies, mortgage companies, insurance companies, and other lending institutions.

4Supervision and Regulation

~~Table of~~Regulatory ~~Contents~~and Enforcement Proceedings

~~Supervision~~On December 23, 2010, the Company the Bank and ~~Regulation~~the Federal Reserve Bank of San Francisco (“FRBSF”) entered into a Written Agreement (the “Written Agreement”), effective December 23, 2010, addressing, among other items, management, operations, lending, asset quality and increased capital for the Bank and the Company, as appropriate.

~~General~~5

The ~~Company~~ Written Agreement was the result of a recent examination of the Bank and the Company by the FRBSF that resulted in certain criticisms of the Bank, ~~are~~particularly ~~extensively~~related ~~regulated~~to ~~under~~the ~~both~~overall ~~federal~~quality ~~and~~of ~~state law~~the Bank’s loan portfolio. Many ~~Set~~of ~~forth~~the ~~below~~requirements isof athe ~~summary~~Written ~~description~~Agreement ofreflect ~~certain~~recommendations ~~laws~~or requirements from the Report of Examination that ~~relate~~the to Bank has been working on since the ~~regulation~~date of the ~~Company~~examination. Subsequent to the examination and in order to enhance the Bank.’s ~~The~~ability ~~description~~to ~~does~~remedy ~~not~~many ~~purport~~of the noted criticisms, the Bank made numerous changes in the executive structure to include a newly appointed Chief Credit Officer (CCO) and Chief Financial Officer. In addition, Stanley R. Cherry, Director and former President/CEO has rejoined the Bank as a senior credit administrator and will be ~~complete~~working ~~and~~closely iswith ~~qualified~~the inCCO ~~its~~to ~~entirety~~manage bythe ~~reference~~day-to-day credit functions. The Company and Bank will continue their efforts to comply with all provisions of the ~~applicable laws~~Written Agreement, and ~~regulations~~believe they are taking the appropriate steps necessary to comply in a timely fashion.

~~However~~Among ~~Congress~~other ~~and~~things, the ~~executive~~ ~~branch~~Written ~~are~~Agreement ~~likely~~requires ~~to consider significant new regulatory reform initiatives in the near future, which could result in material changes to the current oversight structure.~~that:

· The Company serve as a source of strength for the Bank;

· The ~~Company~~ isboard ~~a bank holding company within the meaning~~ of ~~the~~directors ~~Bank Holding Company Act~~ of ~~1956, as amended (~~the “Bank ~~Holding~~submit ~~Company~~a ~~Act”),~~plan ~~and is registered as such with, and subject~~ to ~~the~~strengthen ~~supervision~~board oversight of, the ~~Federal~~management ~~Reserve Board. The Company is required to file with the Federal Reserve Board quarterly~~ and ~~annual~~operations ~~reports~~of ~~and such additional information as~~ the ~~Federal Reserve Board may require pursuant to the~~ Bank ~~Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.~~;

· The ~~Company~~ isBank ~~required~~submit to ~~obtain~~ the ~~approval~~FRBSF ofa ~~the~~plan ~~Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect~~ to ~~such acquisition~~strengthen ofcredit ~~shares,~~risk ~~the~~management Company would own or control more than 5% of any class of outstanding voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger of consolidation of the Company and another bank holding company.practices;

· The ~~Company~~ ~~is prohibited by the~~ Bank ~~Holding~~submit ~~Company~~to ~~Act, except in certain statutorily prescribed instances, from acquiring direct of indirect ownership or control of more than 5% of~~ the ~~outstanding~~FRBSF ~~voting~~revised ~~shares~~written oflending ~~any~~and ~~company~~credit ~~that is~~administration ~~not~~policies ~~a bank or bank holding company~~ and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. See discussion under “Financial Modernization Act” below for additional information.procedures;

· The ~~Federal~~ ~~Reserve~~Bank ~~Board~~submit ~~may~~to ~~require~~FRBSF that the Company terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a ~~significant~~revised ~~risk~~policy tofor the ~~financial safety,~~effective ~~soundness~~grading ~~or stability~~ of ~~any of its banking subsidiaries. The Federal Reserve Board also has~~ the ~~authority~~ toBank’s ~~regulate~~loan provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve board prior to purchasing or redeeming its equity securities.portfolio;

~~Under~~· ~~the Federal~~The ~~Reserve~~Bank ~~Board’s~~submit ~~regulations, a bank holding company is required~~ to ~~serve~~ ~~as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is~~ the ~~Federal~~FRBSF ~~Reserve Board’s policy that in serving as~~ a ~~source~~written ofprogram ~~strength~~for tothe ~~its subsidiary banks~~effective, aongoing ~~bank holding~~third ~~company~~party ~~should~~review ~~stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods~~ of ~~financial stress or adversity and should maintain~~ the ~~financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company~~Bank’s ~~failure~~ toloan ~~meet~~portfolio, ~~its~~and ~~obligations~~that tothe ~~serve~~board asof adirectors ~~source~~take ofappropriate ~~strength~~steps to ~~its~~ensure ~~subsidiary banks~~that ~~will generally be considered by~~ the ~~Federal~~findings ~~Reserve Board to be an unsafe and unsound banking practice or a violation~~ of ~~the~~such ~~Federal~~reviews ~~Reserve~~are ~~Board’s regulations~~addressed orby ~~both.~~management;

· The ~~Company~~ ~~and the~~ Bank ~~are~~not ~~prohibited~~extend, ~~from~~renew, ~~engaging~~or inrestructure ~~certain~~any ~~tie-in~~credit ~~arrangements in~~to ~~connection~~any ~~with~~borrower ~~any~~(or ~~extension~~related ofinterest) ~~credit,~~whose ~~sale~~loans or ~~lease~~other ofextensions ~~property or furnishing~~ of ~~services. For~~credit ~~example, with~~are ~~certain~~criticized ~~exceptions,~~in ~~neither~~ the ~~Company~~FRBSF’s ~~nor~~most ~~the~~recent ~~Bank~~report ~~may condition an extension~~ of ~~credit~~examination to(the a“Report ~~customer~~of ~~on either (1~~Examination”) a, ~~requirement~~or ~~that~~in ~~the customer~~any ~~obtain~~subsequent ~~additional~~examination, ~~services~~without ~~provided~~the byprior usapproval orof ~~(2) an~~a ~~agreement~~majority by of the ~~customer~~full toboard ~~refrain~~of ~~from~~directors ~~obtaining~~or ~~other~~a ~~services~~designated ~~from~~committee ~~a competitor.~~thereof;

5· The Bank submit an acceptable written program to the FRBSF that is designed to improve the Bank’s position through repayment, amortization, liquidation, additional collateral, or other means on certain past due or problem loans and other real estate owned (“OREO”) identified at the date of the Written Agreement, and to develop a similar plan for any such loans or OREO identified in the future. The Bank also must submit quarterly progress reports to the FRBSF on such loans and OREO;

~~Table~~ · The Bank eliminate from its books, by charge-off or collection, all assets or portions of ~~Contents~~assets classified “loss” in the Report of Examination that have not been previously charged off;

· The ~~Company~~ isBank ~~subject~~review toand ~~the~~revise ~~periodic~~its ~~reporting~~ALLL ~~requirements~~methodology ofconsistent ~~the~~with ~~Securities Exchange~~relevant ~~Act~~supervisory ofguidance ~~1934,~~and asthe ~~amended,~~findings and ~~files~~recommendations ~~reports~~regarding ~~and~~the ~~proxy~~ALLL ~~statements pursuant~~in tothe ~~such~~Report ~~Act~~of ~~with~~Examination, and submit to the ~~Securities~~FRBSF ~~and~~a ~~Exchange~~plan ~~Commission~~for ~~(the~~maintenance ~~“SEC”).~~of an adequate ALLL;

~~For~~· ~~a discussion~~The ofCompany ~~restrictions~~and onthe Bank submit to the ~~Company’s~~FRBSF ~~ability~~an acceptable joint written plan to ~~pay~~maintain ~~dividends~~sufficient capital at the Bank, ~~see~~and ~~“Item 5~~notify ~~Market~~the ~~for~~FRBSF ~~Common~~following ~~Equity,~~any ~~Related~~calendar ~~Stockholder~~quarter ~~Matters~~in ~~and~~which ~~Issuer~~the ~~Purchases~~Bank’s ~~of Equity~~capital ~~Securities,”~~ratios fall below. minimums set forth in such plan, including in such notice steps the Bank or Company intend to take to increase capital ratios;

· The Bank submit to the FRBSF an acceptable written contingency funding plan;

~~The Bank~~· ~~is chartered under the laws of the State of California and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.~~ The Bank issubmit ~~subject~~ to the ~~supervision~~FRBSF ~~of,~~a ~~and~~written ~~is regularly examined by, the DFI and the FRB. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank’s~~ business ~~and condition.~~plan ~~Various~~for ~~requirements~~2011 ~~and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes relate~~ to ~~many~~improve ~~aspects of~~ the Bank’s ~~operations, including~~earnings ~~reserves against deposits, interest rates payable on deposits, loans, investments, mergers~~ and ~~acquisitions,~~overall ~~borrowings, dividends and locations of branch offices. Further, the Bank is required to maintain certain levels of capital.~~condition;

~~If,~~· ~~as a~~The ~~result~~Company ofand anthe ~~examination~~Bank ofnot adeclare ~~bank, the DFI~~ or ~~FRB~~pay ~~should~~any ~~determine~~dividends ~~that~~without the ~~financial~~ ~~condition,~~prior ~~capital~~written ~~resources,~~approval ~~asset quality, earnings prospects, management, liquidity, or other aspects~~ of the ~~Bank’s~~FRBSF ~~operations~~and ~~are unsatisfactory or that~~ the ~~Bank~~Director orof ~~its management is violating or has violated any law or regulation, various remedies are available to these regulatory agencies. Such remedies include~~ the ~~power~~Division toof ~~enjoin~~Banking ~~“unsafe~~Supervision orand ~~unsound” practices,~~Regulation to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the ~~Bank,~~Board toof ~~assess~~Governors ~~civil~~of ~~monetary penalties, to remove officers and directors, and ultimately to terminate~~ the ~~Bank’s~~Federal ~~deposit~~Reserve ~~insurance,~~System ~~which for a California chartered bank would result in a revocation of~~ (the ~~bank’s charter.~~“Director”);

The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a quarterly statutory assessment. The Bank is also subject to certain regulations of the Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Further, the Bank is required to maintain certain levels of capital.6

~~Capital Standards~~· The Company not take any other form of payment representing a reduction in capital from the Bank without the prior written approval of the FRBSF;

· The ~~FRB~~ Company and ~~the~~its ~~FDIC~~nonbank ~~have~~subsidiary ~~adopted~~not ~~risk-based~~make ~~minimum~~any ~~capital~~distributions ~~guidelines intended to provide a measure~~ of ~~capital~~interest, ~~that~~principal, ~~reflects~~or ~~the~~other ~~degree~~sums ofon ~~risk~~subordinated ~~associated~~debentures ~~with~~or ~~a banking~~trust ~~organization’s~~preferred ~~operations~~securities ~~for~~without ~~both transactions reported on~~ the ~~balance sheet~~prior aswritten ~~assets~~approval ~~and transactions, such as letters~~ of ~~credit~~the ~~and~~FRBSF ~~recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets~~ and ~~credit~~the equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.Director;

~~A banking~~· ~~organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets.~~ The ~~regulators~~Company ~~measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital~~ and ~~limited~~its ~~amounts~~nonbank ofsubsidiary ~~Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock~~not, ~~retained earnings,~~directly ~~non-cumulative~~or ~~perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries~~indirectly, ~~less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses~~incur, ~~cumulative preferred stock~~increase, ~~long~~or ~~term~~guarantee ~~preferred~~any ~~stock, eligible term subordinated~~ debt ~~and certain~~without ~~other~~prior ~~instruments~~written ~~with~~approval ~~some characteristics~~ of ~~equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of~~ the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition, the DFI has authority to take possession of the business and properties of a bank in the event that the tangible shareholders’ equity of the bank is less than the greater of (i) 4% of the bank’s total assets or (ii) $1,000,000.FRBSF;

6· The Company not, directly or indirectly, purchase or redeem any shares of its stock without the prior written approval of the FRBSF;

~~Table~~ · The Bank immediately take all necessary steps to correct all violations of ~~Contents~~law and regulation cited in the Report of Examination;

~~In addition~~· toThe ~~the~~Company ~~risk-based~~and ~~guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as~~ the ~~leverage~~Bank ~~ratio.~~submit ~~For~~any anew ~~banking~~officer ~~organization~~or ~~rated in the highest of the five categories used by regulators to rate banking organizations~~director, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 4%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or ~~practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a~~ change ~~could~~in ~~affect the ability of the Bank to grow and could restrict the amount of profits, if~~ any, ~~available~~existing ~~for~~officer’s ~~the~~or ~~payment of dividends. It is the Bank~~director’s ~~policy~~duties, to ~~remain~~the ~~“well~~FRBSF ~~capitalized” status, and review alternatives~~ for ~~raising~~ ~~capital~~prior ifapproval ~~necessary~~or ~~to keep such status.~~non-objection;

	Minimum		Minimum		December 31, 2009
	Capital		“Well Capitalized”		Bank		Company
	Requirements		Bank		Actual		Actual
LEVERAGE RATIO	4.0	%	5.0	%	9.7	%	10.3	%
TIER 1 RISK-BASED RATIO	4.0	%	6.0	%	11.9	%	12.5	%
TOTAL RISK-BASED RATIO	8.0	%	10.0	%	13.2	%	13.9	%

The Company and the Bank seek prior approval or non-objection from the FRBSF before making any indemnification or severance payment to an officer or director;

~~Under applicable~~· ~~regulatory~~The ~~guidelines,~~Company and the Bank ~~was~~submit ~~considered~~to ~~“Well~~the ~~Capitalized”~~FRBSF ~~at December 31,~~joint ~~2009.~~quarterly written progress reports on efforts to comply with the Written Agreement;

~~Santa Lucia~~The ~~Bancorp~~Written ~~issued~~Agreement ~~$5,155,000~~will inremain ~~junior~~effective ~~subordinated~~and ~~debt~~enforceable ~~securities~~until ~~(the~~stayed, ~~“debt securities”) to the Santa Lucia Bancorp (CA) Capital Trust~~modified, aterminated ~~statutory~~or ~~trust created~~suspended ~~under~~in ~~the~~writing ~~laws~~by of the ~~State of Delaware~~FRBSF. ~~These~~ ~~debt~~The ~~securities~~foregoing ~~are~~description ~~subordinated to effectively all borrowings~~ of the ~~Company~~Written ~~and~~Agreement ~~are~~is ~~due~~a summary and ~~payable~~does onnot ~~July 7, 2036. These~~purport ~~debt~~to ~~securities may~~ be ~~redeemed~~ ~~for~~a ~~105%~~complete description of ~~the~~all ~~principal~~of ~~balance~~its ~~through July 7~~terms, ~~2011~~ and ~~then at par thereafter. Interest~~ is ~~payable quarterly~~qualified ~~beginning~~in ~~July 7,~~its ~~2006~~entirety atby ~~1.48%~~reference ~~over the quarterly adjustable 3-month LIBOR. Of this $5.2 million, the Company contributed $3.0 million~~ to ~~the~~a ~~Bank~~copy ~~and~~of ~~retained $2.2 million at~~ the ~~Company~~ ~~level. The~~Written ~~securities~~Agreement, doattached ~~not entitle the holders to voting rights~~ in ~~the~~an ~~Company~~8-K ~~but~~filing ~~will~~with ~~contain certain restrictive covenants, including restrictions on~~ the ~~payment~~Securities ofand ~~dividends~~Exchange ~~to the~~Commission ~~holders of~~ (the ~~Company’s~~“SEC”) ~~common~~filed ~~stock in the event that interest payments~~ on ~~the~~December ~~trust~~29, ~~preferred securities are postponed~~2010. ~~The capital contribution received by the Bank from the trust preferred issuance is designated as Tier 1 capital for regulatory purposes.~~

~~Under applicable~~The ~~regulatory~~California ~~guidelines~~Department of Financial Institutions (“DFI”) completed an examination of the Bank in the fourth quarter of 2010. Based upon discussion with the DFI following the examination, the ~~Company~~Bank’s ~~trust~~condition ~~preferred~~has ~~securities issued~~been byfurther ~~our~~downgraded. Further, ~~subsidiary~~the ~~capital~~Bank ~~trust~~likely ~~qualify~~will asreceive ~~Tier~~some 1form of formal enforcement action from the DFI. While we expect the action from the DFI to be similar in scope to the Written Agreement, it will differ in at least one important respect. While the Written Agreement requires the Bank to submit a capital upplan to the FRBSF, the agreement does not specify a ~~maximum~~ ~~limit~~particular level of ~~25%~~capital ofthe ~~Tier~~Company 1or ~~capital~~Bank must maintain. The DFI has indicated that its action will include specific minimum capital ratios that the Bank ~~Any~~must ~~additional~~meet ~~portion~~for ofboth the ~~trust~~tier ~~preferred~~1 ~~securities~~leverage ~~would~~and ~~qualify as~~total ~~Tier~~risk IIbased capital ratios. As At ofthis ~~December 31~~time, ~~2009~~ the ~~subsidiary~~Bank ~~trust~~has ~~had~~not ~~$5.2~~been ~~million~~advised inof ~~trust~~the ~~preferred~~minimum ~~securities outstanding~~capital ratios sought by the DFI. However, ~~all~~those ofratios ~~which~~will ~~qualifies~~be asin ~~Tier~~excess 1of the Bank’s current capital ratios.

~~In addition~~While the Company and Bank are moving diligently to comply with the Written Agreement and to respond to the criticisms of the FRBSF and DFI, there can be no assurance that full compliance will be achieved with either the Written Agreement or any formal action sought by the DFI. As ~~has~~a ~~authority~~result, the Company and the Bank could become subject to ~~take~~further ~~possession~~regulatory restrictions or penalties. Full satisfaction of the ~~business~~Written Agreement and ~~properties~~ ofthe aaction ~~bank~~to inbe sought by the ~~event~~DFI ~~that~~will depend in part on raising a significant amount of additional capital. The Company’s ability to raise capital will depend on market conditions, which are outside the ~~tangible~~Company’s ~~shareholders~~control, and also on the Bank’s ~~equity~~financial ofperformance and condition. Should the Bank’s asset quality ~~bank~~continue isto ~~less~~erode ~~than~~and require significant additional provision for loan losses, resulting in additional future net operating losses at the ~~greater~~Bank, ofthe ~~(i) 4%~~Company’s ofability to raise capital may be impaired. In addition, further operating losses would cause the ~~bank~~Bank’s ~~total~~capital ~~assets~~levels orto ~~(ii) $1~~decline further,~~000,000~~ requiring the raising of more capital.

During the third quarter of 2003, the Bank undertook and completed a private placement of subordinated debentures (“notes”) to augment is Tier II capital. The total principal amount of the notes issued was $2,000,000. The notes were sold pursuant to an applicable exemption from registration under the Securities Act of 1933 to certain accredited investors, including some of the Company’s directors and executive officers. The notes include quarterly payment of interest at prime plus 1.5% and quarterly principal installments of approximately $166,666 commencing on September 30, 2008 until paid in full on June 30, 2011. As of December 31, 2009 the outstanding balance was $999,932.7

~~Participation in the Capital Purchase Program of the Troubled Asset Relief Program.~~General

OnThe ~~October 3,~~Company ~~2008, President~~and ~~Bush signed into law~~ the ~~Emergency~~Bank ~~Economic~~are ~~Stabilization~~extensively ~~Act~~regulated ofunder ~~2008 (“EESA”)~~both ~~enacted~~federal byand ~~the~~state Ulaw.S. ~~Congress~~Set inforth ~~response~~below tois ~~the~~a ~~financial~~summary ~~crises affecting~~description ~~the~~of ~~banking~~certain ~~system~~laws ~~and~~that ~~financial~~relate ~~markets and gong concern threats~~ to ~~investment~~ ~~banks and other financial institutions. On October 14, 2008,~~ the ~~U.S.~~regulation ~~Department~~ of ~~Treasury~~the ~~(“U.S.~~Company ~~Treasury”)~~and ~~announced~~ the ~~Troubled Asset Relief Program Capital Purchase Program (“TARP”)~~Bank. ~~This program~~ ~~made~~The ~~$250~~description ~~billion~~does ofnot ~~capital~~purport ~~available~~ to ~~U.S.~~be ~~financial~~complete ~~institutions from~~and ~~the~~is ~~initial~~qualified ~~$350~~in ~~billion~~its ~~authorized~~entirety by ~~the~~reference ~~EESA~~to in the ~~form~~applicable oflaws ~~preferred stock~~and ~~investments by the U~~regulations.~~S. Treasury~~

7In addition, Congress and the executive branch are taking action to change significantly bank regulations. The recent Dodd-Frank Wall Street Reform and Consumer Protection Act was a first step in revised regulation, but many rules and regulations remain to be written or implemented under that act, and further legislation in this area is likely.

~~Table~~The ~~of Contents~~Company

inThe ~~qualifying~~Company ~~U.S. controlled~~is ~~banks~~a bank holding company within the meaning of the Bank Holding Company Act of 1956, ~~savings~~as ~~associations~~amended (the “Bank Holding Company Act”), and ~~certain~~is ~~bank~~registered as such with, and ~~savings~~subject to the supervision of, the Federal Reserve Board. The Company is required to file with the Federal Reserve Board quarterly and ~~loan holding~~annual ~~companies~~reports ~~under~~and such additional information as the ~~following~~Federal ~~general~~Reserve ~~terms:~~Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.

· The ~~preferred~~Company ~~stock~~is ~~issued~~required to obtain the ~~U.S.~~approval ~~Treasury~~of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would ~~pay~~own or control more than 5% ~~dividends~~ of any class of outstanding voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the ~~first~~merger ~~five~~of ~~years,~~consolidation of the Company and ~~then~~another 9%bank ~~dividends~~holding ~~thereafter;~~company.

~~· In~~The ~~connection~~Company ~~with~~is prohibited by the ~~purchase~~Bank ofHolding ~~preferred~~Company ~~stock~~Act, ~~the~~except ~~U.S.~~in ~~Treasury will~~certain ~~receive~~statutorily ~~warrants~~prescribed ~~entitling~~instances, from acquiring direct of indirect ownership or control of more than 5% of the Uoutstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries.S. However, ~~Treasury~~the Company may, subject to ~~buy~~the prior approval of the ~~participating institution’s~~Federal ~~common~~Reserve ~~stock~~Board, ~~equivalent~~engage in ~~value~~any, toor ~~15%~~acquire shares of companies engaged in, activities that are deemed by the ~~preferred~~Federal ~~stock;~~Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. See discussion under “Financial Modernization Act” below for additional information.

· The ~~preferred~~Federal ~~stock~~Reserve Board may ~~not~~require bethat ~~redeemed~~the ~~for~~Company terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a ~~period~~significant risk to the financial safety, soundness or stability of ~~three~~any ~~years~~of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, ~~except~~ ~~with~~including ~~proceeds~~authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from ~~high-quality~~the ~~private~~Federal ~~capital;~~Reserve board prior to purchasing or redeeming its equity securities.

~~· The~~Under ~~consent~~the ofFederal ~~the~~Reserve ~~U.S.~~Board’s ~~Treasury~~regulations, ~~will~~a bebank holding company is required to ~~increase~~serve ~~common dividends~~as ~~per~~a ~~share~~source orof ~~any~~financial ~~share~~and ~~repurchases,~~managerial ~~with~~strength ~~limited~~to ~~exceptions~~its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, ~~during~~ it is the ~~first~~Federal ~~three~~Reserve ~~years~~Board’s policy that in serving as a source of strength to its subsidiary banks, ~~unless~~a ~~the~~bank ~~preferred~~holding ~~stock~~company ~~has~~should ~~been~~stand ~~redeemed~~ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will ~~transferred~~generally be considered by the Federal Reserve Board to ~~third~~be ~~parties;~~an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.

~~· Participating~~The ~~companies~~Company ~~must~~and ~~adopt~~ the ~~U.S.~~Bank ~~Treasury’s~~are ~~standard~~prohibited ~~for executive~~from ~~compensation~~engaging ~~and~~in ~~corporate~~certain ~~governance~~tie-in ~~for~~arrangements ~~the~~in ~~period~~connection ~~during~~with ~~which~~any ~~the U.S.~~extension ~~Treasury~~of ~~holds~~credit, ~~the~~sale ~~equity~~or ~~issued~~lease ~~under~~of ~~the~~property ~~TARP~~or furnishing of services. AtFor example, with certain exceptions, neither the ~~close~~Company nor the Bank may condition an extension of ~~Company’s~~credit ~~TARP~~to ~~transaction, these~~a ~~executive~~customer ~~compensation~~on ~~restrictions~~either ~~included~~(1) a ~~the~~requirement that the ~~Company,~~customer ~~among~~ obtain additional services provided by us or (2) an agreement by the customer to refrain from obtaining other ~~things,~~services ~~must:~~from a competitor.

· Ensure that the incentive compensation programs for its senior executive officers do not encourage unnecessary and excessive risks that threaten the value of the Company8

~~· Implement~~The aCompany ~~required~~is ~~clawback~~subject to the periodic reporting requirements of ~~any~~the ~~bonus~~Securities orExchange ~~incentive~~Act ~~compensation paid~~of to1934, ~~the~~as ~~Company’s~~amended, ~~senior~~and ~~executive~~files ~~officers~~reports ~~based~~and onproxy statements ~~of earnings,~~pursuant ~~gains,~~to orsuch ~~other~~Act ~~criteria~~with ~~that~~the ~~are~~Securities ~~later~~and ~~proven~~Exchange toCommission be(the ~~materially inaccurate;~~“SEC”).

~~· Not~~For ~~make~~a ~~any~~discussion ~~“golden~~of ~~parachute~~restrictions ~~payment”~~on ~~(as~~the ~~defined~~Company’s inability ~~the~~to ~~Internal Revenue~~pay ~~Code)~~dividends, tosee ~~any~~“Item of5 ~~The~~Market ~~Company’s~~for ~~senior~~Common ~~executive~~Equity, ~~officers;~~Related Stockholder Matters and Issuer Purchases of Equity Securities,” below.

~~· Agree~~The ~~not to deduct for tax purposes executive compensation in excess of $500,000 in any one fiscal year for each of the Company’s senior executive officers.~~Bank

~~December 19, 2008,~~The Bank is chartered under the ~~Company~~laws ~~entered~~of ~~into~~the aState ~~Purchase~~of ~~Agreement~~California ~~with~~and ~~the~~its ~~United~~deposits ~~States Department~~are ofinsured by the ~~Treasury~~Federal ~~(the~~Deposit Insurance Corporation (“~~Treasury~~FDIC”), ~~pursuant~~ to ~~which~~ the ~~Company agreed~~extent provided by law. The Bank is subject to ~~issue~~the supervision of, and ~~sell~~is 4regularly examined by,~~000~~ ~~shares~~the DFI and the FRB. Such supervision and regulation include comprehensive reviews of all major aspects of the ~~Company~~Bank’s ~~Preferred~~business ~~Stock~~and ascondition. ~~Fixed Rate~~Various ~~Cumulative~~requirements ~~Perpetual~~and ~~Preferred~~restrictions ~~Stock,~~under ~~Series A~~the (laws of the ~~“Preferred~~United ~~Stock)~~ States and athe ~~Warrant~~State toof ~~purchase~~California ~~38,107~~affect ~~shares~~the operations of the ~~Company’s~~Bank. ~~Common~~Federal ~~Stock~~and ~~(adjusted for~~California statutes relate to many aspects of the 2%Bank’s ~~stock~~operations, ~~dividend)~~including ~~for~~reserves anagainst ~~aggregate~~deposits, ~~purchase~~interest ~~price~~rates ofpayable $4on deposits,~~000~~ loans,~~000~~ ~~in cash.~~investments, Inmergers ~~connection~~and ~~with~~acquisitions, ~~this~~borrowings, ~~transaction~~dividends ~~the~~and ~~Company~~locations ~~incurred~~of ~~$50~~branch offices. Further,~~000~~ inthe ~~costs~~Bank is required to maintain certain levels of capital.

~~The Preferred~~If, ~~Stock~~as ~~will~~a ~~qualify~~result asof ~~Tier~~an 1examination of a bank, the DFI or FRB should determine that the financial condition, capital ~~and~~resources, ~~will~~asset ~~pay~~quality, ~~cumulative dividends~~earnings ~~quarterly~~prospects, atmanagement, aliquidity, ~~rate~~or other aspects of 5%the ~~per~~Bank’s ~~annum~~operations ~~for~~are unsatisfactory or that the ~~first~~Bank ~~five~~or ~~years~~its ~~and~~management ~~9% per~~is ~~annum~~violating ~~thereafter~~or has violated any law or regulation, various remedies are available to these regulatory agencies. ~~The~~Such ~~Preferred~~remedies ~~Stock~~include ~~may~~the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be ~~redeemed~~judicially byenforced, ~~the~~to ~~Company~~direct ~~after three~~an ~~years.~~increase ~~Prior~~in capital, to restrict the ~~end~~growth of the ~~three~~Bank, ~~years~~to assess civil monetary penalties, ~~the~~to ~~Preferred~~remove ~~Stock~~officers ~~may~~and ~~be redeemed~~directors, ~~only~~and ~~with~~ultimately ~~proceeds~~to ~~from~~terminate the Bank’s ~~sale~~deposit ofinsurance, ~~qualifying~~which ~~equity~~for ~~securities~~a California chartered bank would result in a revocation of the ~~Company~~bank’s charter.

The ~~Warrant~~ ~~has~~deposits aof ~~10-year~~the ~~term~~Bank are insured by the FDIC in the manner and isto ~~immediately~~the ~~exercisable~~extent ~~upon~~provided ~~its~~by ~~issuance~~law. For this protection, ~~with~~ anthe ~~exercise~~Bank ~~price,~~pays a quarterly statutory assessment. The Bank is also subject to ~~anti-dilution~~certain ~~adjustments~~regulations of the Federal Reserve Board and applicable provisions of California law, ~~equal~~insofar toas ~~$15~~they do not conflict with or are not preempted by federal banking law.~~745 per~~ Various ~~share~~other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank’s operations, ~~adjusted~~including ~~for~~reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Further, the 2%Bank ~~stock~~is ~~dividend~~required to maintain certain levels of capital.

~~The~~Capital ~~American Recovery and Reinvestment Act of 2009~~Standards

OnThe ~~February 17, 2009,~~FRB ~~President~~and ~~Obama~~the ~~signed~~FDIC ~~into~~have ~~law~~adopted ~~The~~risk-based ~~American~~minimum ~~Recovery~~capital ~~and~~guidelines ~~Reinvestment Act~~intended ofto ~~2009~~provide ~~(the~~a ~~“Stimulus~~measure ~~Bill”),~~of ~~more~~capital ~~commonly~~that ~~known~~reflects as the ~~economic~~degree ~~stimulus or~~of ~~economic~~risk ~~recovery~~associated ~~package. The Stimulus~~with ~~Bill includes~~ a ~~wide~~banking ~~variety~~organization’s ofoperations ~~programs~~for ~~intended~~both totransactions ~~stimulate~~reported on the ~~economy~~ ~~and~~balance ~~provide~~sheet ~~for~~as ~~extensive~~assets ~~infrastructure,~~and ~~energy~~transactions, ~~health~~such ~~and~~as ~~education needs. In~~letters ~~addition,~~of ~~the~~credit ~~Stimulus~~and ~~Bill imposes~~recourse ~~certain~~arrangements, ~~new~~which ~~executive~~are ~~compensation~~recorded ~~and~~as ~~corporate~~off ~~expenditure~~balance ~~limits~~sheet ~~on all~~items. ~~current~~Under ~~and~~these ~~future~~guidelines, ~~TARP~~nominal ~~recipients,~~dollar ~~including~~amounts ~~the~~of ~~Company,~~assets ~~that~~and ~~are~~credit ~~in addition~~equivalent toamounts ~~those~~of ~~previously~~off ~~announced~~balance bysheet ~~the~~items ~~U.S.~~are ~~Treasury,~~multiplied ~~until~~by ~~the institution~~one ~~has~~of ~~repaid~~several ~~the~~risk ~~U.S.~~adjustment ~~Treasury~~percentages, which isrange ~~now~~from ~~permitted~~0% ~~under~~for ~~the Stimulus~~assets ~~Bill~~with ~~without~~low ~~penalty~~credit ~~and~~risk, ~~without~~such ~~the~~as ~~need~~certain toU.S. ~~raise~~Treasury ~~new capital~~securities, ~~subject~~ to ~~the~~100% ~~U.S.~~for ~~Treasury’s~~assets ~~consultation~~ with ~~the~~relatively ~~recipient’s~~high ~~appropriate regulatory~~credit ~~agency~~risk, such as business loans.

~~In addition~~A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, ~~ARRA~~which ~~directs~~includes off balance sheet items, against both total qualifying capital (the ~~Treasury~~sum toof ~~review~~Tier ~~previously~~1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, non-~~paid~~cumulative ~~bonuses~~perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, ~~retention~~ ~~awards~~less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and ~~other~~lease ~~compensation~~losses, ~~paid~~cumulative topreferred ~~senior~~stock, ~~executive~~long ~~officers~~term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other ~~highly~~requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-~~compensated~~adjusted ~~employees~~assets of ~~each~~8% ~~TARP~~and ~~recipient~~a minimum ratio of Tier 1 capital to ~~determine whether~~risk-adjusted ~~any~~assets ~~such~~of ~~payments~~4%. ~~were~~In ~~excessive~~addition, ~~inconsistent~~the ~~with~~DFI has authority to take possession of the ~~purposes~~business and properties of ~~ARRA~~ ora bank in the ~~TARP,~~event orthat ~~otherwise~~the ~~contrary~~tangible toshareholders’ equity of the ~~public~~bank ~~interest.~~is Ifless than the ~~Treasury determines~~greater ~~that~~of ~~any~~(i) 4% ~~such~~of ~~payments~~the ~~have~~bank’s ~~been~~total assets or (ii) $1,000,000.

~~Table~~In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 4%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or ~~Contents~~practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. It is the Bank’s policy to remain “well capitalized” status, and review alternatives for raising capital if necessary to keep such status.

~~made by~~The aCompany ~~TARP~~is ~~recipient, the Treasury will seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursements to the U. S. Government (~~not ~~the TARP recipient) with respect to any such compensation or bonuses. ARRA also permits the Treasury,~~ subject to ~~consultation~~similar ~~with~~regulatory herequirements ~~appropriate~~because ~~federal~~its ~~banking~~consolidated ~~agency,~~assets todo ~~allow~~not ~~a TARP~~exceed ~~recipient~~$500 ~~to repay any assistance previously provided to such TARP recipient under the TARP~~million, ~~without regard to whether~~ the ~~TARP~~minimum ~~recipient~~asset ~~has replaced~~size ~~such~~criteria ~~funds~~for ~~from~~bank ~~any~~holding ~~source,~~companies ~~and~~subject ~~without regard~~ to ~~any~~those ~~waiting period~~requirements. ~~Any~~ ~~TARP~~The ~~recipient~~Bank’s ~~that~~actual ~~repays~~capital ~~its~~ratios ~~TARP~~and ~~assistance~~the ~~pursuant~~required toratios ~~this~~for ~~provision would~~“well nocapitalized” ~~longer~~and be“adequately ~~subject~~capitalized” tobank ~~the~~are ~~executive~~as ~~compensation provision under ARRA.~~follows:

Homeowner Affordability and Stability Plan

	Regulatory Requirements						31-Dec-10
	Adequately Capitalized			Well Capitalized			Bank
Leverage Ratio		4.00	%		5.00	%		4.75	%

Tier I Risk-Based Ratio		4.00	%		6.00	%		6.85	%

Total Risk-Based Ratio		8.00	%		10.00	%		8.16	%

~~On February 18,~~Under ~~2009,~~applicable ~~the~~regulatory ~~Treasury~~guidelines, ~~announced~~ the ~~Homeowner~~Bank ~~Affordability~~was ~~and Stability~~considered ~~Plan (~~“~~HASP~~Adequately Capitalized”), which proposes to provide refinancing for certain homeowners, to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, and to establish a Homeowner Stability Initiative to reach at~~-risk~~ ~~homeowners. Among other things~~December 31, the Homeowner Stability Initiative would offer monetary incentive to mortgage servicers and mortgage holders for certain modifications of at-risk loans, and would establish an insurance fund designed to reduce foreclosures2010.

~~Prompt Corrective~~The ~~Action~~Company issued $5.2 million in junior subordinated debt securities (the “debt securities”) to the Company (CA) Capital Trust, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and ~~Other~~are ~~Enforcement~~due ~~Mechanisms~~and payable on July 7, 2036. These debt securities may be redeemed for 105% of the principal balance through July 7, 2011 and then at par thereafter. Interest is payable quarterly beginning July 7, 2006 at 1.48% over the quarterly adjustable 3-month LIBOR. Of this $5.2 million, the Company contributed $3.0 million to the Bank and retained $2.2 million at the Company level. The securities do not entitle the holders to voting rights in the Company but will contain certain restrictive covenants, including restrictions on the payment of dividends to the holders of the Company’s common stock in the event that interest payments on the trust preferred securities are postponed. The capital contribution received by the Bank from the trust preferred issuance is designated as Tier 1 capital for regulatory purposes.

~~Federal~~Following ~~banking~~consultation ~~agencies~~with ~~possess~~the ~~broad~~FRBSF, ~~powers~~on toAugust 31, ~~take corrective~~2010 ~~and~~the ~~other~~Company ~~supervisory~~elected ~~action~~ to ~~resolve~~defer ~~the~~regularly ~~problems~~scheduled ofpayments ~~insured depository~~on ~~institutions,~~debt ~~including~~securities ~~but~~relating ~~not limited~~ to ~~those~~its ~~institutions~~outstanding ~~that fall~~$5 ~~below~~million ~~one~~trust orpreferred ~~more~~security ~~prescribed~~(the ~~minimum~~“Security”) ~~capital~~for ~~ratios~~a ~~described~~period ~~above.~~of ~~An institution~~up ~~that,~~to ~~based~~20 ~~upon~~consecutive ~~its~~quarters ~~capital~~(the ~~levels,~~“Deferral isPeriod”). The ~~classified~~terms asof ~~well capitalized,~~the ~~adequately~~Security ~~capitalized,~~and orthe ~~undercapitalized~~trust ~~may~~documents beallow ~~treated~~the ~~as though~~Company itto ~~were~~defer inpayments ~~the~~of ~~next~~interest ~~lower~~for ~~capital category if~~ the ~~appropriate~~Deferral ~~federal banking~~Period ~~agency,~~without ~~after~~default ~~notice~~or ~~and~~penalty. During ~~opportunity~~the ~~for~~Deferral ~~hearing~~Period, ~~determines~~the ~~that~~Company ~~an unsafe~~will orcontinue ~~unsound~~to ~~condition~~recognize orinterest anexpense ~~unsafe~~associated orwith ~~unsound~~the ~~practice warrants such treatment~~Security. Upon Atthe ~~each~~expiration ~~successive~~of ~~lower~~the ~~capital~~Deferral ~~category~~Period, anall ~~insured~~accrued ~~depository institution~~and isunpaid ~~subject~~interest towill ~~more~~be ~~restrictions.~~due ~~The~~and ~~federal~~payable. During ~~banking~~the ~~agencies~~Deferral Period, ~~however,~~ ~~may~~the ~~not~~Company ~~treat~~is aprevented ~~significantly~~from ~~undercapitalized~~paying ~~institution~~cash ~~as critically~~dividends ~~undercapitalized~~to ~~unless~~shareholders ~~its capital ratio actually warrants such~~or ~~treatment~~repurchasing stock.

InUnder ~~addition~~applicable toregulatory ~~measures taken~~guidelines, ~~under~~ the ~~prompt~~Company’s ~~corrective~~trust ~~action~~preferred ~~provisions,~~securities ~~commercial~~issued ~~banking organizations~~by ~~may~~our besubsidiary ~~subject~~capital totrust ~~potential~~qualify ~~enforcement~~as ~~actions~~Tier by1 ~~the~~capital ~~federal regulators~~up ~~for~~to ~~unsafe~~a ormaximum ~~unsound~~limit ~~practices~~of in25% ~~conducting~~of ~~their~~Tier ~~businesses~~1 ~~or for~~capital. Any ~~violations~~additional portion of ~~any~~the ~~law,~~trust ~~rule,~~preferred ~~regulation,~~securities orwould ~~any~~qualify ~~condition~~as ~~imposed~~Tier ~~in writing~~II bycapital. As of December 31, 2010 the ~~agency~~subsidiary ortrust ~~any~~had ~~written~~$5.2 ~~agreement~~million ~~with~~in ~~the~~trust ~~agency~~preferred securities outstanding, of which $2. ~~Enforcement~~6 ~~actions~~million ~~may~~qualifies ~~include:~~as Tier 1 capital.

· In addition, the ~~imposition~~DFI ofhas aauthority ~~conservator~~to ortake possession of the ~~issuance~~business and properties of a ~~cease-and-desist~~ ~~order~~bank in the event that ~~can~~the betangible ~~judicially~~shareholders’ ~~enforced;~~equity of the bank is less than the greater of (i) 4% of the bank’s total assets or (ii) $1,000,000.

~~· the termination of insurance of deposits (in the case of a depository institution);~~10

· During the ~~imposition~~third quarter of ~~civil~~2003, ~~money~~the ~~penalties;~~Bank undertook and completed a private placement of subordinated debentures (“notes”) to augment its Tier II capital. The total principal amount of the notes issued was $2,000,000. The notes were sold pursuant to an applicable exemption from registration under the Securities Act of 1933 to certain accredited investors, including some of the Company’s directors and executive officers. The notes include quarterly payment of interest at prime plus 1.5% and quarterly principal installments of approximately $166,666 commencing on September 30, 2008 until paid in full on June 30, 2011. At December 31, 2010, the Bank prepaid the remaining $499 thousand to the holders of the notes and carried a $0 balance.

~~· the~~Dodd-Frank ~~issuance~~Wall ofStreet ~~directives~~Reform toand ~~increase~~Consumer ~~capital;~~Protection Act

· On July 21, 2010, President Obama signed into law the ~~issuance~~sweeping offinancial ~~formal~~regulatory reform act entitled the "Dodd-Frank Wall Street Reform and ~~informal~~Consumer ~~agreements;~~Protection Act" (the "Dodd-Frank Act") that implements significant changes to the regulation of the financial services industry, including provisions that, among other things:

· Centralize responsibility for consumer financial protection by creating a new agency within the ~~issuance~~Federal Reserve Board, the Bureau of ~~removal~~Consumer Financial Protection, with broad rulemaking, supervision and ~~prohibition~~enforcement ~~orders~~authority ~~against institution-affiliated~~for ~~parties;~~a wide range of consumer protection laws that would apply to all banks and thrifts. Smaller financial institutions, including the Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

· ~~the~~ ~~enforcement~~Apply ofthe ~~such~~same ~~actions~~leverage ~~through~~and ~~injunctions or restraining orders~~ risk-based ~~upon~~capital arequirements ~~judicial determination~~ that ~~the~~apply ~~agency~~to ~~would~~insured ~~be harmed~~depository ifinstitutions ~~such~~to ~~equitable~~bank ~~relief~~holding ~~was not granted~~companies.

~~Banks~~· ~~are~~Require ~~also~~the ~~subject~~FDIC to ~~certain~~ ~~Federal~~seek ~~Reserve Board restrictions on extensions of credit~~ to ~~executive officers,~~make ~~directors,~~its ~~principal~~capital ~~shareholders~~requirements ~~or any related interests of such persons (i.e., insiders). Extensions of credit (1) must be made on substantially the same terms and pursuant to the same credit underwriting procedures as those~~ for ~~comparable~~banks ~~transactions~~countercyclical ~~with~~so ~~persons~~that ~~who are neither insiders nor employees, and (2) must not involve more than~~ the ~~normal~~amount ~~risk~~ of ~~repayment~~capital orrequired ~~present other unfavorable features. Banks are also subject~~ to ~~certain~~ ~~lending~~be ~~limits~~maintained ~~and~~increases ~~restrictions~~in ontimes ~~overdrafts to insiders. A violation~~ of ~~these~~economic ~~restrictions~~expansion ~~may~~and ~~result~~decreases in ~~regulatory~~times ~~sanctions~~of oneconomic ~~the bank or its insiders~~contraction.

~~Additionally, a~~· ~~holding~~Change ~~company’s~~the ~~inability~~assessment tobase ~~serve~~for asfederal adeposit ~~source~~insurance offrom ~~strength~~the toamount ~~its subsidiary~~of ~~banking~~insured ~~organizations~~deposits ~~could~~to ~~serve~~consolidated asassets anless ~~additional~~tangible ~~basis for a regulatory action against the holding company~~capital.

~~Safety~~· Implement corporate governance revisions, including executive compensation and ~~Soundness~~ ~~Standards~~proxy access by stockholders.

~~The Federal~~· ~~Deposit~~Make ~~Insurance~~permanent ~~Corporation~~the ~~Improvement~~$250,000 ~~Act~~limit ~~(“FDICIA”)~~for ~~imposes certain~~federal ~~specific~~deposit ~~restrictions~~insurance onand ~~transactions~~increase ~~and~~the ~~requires~~cash ~~federal~~limit ~~banking regulators~~of toSecurities ~~adopt~~Investor ~~overall~~Protection ~~safety~~Corporation protection from $100,000 to $250,000, and ~~soundness~~provide ~~standards~~unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions.

9· Repeal the federal prohibitions on the payment of interest on demand deposits effective July 21, 2011, thereby permitting depository institutions to pay interest on business transaction and other accounts.

~~Table~~ Many aspects of ~~Contents~~the Dodd-Frank Act are subject to rulemaking by various regulatory agencies and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. The elimination of the prohibition on the payment of interest on demand deposits could materially increase our interest expense, depending on our competitors' responses. Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek additional sources of capital in the future.

~~depository institutions~~Participation ~~related~~in ~~to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits~~ the ~~interest~~Capital ~~rates~~Purchase ~~paid~~Program ~~on deposits by undercapitalized institutions, restricts the use~~ of ~~brokered deposits, limits~~ the ~~aggregate extensions~~Troubled ofAsset ~~credit~~Relief by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accountsProgram. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.

~~Premiums~~On ~~for~~October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (“EESA”) enacted by the U.S. Congress in response to the financial crises affecting the banking system and financial markets and gong concern threats to investment banks and other financial institutions. On October 14, 2008, the U.S. Department of Treasury (“U.S. Treasury”) announced the Troubled Asset Relief Program Capital Purchase Program (“TARP”). This program made $250 billion of capital available to U.S. financial institutions from the initial $350 billion authorized by the EESA in the form of preferred stock investments by the U.S. Treasury in qualifying U.S. controlled banks, savings associations and certain bank and savings and loan holding ~~Deposit~~companies ~~Insurance~~under the following general terms:

~~Our deposits~~· are insured by the FDIC to the maximum amount permitted by law which is currently $250,000 per depositor through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor. On October 14, 2008, the FDIC announced the Temporary Transaction Account Guarantee Program to strengthen confidence in the banking system. The ~~rule,~~preferred asstock ~~amended,~~issued also allows full deposit insurance coverage for non-interest bearing accounts regardless of the dollar amount until June 30, 2010 at the participating FDIC-insured institutions’ option. We have elected to ~~participate in~~ the ~~program by paying a 10 basis point surcharge on our non-interest bearing transaction accounts over $250,000 through December 31, 2009, and a 15 basis point surcharge through June 30, 2010~~U. ~~Effective April 1, 2009, the FDIC adopted a final rule revising its risk-based insurance assessment system and effectively increasing the overall assessment rate~~S. ~~The~~Treasury ~~new~~would ~~base~~pay ~~assessment~~5% ~~rate~~dividends for ~~banks in~~ the ~~best~~first ~~risk category range from twelve to sixteen cents annually for every $100 of domestic deposits held. In addition, the FDIC also imposed a special assessment of~~ five ~~basis~~ ~~points on all insured institutions’ total assets minus Tier 1 capital at June 30~~years, ~~2009~~ inand ~~order~~then to9% ~~replenish~~dividends ~~the Deposit Insurance Fund.~~thereafter;

On November 12, 2009, the FDIC finalized a Deposit Insurance Fund restoration plan that required banks to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. Under the plan, banks are assessed through 2010 according to the risk-based premium schedule adopted in April 2009 However, beginning January 1, 2011, the based rate increases by three basis points per year.11

~~Sarbanes-Oxley~~· ~~Act~~In connection with the purchase of ~~2002~~preferred stock, the U.S. Treasury will receive warrants entitling the U.S. Treasury to buy the participating institution’s common stock equivalent in value to 15% of the preferred stock;

On· ~~July 30, 2002,~~The ~~the~~preferred ~~Sarbanes-Oxley~~stock ~~Act~~may ofnot ~~2002~~be ~~(“SOX”),~~redeemed ~~was~~for ~~signed into law to address corporate and accounting fraud. SOX establishes~~ a ~~new~~period ~~accounting oversight board that will enforce auditing standards and restricts the scope~~ of ~~services that~~three ~~accounting firms may provide to their public company audit clients. Among other things~~years, ~~SOX~~except ~~also (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed~~ with ~~the~~ ~~SEC;~~proceeds ~~(ii) imposes~~from ~~new disclosure requirements regarding internal controls, off~~high-~~balance-sheet~~quality ~~transactions,~~private ~~and pro forma (non-GAAP) disclosures~~capital; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

~~Under SOX,~~· ~~the~~The ~~SEC~~consent isof ~~required~~the ~~to regularly and systematically review corporate filings, based on certain enumerated factors~~U.S. ToTreasury ~~deter~~will ~~wrongdoing,~~be ~~SOX:~~required ~~(i) subjects bonuses issued~~ to ~~top~~increase ~~executives~~common todividends ~~disgorgement~~per ifshare ~~a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer~~ or ~~director~~any ~~from~~share ~~misleading~~repurchases, orwith ~~coercing~~limited anexceptions, ~~auditor; (iii) prohibits insider trades~~ during ~~pension~~the ~~fund~~first ~~“blackout~~three ~~periods”;~~years, ~~(iv) imposes~~unless ~~new criminal penalties for fraud and other wrongful acts; and (v) extends~~ the ~~period~~ ~~during~~preferred ~~which~~stock ~~certain~~has ~~securities~~been ~~fraud~~redeemed ~~lawsuits~~or ~~can~~transferred beto ~~brought~~third ~~against~~parties; ~~a company or its officers.~~and

As· ~~a public~~Participating ~~reporting~~companies ~~company,~~must adopt the ~~Company~~U.S. isTreasury’s ~~subject~~standard tofor ~~the~~executive ~~requirements~~compensation ~~of SOX~~ and ~~related~~ ~~rules and~~corporate ~~regulations~~governance ~~issued~~for by the ~~SEC~~period ~~and~~during ~~applied~~which to the ~~Company by the FRB~~U. ~~The~~S. ~~Company’s~~Treasury ~~common~~holds ~~stock is~~the ~~not~~equity ~~listed~~issued onunder ~~any national exchange such as~~ the ~~NYSE or NASDAQ~~TARP. As ~~such,~~At the ~~Company~~close isof ~~not~~Company’s ~~required~~TARP ~~to comply~~transaction, ~~with~~these ~~the~~executive ~~additional~~compensation ~~SOX~~restrictions ~~requirements~~included ~~adopted~~that bythe ~~such exchanges. The~~ Company, ~~anticipated~~among ~~additional~~other ~~expenses to comply with SOX in 2009 however~~things, ~~the requirement for compliance was delayed another year.~~must:

10· Ensure that the incentive compensation programs for its senior executive officers do not encourage unnecessary and excessive risks that threaten the value of the Company

~~Table~~· Implement a required clawback of ~~Contents~~any bonus or incentive compensation paid to the Company’s senior executive officers based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;

~~Financial Services~~· ~~Modernization~~Not ~~Legislation~~make any “golden parachute” (as defined in the Internal Revenue Code) to any of the Company’s senior executive officers; and

On· ~~November 12, 1999,~~Agree ~~the~~no ~~Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) was signed into law. The Financial Services Modernization Act is intended~~ to ~~modernize~~deduct ~~the~~for ~~banking industry by removing barriers to affiliation among banks, insurance companies,~~ the ~~securities~~tax ~~industry~~purposes ~~and~~executive ~~other~~compensation ~~financial~~in ~~service providers.~~excess ~~It provides financial organizations with the flexibility~~ of ~~structuring such affiliations through a holding company structure or through a financial subsidiary of a bank~~$500,000 ~~subject~~in toany ~~certain~~one ~~limitations.~~fiscal ~~The~~year ~~Financial~~for ~~Services Modernization~~each ~~Act establishes a new type~~ of ~~bank~~the ~~holding~~Company’s ~~company,~~senior ~~known~~executive as a financial holding company, which may engage in an expanded list of activities that are “financial in nature,” which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant bankingofficers.

~~The Financial~~On ~~Services~~December 19, ~~Modernization~~2008, ~~Act~~the ~~also~~Company ~~sets~~entered ~~forth~~into a ~~system~~Purchase ofAgreement ~~functional regulation~~with ~~that~~the ~~makes~~United ~~the~~States ~~Federal~~Department ~~Reserve~~of ~~Board~~the Treasury (the “~~umbrella supervisor~~Treasury” ~~for holding companies~~), ~~while~~pursuant ~~providing~~to ~~for~~which the ~~supervision~~Company ofagreed ~~the~~to ~~holding~~issue ~~company’s subsidiaries by other federal~~ and ~~state~~sell ~~agencies.~~4,000 Inshares ~~addition,~~of the Company’s ~~is subject~~Preferred toStock ~~other~~as ~~provisions~~Fixed ofRate ~~the~~Cumulative ~~Financial~~Perpetual ~~Services~~Preferred ~~Modernization Act~~Stock, ~~including~~ ~~those~~Series A ~~relating~~(the to“Preferred ~~CRA,~~Stock) ~~privacy~~ and ~~safe-guarding~~a ~~confidential customer~~Warrant ~~information~~to purchase 38,869 ~~regardless~~shares of ~~whether~~ the Company’s ~~elects~~Common toStock ~~become~~(adjusted ~~a financial~~for ~~holding~~the ~~company~~2% orstock todividend) ~~conduct~~for ~~activities~~an ~~through~~aggregate apurchase ~~financial subsidiary~~price of ~~the Company. The Company does not~~$4, ~~however~~000,000 ~~currently~~in ~~intend~~cash. ~~to file~~In ~~notice~~connection with ~~the~~this ~~Federal~~transaction ~~Reserve~~the ~~Board~~Company toincurred ~~become~~$50,000 ~~a financial holding company or to engage~~ in ~~expanded financial activities through a financial subsidiary of the Company~~costs.

The ~~Company~~ ~~does~~Preferred ~~not~~Stock ~~believe~~will ~~that~~qualify ~~the~~as ~~Financial~~Tier ~~Services~~1 ~~Modernization~~capital ~~Act~~and will ~~have~~ apay ~~material~~cumulative ~~adverse~~dividends ~~effect~~quarterly onat ~~its~~a ~~operations~~rate inof ~~the~~5% ~~near-term.~~per ~~However,~~annum to for the ~~extent~~first ~~that~~five ityears ~~permits banks, securities firms,~~ and ~~insurance~~9% ~~companies~~per ~~to affiliate,~~annum ~~the~~thereafter. ~~financial~~The ~~services~~Preferred ~~industry~~Stock may ~~experience~~be ~~further~~redeemed ~~consolidation. The~~by ~~Financial~~the ~~Services~~Company ~~Modernization~~after ~~Act~~three isyears. ~~intended~~Prior to ~~grant~~the toend ~~community banks certain powers as a matter~~ of ~~right~~the ~~that~~three ~~larger institutions have accumulated on an ad hoc basis. Nevertheless~~years, ~~this act may have~~ the ~~result~~Preferred ofStock ~~increasing the~~may ~~amount~~be ofredeemed ~~competition~~only ~~that~~with ~~the~~proceeds ~~Company faces~~ from ~~larger~~the ~~institutions~~sale ~~and other types~~ of ~~companies~~qualifying ~~offering~~equity ~~financial~~securities ~~products, many~~ of ~~which may have substantially more financial resources than~~ the Company.

~~Community Reinvestment~~The ~~Act~~Warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $15.43 per share, adjusted for the two separate 2% stock dividends declared in September 2009 and March 2010.

~~The Bank~~Following isconsultation ~~subject~~with tothe ~~certain~~FRBSF, ~~fair~~on ~~lending~~August 31, ~~requirements~~2010 ~~and~~the ~~reporting~~Company ~~obligations involving~~elected ~~home~~to ~~mortgage~~defer ~~lending~~regularly ~~operations~~scheduled ~~and~~dividends ~~Community~~on ~~Reinvestment~~the ~~Act~~Preferred ~~(“CRA”) activities~~Stock. ~~The~~ ~~CRA~~As ~~generally~~of ~~requires~~ December 31, 2010, the ~~federal~~Company ~~banking~~has ~~agencies~~missed totwo ~~evaluate~~dividend payments. By deferring the ~~record~~dividends ofon aSeries ~~financial~~A ~~institution in~~Senior ~~meeting~~Preferred ~~the~~Stock ~~credit~~for ~~needs~~a total of ~~their~~six ~~local communities~~quarters, ~~including~~whether ~~low~~or ~~and moderate~~not ~~income~~consecutive, ~~neighborhoods~~the U. ~~In addition~~S. toTreasury ~~substantial~~will ~~penalties~~have ~~and~~the ~~corrective~~right ~~measures~~to ~~that~~elect ~~may~~two bemembers ~~required for~~of athe ~~violation~~Company’s Board of ~~certain~~Directors, ~~fair~~voting ~~lending~~together ~~laws,~~with ~~the~~any ~~federal~~other ~~banking~~holders ~~agencies~~of ~~may take~~preferred ~~compliance~~shares ~~with~~ranking ~~such~~pari ~~laws~~passu ~~and~~with ~~CRA~~the ~~into~~Series ~~account~~A ~~when~~Senior ~~regulating~~Preferred ~~and supervising~~Stock. ~~other~~These ~~activities. A~~directors ~~bank’s compliance~~would ~~with~~serve ~~its~~on ~~CRA~~the ~~obligations~~Company’s isBoard ~~based~~of onDirectors auntil ~~performance-based~~such ~~evaluation system~~time ~~which~~as ~~based~~the ~~CRA~~Company ~~ratings~~has onpaid anin ~~institution’s~~full ~~lending~~all ~~service~~dividends ~~and investment~~not ~~performance~~previously paid, ~~resulting~~at inwhich atime ~~rating~~these bydirectors’ ~~the~~terms ~~appropriate~~of ~~bank~~office ~~regulatory~~would ~~agency~~immediately ofterminate. ~~“outstanding”,~~Given ~~“satisfactory”,~~the ~~“needs~~Company’s torecent ~~improve”~~losses orand ~~“substantial noncompliance.” At~~accumulated ~~its~~deficit, ~~last~~it ~~examination by~~is unlikely the ~~FRB,~~Company ~~the~~will ~~Bank~~resume ~~received~~payment aof ~~CRA~~dividends ~~rating~~on ofits ~~“Satisfactory~~Preferred Stock in 2011.”

~~USA~~The ~~Patriot~~American Recovery and Reinvestment Act of ~~2001~~2009

On ~~October~~February 2617, ~~2001~~2009, President ~~Bush~~Obama signed ~~the~~into ~~Uniting~~law ~~and Strengthening~~The ~~America~~American byRecovery ~~Providing Appropriate Tools Required to Intercept~~ and ~~Obstruct~~ ~~Terrorism,~~Reinvestment ~~or the Patriot~~ Act, of ~~2001.~~2009 ~~Among~~(the ~~other~~“Stimulus ~~things~~Bill”), ~~the Patriot~~more ~~Act~~commonly ~~(i) prohibits~~known ~~banks~~as ~~from~~the ~~providing~~economic ~~correspondent~~stimulus ~~accounts directly~~or toeconomic ~~foreign~~recovery ~~shell~~package. The ~~banks;~~Stimulus ~~(ii) imposes~~Bill ~~due~~includes ~~diligence~~a ~~requirements on~~wide ~~banks~~variety ~~opening~~of orprograms ~~holding~~intended ~~accounts~~to ~~for~~stimulate ~~foreign~~the ~~financial~~economy ~~institutions~~and ~~or wealthy~~provide ~~foreign~~for ~~individuals~~extensive ~~(iii) requires~~infrastructure, ~~financial~~energy, ~~institutions~~health ~~to establish~~and aneducation ~~anti-money-laundering~~needs. In ~~compliance program~~addition, ~~and~~the ~~(iv) eliminates civil~~Stimulus ~~liability~~Bill ~~for~~imposes ~~persons~~certain ~~who~~new ~~file~~executive ~~suspicious~~compensation ~~activity~~and ~~reports.~~corporate ~~The~~expenditure ~~Patriot Act~~limits ~~also~~on ~~increases~~all ~~governmental~~current ~~powers~~and tofuture ~~investigate~~TARP ~~terrorism~~recipients, including ~~expanded~~ ~~government~~the ~~access~~Company, tothat ~~account~~are ~~records~~in ~~and~~addition ~~makes rules~~ to ~~implement the~~those ~~Patriot~~previously ~~Act. On~~announced ~~March 9,~~by ~~2006,~~ the ~~President~~U.S. ~~signed~~Treasury, until the ~~USA~~institution ~~Patriot~~has ~~improvement~~repaid ~~and~~the ~~Reauthorization~~U.S. ~~Act~~Treasury, which ~~extended~~ ~~and~~is ~~modified~~now ~~the~~permitted ~~original~~under ~~act. While we believe~~ the ~~Patriot~~Stimulus ~~Act~~Bill ~~may,~~without topenalty ~~some degree, affect our recordkeeping~~ and ~~reporting~~without ~~expenses,~~the weneed doto ~~not~~raise ~~believe~~new ~~that~~capital, itsubject ~~will~~to ~~have~~the aU.S. ~~material~~Treasury’s ~~adverse~~consultation ~~effect~~with onthe ~~our~~recipient’s ~~business~~appropriate ~~and~~regulatory ~~operations~~agency.

~~Transactions between Affiliates~~12

~~Transactions between~~In ~~The~~addition, ~~Company~~ARRA directs the Treasury to review previously-paid bonuses, retention awards and ~~its~~other ~~“affiliates”~~compensation ~~are~~paid ~~quantitatively~~to senior executive officers and ~~qualitatively restricted~~certain ~~under~~other highly-compensated employees of each TARP recipient to determine whether any such payments were excessive, inconsistent with the ~~Federal~~purposes ~~Reserve~~of ~~Act~~ARRA or the TARP, or otherwise contrary to the public interest. ~~The~~ ~~Federal~~If ~~Deposit~~the ~~Insurance~~Treasury ~~Act~~determines ~~applies~~that ~~Sections~~any ~~23A~~such ~~and~~payments ~~23B~~have ~~to insured~~been ~~nonmember~~made ~~banks~~by ina TARP recipient, the ~~same~~Treasury ~~manner~~will ~~and~~seek to negotiate with the ~~same~~TARP ~~extent~~recipient asand ifthe ~~they were~~subject ~~members~~employee offor ~~the~~appropriate ~~Federal~~reimbursements ~~Reserve~~to ~~System~~the U. ~~The~~ ~~FRB~~S. ~~issued~~Government ~~Regulation~~(not Wthe onTARP ~~October 31~~recipient) with respect to any such compensation or bonuses. ARRA also permits the Treasury, ~~2002~~subject to consultation with the appropriate federal banking agency, ~~which~~to allow a TARP recipient to repay any ~~comprehensively~~assistance ~~implements~~previously ~~sections~~provided ~~23A~~to ~~and~~such ~~23B~~TARP ofrecipient under the ~~Federal~~TARP, ~~Reserve~~without ~~Act. Sections~~regard ~~23A~~to ~~and~~whether ~~23B~~the ~~and~~TARP ~~Regulation~~recipient ~~W restrict~~has ~~loans~~replaced bysuch afunds ~~depository~~from ~~institution~~any source, and without regard to any waiting period. Any TARP recipient that repays its ~~affiliates,~~TARP ~~asset~~assistance pursuant to this provision would no longer be subject to the executive compensation provision under ARRA.

11Homeowner Affordability and Stability Plan

~~Table~~On February 18, 2009, the Treasury announced the Homeowner Affordability and Stability Plan (“HASP”), which proposes to provide refinancing for certain homeowners, to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, and to establish a Homeowner Stability Initiative to reach at-risk homeowners. Among other things, the Homeowner Stability Initiative would offer monetary incentive to mortgage servicers and mortgage holders for certain modifications of ~~Contents~~at-risk loans, and would establish an insurance fund designed to reduce foreclosures.

~~purchases by~~Prompt aCorrective ~~depository~~Action ~~institution from its affiliates,~~ and ~~other~~Other ~~transactions~~Enforcement between a depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations of sections 23A and 23B. Regulation W had an effective date of April 1, 2003.Mechanisms

~~Privacy~~Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

~~Federal banking~~In ~~rules limit~~addition to measures taken under the ~~ability~~prompt ofcorrective ~~banks~~action ~~and~~provisions, ~~other~~commercial ~~financial~~banking ~~institutions~~ organizations may be subject to ~~disclose~~potential ~~non-public~~enforcement ~~information~~actions ~~about~~by ~~consumers~~the tofederal ~~non-affiliated~~regulators ~~third parties. Pursuant~~for tounsafe ~~these~~or ~~rules~~unsound practices in conducting their businesses or for violations of any law, ~~financial~~ ~~institutions~~rule, ~~must~~regulation, ~~provide~~or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include:

~~· initial~~o ~~notices~~the toimposition ~~customers~~of ~~about~~a ~~their~~conservator ~~privacy policies,~~or ~~describing~~ the ~~conditions~~issuance ~~under~~of ~~which~~a ~~they may disclose non~~cease-~~public information~~and-desist toorder ~~non-affiliated~~that ~~third~~can ~~parties~~be ~~and~~judicially ~~affiliates~~enforced;

~~· annual~~o ~~notices~~the termination of ~~their~~insurance ~~privacy~~of ~~policies~~deposits to(in ~~current customers;~~the ~~and~~case of a depository institution);

~~· a~~o ~~reasonable~~the ~~method~~imposition ~~for customers to “opt out”~~ of ~~disclosures~~ tocivil ~~non-affiliated~~money ~~third parties.~~penalties;

~~These privacy~~o ~~provisions~~the ~~affect~~issuance ~~how~~of ~~consumer~~directives ~~information is transmitted through diversified financial companies and conveyed~~ to ~~outside~~increase ~~vendors. We have implemented our privacy policies in accordance with the law.~~capital;

~~In recent~~o ~~years,~~the aissuance ~~number~~ of ~~states~~formal ~~have~~and ~~implemented~~informal their own versions of privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.agreements;

~~Predatory~~o ~~Lending~~the issuance of removal and prohibition orders against institution-affiliated parties; and

~~The term~~o ~~“predatory lending”, much like~~ the ~~terms~~enforcement ~~“safety and soundness” and “unfair and deceptive practices”, is far-reaching and covers a potentially broad range~~ of ~~behavior. As~~ such, itactions ~~does~~through ~~not~~injunctions ~~lend itself~~or torestraining aorders ~~concise~~based orupon a ~~comprehensive~~judicial ~~definition. But~~determination ~~typically~~that ~~predatory~~the ~~lending~~agency ~~involves~~would ~~at least~~be ~~one,~~harmed ~~and~~if ~~perhaps~~such ~~all~~equitable ~~three,~~relief ofwas ~~the~~not ~~following elements:~~granted.

~~· making~~Banks ~~unaffordable~~are ~~loans~~also ~~based~~subject to certain Federal Reserve Board restrictions on ~~the~~extensions ~~assets~~of credit to executive officers, directors, principal shareholders or any related interests of ~~the~~such ~~borrower~~persons ~~rather than~~(i.e., insiders). Extensions of credit (1) must be made on substantially the ~~borrower’s~~same ~~ability~~terms and pursuant to ~~repay~~the ansame ~~obligation~~credit underwriting procedures as those for comparable transactions with persons who are neither insiders nor employees, and (2) must not involve more than the normal risk of repayment or ~~asset-based~~present other unfavorable features. Banks are also subject to certain lending; limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in regulatory sanctions on the bank or its insiders.

~~· inducing~~Additionally, a ~~borrower~~holding company’s inability to ~~refinance~~serve as a ~~loan~~source ~~repeatedly~~of instrength ~~order~~ to ~~charge high~~its ~~points~~subsidiary ~~and~~banking ~~fees~~organizations ~~each~~could ~~time~~serve ~~the~~as ~~loan~~an isadditional ~~refinanced~~basis orfor ~~loan~~a ~~flipping;~~regulatory ~~and~~action against the holding company

~~· engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.~~13

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

· The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes certain specific restrictions on transactions and requires federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates ~~for~~paid ~~first~~on ~~lien~~deposits ~~mortgage~~by ~~loans~~undercapitalized ininstitutions, ~~excess~~restricts the use of 8brokered ~~percentage points~~deposits, ~~above~~limits ~~comparable~~the ~~Treasury~~aggregate ~~securities~~extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.

~~· subordinate~~Premiums ~~lien~~for ~~loans~~Deposit ~~of 10 percentage points above Treasury securities, and~~Insurance

~~· fees~~The ~~such~~Bank’s asdeposits ~~optional~~have historically been insured by the FDIC up to $100,000 per insured depositor, except certain types of retirement accounts, which are insured up to $250,000 per insured depositor. On October 3, 2008, the maximum amount insured under FDIC deposit insurance ~~and~~was ~~similar~~temporarily ~~debt~~increased ~~protection~~from ~~costs~~$100,000 ~~paid in~~to ~~connection~~$250,000 per insured depositor and made permanent with the ~~credit~~Dodd-Frank Wall Street Reform and Consumer Protection Act. This increase was part of the Emergency Economic Stabilization Act of 2008. Additionally, the Bank has elected to participate in the FDIC’s Temporary Liquidity Guarantee Program. Under this program, all non-interest bearing deposit transaction ~~when~~accounts ~~combined~~at the Bank with ~~points~~balances ~~and~~over ~~fees~~$250,000 ifwere also fully insured through January 1, 2013 at an ~~deemed~~additional ~~excessive~~cost to the Bank of 10 basis points per dollar over $250,000 on a per account basis.

~~In addition~~Until recently, the ~~regulation~~FDIC ~~bars~~has ~~loan~~set ~~flipping~~a bydesignated ~~the~~reserve ~~same~~ratio ~~lender~~of 1.25% ($1.25 against $100 of ~~loan~~insured ~~servicer within~~deposits) afor ~~year. Lenders~~the ~~also~~Deposit ~~will~~Insurance ~~be presumed~~Fund to(“DIF”). ~~have~~As ~~violated~~discussed, the ~~law;~~Dodd-Frank ~~which~~Act ~~says~~raised ~~loans~~the ~~shouldn’t~~reserve beratio ~~made~~ to ~~people unable~~1.35%. The toFederal ~~repay~~Deposit ~~them;~~Insurance ~~unless~~Reform ~~they~~Act ~~document~~of ~~that~~2005 (“FDIC Act”) provides the ~~borrower~~FDIC ~~has~~Board of Directors the ~~ability~~authority to ~~repay. Lenders~~ ~~that~~set ~~violate~~ the ~~rules face cancellation~~designated ofreserve ~~loans~~ratio between 1.15% and ~~penalties~~1.50%. ~~equal~~The toFDIC must adopt a restoration plan when the ~~finance~~reserve ~~charges~~ratio ~~paid~~falls below 1. ~~The~~15% ~~Company~~and ~~does~~begin ~~not~~paying ~~expect~~dividends ~~these~~when ~~rules and potential~~the ~~state~~reserve ~~action~~ratio inexceeds ~~this~~1.35%. ~~area~~The toDIF ~~have~~reserve aratio ~~material~~calculated ~~impact~~by onthe ~~our~~FDIC ~~financial condition~~that orwas ~~results~~in ofeffect ~~operations~~at December 31, 2009 was -0.39%.

~~Bank~~Through the later part of 2008 and through 2010 the number of bank and thrift failures rose significantly, resulting from, among other things, the U.S. financial crisis and significantly weakened economic conditions. This placed considerable strain on the FDIC’s DIF. As a result, on September 29, 2009, the FDIC adopted an Amended Restoration Plan to allow the DIF to return to a ratio of 1.15% within eight years. The FDIC also adopted higher annual risk-based assessment rates beginning in January of 2011. On November 12, 2009 the FDIC also adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012, on December ~~Secrecy~~30, 2009, except for those institutions where the FDIC grants an exemption. Under the Dodd-Frank Act, ~~and~~the ~~Anti~~minimum ~~Money~~designated ~~Laundering~~reserve ~~Legislation~~ratio of the DIF increased from 1.15 percent to 1.35 percent of estimated insured deposits. Additionally, the Dodd-Frank Act revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the FDIC’s proposed rules, the assessment base will change from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The Bank currently anticipates its quarterly assessments will increase significantly during the next three years. It is currently estimated that assessments against the Bank for 2011 will total approximately $.9 million compared to the approximately $.7 million reported for the year ended December 31, 2010.

In ~~1970~~ 2007, ~~Congress~~FDIC ~~passed~~regulations ~~the~~established ~~Currency~~a ~~and~~new ~~Foreign~~risk-based ~~Transactions~~assessment ~~Reporting~~system ~~Act, otherwise~~under ~~known~~which asdeposit ~~the~~insurance ~~Bank~~assessments ~~Secrecy~~are ~~Act~~based ~~(the~~upon ~~“BSA”),~~supervisory ~~which~~ratings ~~established requirements~~ for ~~recordkeeping~~all ~~and~~insured ~~reporting~~institutions, ~~by banks and other~~ financial ~~institutions. The~~ ~~BSA~~ratios ~~was~~for ~~designed~~most ~~to help identify the source~~institutions, ~~volume~~ and ~~movement~~long-term ofdebt ~~currency~~issuer ~~and~~ratings ~~other~~for ~~monetary instruments~~large ~~into~~institutions ~~and~~that ~~out~~have ~~of the United States in order to help detect and prevent money laundering~~ them.

12The FDIC is authorized to terminate a depository institution’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the institution’s regulatory authorities. Any such termination of deposit insurance would likely have a material adverse effect on the Bank, the severity of which would depend on the amount of deposits affected by such a termination.

~~Table of Contents~~14

~~connected~~Under ~~with~~federal ~~drug trafficking~~law, ~~terrorism~~deposits and ~~other~~certain ~~criminal activities. The~~claims ~~primary~~for ~~tool~~administrative ~~used~~expenses ~~to implement~~and ~~BSA~~employee ~~requirements~~compensation isagainst ~~the~~an ~~filing~~insured ofdepository ~~Suspicious~~institution ~~Activity~~are ~~Reports. Today,~~afforded ~~the BSA requires that all banking institutions develop and provide for the continued administration of~~ a ~~program reasonable~~priority ~~designed~~over toother ~~assure~~general ~~and~~unsecured ~~monitor~~claims ~~compliance~~against ~~with~~such ~~certain~~an ~~recordkeeping and~~institution, ~~reporting~~including ~~requirements~~federal ~~regarding~~funds ~~both to domestic~~ and ~~international currency~~letters ~~transactions. These~~of ~~programs must~~credit, atin athe ~~minimum,~~liquidation ~~provide~~or ~~for~~other aresolution ~~system~~ of ~~internal~~such ~~controls~~an toinstitution ~~assure~~by ~~ongoing compliance,~~any ~~provide~~receiver ~~for~~appointed ~~independent~~by ~~testing~~regulatory ofauthorities. ~~such~~Such ~~systems~~priority ~~and~~creditors ~~compliance, designate~~would ~~individuals~~include ~~responsible~~the ~~for such compliance and provide appropriate personnel training~~FDIC.

~~Commercial~~Sarbanes-Oxley ~~Real~~Act ~~Estate~~of ~~Lending~~2002

~~Federal banking~~On ~~regulators~~July 30, ~~recently~~2002, ~~issued~~the ~~final~~Sarbanes-Oxley ~~guidance~~Act ~~regarding~~of ~~commercial~~2002 ~~real estate~~(“SOX”), ~~lending~~was tosigned ~~address~~into alaw ~~concern~~to ~~that~~address ~~rising~~corporate ~~commercial~~and ~~real~~accounting ~~estate~~fraud. ~~lending concentrations~~SOX ~~may~~establishes ~~expose~~a ~~institutions~~new toaccounting ~~unanticipated~~oversight ~~earnings~~board ~~and~~that ~~capital volatility~~will inenforce ~~the~~auditing ~~event~~standards ofand ~~adverse~~restricts ~~changes in~~ the ~~general~~scope ~~commercial~~of ~~real estate~~services ~~market. This guidance suggests~~ that ~~institutions~~accounting ~~that~~firms ~~are~~may ~~potentially~~provide ~~exposed~~ to ~~significant~~their ~~commercial~~public ~~real estate~~company ~~concentration~~audit ~~risk~~clients. ~~will~~Among beother ~~subject~~things, toSOX ~~increased~~also ~~regulatory scrutiny. Institutions~~(i) requires ~~that~~chief ~~have experienced~~executive ~~rapid~~officers ~~growth~~and inchief ~~commercial~~financial ~~real~~officers ~~estate~~to ~~lending,~~certify ~~have notable exposure~~ to ~~specific~~the ~~types~~accuracy of ~~commercial~~periodic ~~real~~reports ~~estate~~filed ~~lending,~~with orthe ~~are approaching~~SEC; or(ii) imposes ~~exceed~~new ~~certain~~disclosure ~~supervisory~~requirements ~~criteria~~regarding ~~that~~internal ~~measure~~controls, anoff-balance-sheet ~~institution’s commercial real estate portfolio against its capital levels~~transactions, ~~may~~and bepro ~~subject~~forma ~~to such~~(non-GAAP) ~~increased~~disclosures; ~~regulatory~~(iii) accelerates ~~scrutiny. Our commercial~~the ~~real~~time ~~estate~~frame ~~portfolio~~for ~~may~~reporting beof ~~viewed~~insider astransactions ~~falling~~and ~~within~~periodic ~~one~~disclosures orby ~~more~~public ~~of the~~companies; ~~foregoing categories,~~ and ~~accordingly~~(iv) requires wecompanies ~~may~~to ~~become~~disclose ~~subject~~whether ~~to increased~~or ~~regulatory~~not ~~scrutiny~~they ~~because of our commercial real estate portfolio. If it is determined by our regulator that we~~ have anadopted ~~undue~~a ~~concentration~~code inof ~~commercial~~ethics ~~real~~for ~~estate~~senior ~~lending,~~financial weofficers ~~may~~and ~~be required~~whether tothe ~~maintain~~audit ~~increased~~committee ~~levels~~includes ofat ~~capital~~least ~~and/or~~one be“audit ~~required~~committee tofinancial ~~reduce our concentration in commercial real estate loans~~expert.”

~~Future~~Under ~~Legislation~~SOX, the SEC is required to regularly and ~~Regulatory~~systematically ~~Initiatives~~review corporate filings, based on certain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

~~Various~~As ~~other~~a ~~legislative~~public ~~and~~reporting ~~regulatory initiatives~~company, ~~including proposals to overhaul~~ the ~~banking~~Company ~~regulatory system are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Currently, the Congress~~ is ~~actively~~subject ~~considering significant changes~~ to the ~~manner~~ ofrequirements ~~regulating financial institutions including combining one or more~~ of ~~the~~ ~~FRB,~~SOX ~~FDIC, Comptroller of the Currency~~ and ~~the~~related ~~Office of Thrift Supervision~~ rules and ~~creating~~regulations aissued ~~new~~by ~~consumer~~the ~~protection~~SEC ~~agency for financial products. The current legislation being considered~~ and ~~other~~applied ~~future~~to ~~legislation regarding financial institutions may change banking statutes and~~ the ~~operating environment~~Company ofby ~~Bancorp and~~ the ~~Bank~~FRB. The inCompany’s ~~substantial~~common ~~and~~stock ~~unpredictable~~is ~~ways,~~not ~~and could~~listed ~~increase~~on ~~or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether~~ any ofnational ~~this~~exchange ~~potential~~such ~~legislation~~as ~~will be enacted, and if enacted,~~ the ~~effect that~~NYSE it or ~~any~~NASDAQ. As ~~implementing regulations~~such, ~~would have on~~ the ~~financial~~Company ~~condition or~~is ~~results~~not ofrequired ~~operations~~to ofcomply ~~the~~with ~~Bancorp or~~ the ~~Bank.~~additional ~~The~~SOX ~~nature~~requirements ~~and~~adopted ~~extent~~by ~~of future~~such ~~legislative and regulatory changes affecting financial institutions is unpredictable at this time~~exchanges. The WeCompany ~~cannot~~anticipated ~~determine~~additional ~~the~~expenses ~~ultimate~~to ~~effect~~comply ~~that~~with ~~such potential~~SOX ~~legislation,~~in if2010 ~~enacted~~however, ~~would~~the ~~have~~requirement ~~upon~~for ~~our~~compliance ~~financial~~was ~~condition~~delayed ~~of operations~~another year.

~~Where~~Financial ~~You~~Services ~~Can~~Modernization ~~Find More Information~~Legislation

~~Under the~~On ~~Securities~~November 12, ~~Exchange~~1999, the Gramm-Leach-Bliley Act of ~~1934~~1999 ~~Sections 13 and 15~~(~~d),~~the ~~periodic~~“Financial ~~and~~Services ~~current reports~~Modernization ~~must~~Act”) bewas ~~filed~~signed ~~with~~into ~~the SEC~~law. The ~~Company~~ ~~electronically~~Financial ~~files~~Services ~~the~~Modernization ~~following~~Act ~~reports~~is ~~with~~intended to modernize the ~~SEC: Form 10-K~~banking ~~(Annual~~industry ~~Report),~~by ~~Form ARS (Annual~~removing ~~Report~~barriers to ~~Shareholders),~~affiliation ~~Form 10-Q~~among ~~(Quarterly Report)~~banks, ~~Form 8-K (Current~~insurance ~~Report)~~companies, ~~insider~~the ~~ownership~~securities ~~reports~~industry and ~~Form DEF~~other ~~14A~~financial ~~(Proxy Statement)~~service providers. ~~The~~ ~~Company~~It ~~may~~provides ~~file additional~~financial ~~forms. The~~organizations ~~SEC~~with ~~maintains~~the ~~an Internet~~flexibility ~~site,~~of ~~www.sec.gov.~~structuring insuch ~~which~~affiliations ~~all~~through ~~forms~~a ~~filed~~holding ~~electronically~~company ~~may~~structure ~~be accessed. Additionally,~~or ~~all~~through ~~forms~~a ~~filed with~~financial ~~the~~subsidiary ~~SEC~~of ~~and~~a ~~additional~~bank, ~~shareholder~~subject ~~information~~to iscertain ~~available~~limitations. ~~free~~The ofFinancial ~~charge using~~Services ~~the~~Modernization ~~Link~~Act onestablishes ~~the~~a ~~Company’s~~new ~~website: www.santaluciabank.com. The Company~~type ~~makes~~of ~~these~~bank ~~reports~~holding ~~available~~company, toknown ~~the~~as ~~website~~a asfinancial ~~soon~~holding ascompany, ~~reasonable practicable~~which ~~after~~may ~~filing~~engage ~~them~~in ~~with~~an ~~the~~expanded ~~SEC. None~~list of ~~the~~activities ~~information~~that onare or“financial ~~hyperlinked~~in ~~from~~nature,” ~~the~~which ~~Company’s~~include ~~website~~securities isand insurance ~~incorporated~~brokerage, ~~into~~securities ~~this~~underwriting, ~~Annual~~insurance ~~Report~~underwriting onand ~~Form 10-K~~merchant banking.

~~ITEM~~The 1AFinancial Services Modernization Act also sets forth a system of functional regulation that makes the Federal Reserve Board the “umbrella supervisor” for holding companies, while providing for the supervision of the holding company’s subsidiaries by other federal and state agencies. ~~RISK~~In ~~FACTORS~~addition, the Company is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential customer information, regardless of whether the Company elects to become a financial holding company or to conduct activities through a financial subsidiary of the Company. The Company does not, however, currently intend to file notice with the Federal Reserve Board to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Company.

~~FACTORS~~The ~~THAT~~Company ~~MAY AFFECT~~does ~~FUTURE~~not ~~RESULTS~~believe ~~OF OPERATIONS~~that the Financial Services Modernization Act will have a material adverse effect on its operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company faces from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company.

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes may affect our business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Annual Report. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Annual15

13Community Reinvestment Act

~~Table~~The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of ~~Contents~~a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which based CRA ratings on an institution’s lending service and investment performance, resulting in a rating by the appropriate bank regulatory agency of “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance.” At its last examination by the FRB, the Bank received a CRA rating of “Satisfactory.”

~~Report~~USA isPatriot ~~qualified~~Act inof ~~its entirety by these factors.~~2001

IfOn ~~any~~October 26, of2001, President Bush signed the ~~following~~Uniting ~~risks~~and ~~actually~~Strengthening ~~occur~~America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, ~~our~~or the Patriot Act, of 2001. Among other things, the Patriot Act (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial ~~condition~~ institutions or wealthy foreign individuals (iii) requires financial institutions to establish an anti-money-laundering compliance program, and ~~results~~(iv) eliminates ofcivil ~~operations~~liability ~~could~~for bepersons ~~materially~~who file suspicious activity reports. The Patriot Act also increases governmental powers to investigate terrorism, including expanded government access to account records and ~~adversely~~makes ~~affected~~rules to implement the Patriot Act. IfOn ~~this~~March 9, ~~were~~2006, tothe ~~happen~~President signed the USA Patriot improvement and Reauthorization Act, which extended and modified the ~~value~~original ofact. While ~~our common~~we ~~stock~~believe ~~could~~the ~~decline~~Patriot ~~significantly~~Act may, to some degree, affect our recordkeeping and ~~you~~reporting ~~could~~expenses, ~~lose~~we ~~all~~do ornot ~~part~~believe ~~of your~~that ~~investment~~it will have a material adverse effect on our business and operations.

~~Risks~~Transactions ~~Associated~~between ~~with our Business.~~Affiliates

~~Recession~~Transactions between The Company and ~~changes~~its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in ~~domestic~~ the same manner and ~~foreign~~to ~~financial~~the ~~markets~~same ~~may~~extent ~~have~~as aif ~~material~~they ~~negative~~were ~~impact~~members of the Federal Reserve System. The FRB issued Regulation W on ~~our results~~October 31, 2002, which comprehensively implements sections 23A and 23B of ~~operations~~the Federal Reserve Act. Sections 23A and ~~financial~~23B ~~condition~~and Regulation W restrict loans by a depository institution to its affiliates, asset purchases by a depository institution from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document the FRB’s interpretations of sections 23A and 23B. Regulation W had an effective date of April 1, 2003.

Economic indices continue to show that since the fourth quarter of 2007, the United States economy has been in a recession. This has been reflected in significant business failures and job losses, including bankruptcies of three U.S. automobile manufacturing companies county and state budget cuts causing furloughing and is expected to continue in 2010.Privacy

InFederal ~~addition,~~banking inrules limit the ~~past year,~~ability ~~the~~of ~~domestic~~banks and ~~foreign~~other financial ~~markets, securities trading markets and economies generally have experienced significant turmoil including, without limitation, government takeovers of troubled~~ institutions, ~~government brokered mergers of such firms~~ to ~~avoid~~disclose ~~bankruptcy~~non-public orinformation ~~failures,~~about bankruptcies of securities trading firms and insurance companies, failures of financial institutions and securities brokerage firms, declines in real property values, and wide fluctuations in energy prices, all of which have contributed to reduced availability of credit for businesses and consumers, elevated foreclosures on residential and commercial properties, falling home prices, reduced liquidity and a lack of stability across the entire financial sector. These recent events and the corresponding uncertainty and decline in financial markets are likely to ~~continue~~non-affiliated ~~for~~third ~~the foreseeable future~~parties. ~~The~~ Pursuant ~~full extent of the repercussions~~ to ~~our~~these nation’s economy in general and our business in particular there from are not fully known at this time. Such events may have a negative effect on (i) our ability to service our existing customers and attract new customersrules, ~~(ii) the ability of our borrowers to operate their business as successfully as in the past, (iii) the~~ financial ~~security~~institutions ~~and~~must ~~net worth of our customers, and (iv) the ability of our customers to repay their loans with us in accordance with the terms thereof.~~provide:

We- doinitial ~~not~~notices ~~believe~~to ~~these difficult~~customers ~~conditions~~about ~~are~~their ~~likely~~privacy topolicies, ~~improve~~describing in the ~~near future. A worsening of these~~ conditions ~~would~~under ~~likely~~which ~~exacerbate~~they ~~the~~may ~~adverse~~disclose ~~effects~~non-public ~~of these~~information ~~difficult~~to ~~market~~non-affiliated ~~and~~third ~~economic~~parties ~~conditions on us, our customers~~ and ~~the other financial institutions in our market.~~affiliates;

~~Current~~- ~~levels~~annual notices of ~~market~~their ~~volatility~~privacy ~~are unprecedented,~~policies ~~which may limit our ability~~ to ~~access~~current ~~capital~~customers; and ~~negatively affect our results of operations and financial condition.~~

~~The~~- ~~capital and credit markets have been experiencing volatility and disruption for more than~~ a ~~year. In~~reasonable ~~recent~~method ~~months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability~~ for ~~certain~~customers ~~issuers without regard~~ to ~~those~~ ~~issuers’~~“opt ~~underlying~~out” ~~financial strength. If current levels~~ of ~~market disruption~~disclosures ~~and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability~~ to ~~access~~ ~~capital~~non-affiliated ~~and~~third ~~on our business, financial condition and results of operations~~parties.

~~The~~These ~~current~~privacy ~~changing~~provisions ~~economic environment~~affect ~~poses~~how ~~significant~~consumer ~~challenges~~information ~~for~~is ustransmitted through diversified financial companies and conveyed to outside vendors. We have implemented our privacy policies in accordance with the law.

WeIn ~~are~~recent ~~operating~~years, in a ~~challenging~~ ~~and~~number ~~uncertain~~of ~~economic~~states ~~environment,~~have ~~including~~implemented ~~generally~~their ~~uncertain national~~own ~~and~~versions ~~local conditions. Financial institutions continue to be affected by the softening~~ of ~~the~~privacy ~~real estate market and constrained financial markets~~laws. ~~While we~~For ~~have very limited direct exposure to the residential real estate market and while we have no sub-prime residential loans or securities backed by such loans on our books~~example, ~~we are nevertheless affected by these events. Continued declines~~ in ~~real estate values~~2003, ~~home~~ ~~sales~~California ~~volumes~~adopted ~~and~~standards ~~financial~~that ~~stress~~are onmore ~~borrowers~~restrictive asthan afederal ~~result of the uncertain economic environment~~law, ~~including~~allowing ~~job~~bank ~~losses,~~customers ~~interest~~the ~~rate~~opportunity ~~resets~~to ~~on adjustable~~bar ~~rate mortgage loans and other factors could have adverse effects on our borrowers which would adversely affect our~~ financial ~~condition~~companies ~~and~~from ~~results of~~sharing ~~operations. This~~information ~~deterioration in economic conditions coupled~~ with atheir ~~possible national economic recession could drive losses beyond that which is provided for in our allowance for loan losses and result in the following other consequences:~~affiliates.

~~· Loan delinquencies, problem assets and foreclosures may increase;~~16

~~· Demand~~Predatory ~~for our products and services may decline;~~Lending

14The term “predatory lending”, much like the terms “safety and soundness” and “unfair and deceptive practices”, is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. But typically predatory lending involves at least one, and perhaps all three, of the following elements:

~~Table~~ o making unaffordable loans based on the assets of ~~Contents~~the borrower rather than on the borrower’s ability to repay an obligation or asset-based lending;

~~· Low~~o ~~cost~~inducing ora ~~non-interest~~borrower ~~bearing~~to ~~deposits~~refinance ~~may~~a ~~decrease~~loan repeatedly in order to charge high points and fees each time the loan is refinanced or loan flipping; and

~~· Collateral~~o ~~for~~engaging ~~our loans, especially real estate, may decline~~ in ~~value, in~~fraud ~~turn~~or ~~reducing~~deception ~~customers’~~to ~~borrowing~~conceal ~~power,~~the ~~and~~true ~~reducing~~nature of the ~~value~~loan ofobligation ~~assets and~~from ~~collateral~~an ~~associate~~unsuspecting ~~with~~or ~~our~~unsophisticated ~~existing loans~~borrower.

AFederal ~~significant~~Reserve ~~portion~~Board ofregulations ~~our~~aimed ~~loan~~at ~~portfolio~~curbing is such lending significantly widened the pool of high-cost home-secured loans covered by ~~real~~the ~~estate~~home Ownership and Equity Protection Act of 1994, a ~~further~~federal ~~downturn~~law inthat ~~the~~requires ~~local~~extra ~~economy~~disclosures and ~~real estate~~consumer ~~market~~protections ~~could~~to ~~affect~~borrowers. The ~~our~~following ~~business.~~triggers coverage under the home ownership and Equity Protection Act of 1994:

Ato ~~December 31, 2009,~~interest ~~real~~rates ~~estate served as the principal source of collateral with respect to approximately 79% of our loan portfolio. A decline in current economic conditions could have an adverse effect on the demand~~ for ~~new~~first ~~loans~~lien ~~even~~mortgage ~~if rates continue to decline. It is also understood that the ability of borrowers to repay outstanding~~ loans, ~~the value of real estate and other collateral securing loans and the value of real estate owned by the Company, could affect the Company’s financial condition and results of operations~~ in ~~general~~excess ~~and the market value~~ of ~~the~~8 ~~Company’s~~percentage ~~common stock. Acts~~points ofabove ~~nature,~~comparable ~~including earthquakes~~Treasury ~~and floods~~securities, ~~which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company’s financial condition.~~

~~Acts~~o ofsubordinate ~~nature,~~lien ~~including earthquakes,~~loans ~~floods and fires, which may cause uninsured damage and other loss~~ of ~~value~~10 topercentage ~~real~~points ~~estate~~above ~~that~~Treasury ~~secures these loans~~securities, ~~may also negatively impact our financial condition.~~and

Weo ~~also~~fees ~~have~~such aas ~~high~~optional ~~concentration~~insurance inand ~~commercial real~~similar ~~estate~~debt orprotection ~~CRE~~costs ~~loans,~~paid ~~which~~in ~~generally~~connection ~~present~~with ~~increased~~the ~~levels~~credit oftransaction ~~risk~~when ~~to our~~combined ~~results~~with ofpoints ~~operation~~ and ~~financial~~fees ~~condition~~if deemed excessive.

~~CRE loans~~In ~~generally~~addition, ~~involve~~the aregulation ~~higher~~bars ~~degree~~loan flipping by the same lender of ~~credit~~loan ~~risk~~servicer ~~than~~within ~~residential mortgage~~a ~~lending~~year. Lenders ~~due,~~also ~~among~~will ~~other~~be ~~things,~~presumed to have violated the ~~large~~law; ~~amounts~~which ~~loaned~~says ~~to individual~~loans ~~borrowers. Losses~~shouldn’t ~~incurred~~be ~~on loans~~made to apeople ~~small~~unable ~~number~~to ofrepay ~~borrowers~~them; ~~could~~unless ~~have~~they adocument ~~material~~that ~~adverse~~the ~~impact~~borrower ~~on our~~has ~~income~~the ~~and~~ability ~~financial~~to ~~condition~~repay. ~~Unlike~~ Lenders ~~residential~~that ~~mortgage~~violate ~~loans,~~the ~~commercial~~rules face ~~real~~cancellation ~~estate~~of loans ~~generally~~ ~~depend~~and onpenalties equal to the ~~cash~~finance ~~flow~~charges ~~from~~paid. The ~~the~~Company ~~property~~does not expect these rules and potential state action in this area to ~~service~~have ~~the~~a ~~debt. Cash~~material ~~flow~~impact ~~may~~on beour ~~significantly~~financial ~~affected~~condition ~~by general~~or ~~economic~~results ~~conditions~~of operations.

~~Within the~~Bank ~~makeup~~Secrecy ofAct our CRE, approximately 30% of our commercial term loans are granted for owner use, which is repaid from the cash flow of the owner’s business. This coupled with the diversification of business types, location, conservative underwriting and ~~loss~~Anti ~~history~~Money ~~further mitigates~~Laundering the risk in our CRE portfolio. The Company targets commercial term loans for owners use as it supports the local business economy. The Company feels that owner occupied properties do not carry the same risk as commercial strip centers and other income properties with higher vacancy factors that rely on third parties for repayment.Legislation

In ~~addition~~ 1970, ~~federal~~Congress ~~banking~~passed ~~regulators~~the ~~have~~Currency ~~issued~~and ~~final~~Foreign ~~guidance~~Transactions ~~regarding commercial~~Reporting ~~real~~Act, ~~estate~~otherwise ~~lending. This guidance~~known ~~suggests~~as ~~that~~the ~~institutions~~Bank ~~that~~Secrecy ~~are~~Act ~~potentially~~(the ~~exposed~~“BSA”), towhich ~~significant commercial~~established ~~real~~requirements ~~estate~~for ~~concentration~~recordkeeping ~~risk~~and ~~will~~reporting beby ~~subject~~banks toand ~~increased regulatory~~other ~~scrutiny~~financial institutions. ~~Institutions~~The ~~that have~~BSA ~~experienced~~was ~~rapid~~designed ~~growth~~to inhelp ~~commercial~~identify ~~real~~the ~~estate lending~~source, ~~have~~volume ~~notable exposure~~and tomovement ~~specific~~of ~~types~~currency ofand ~~commercial~~other ~~real~~monetary ~~estate~~instruments ~~lending,~~into orand ~~are approaching~~out orof ~~exceed~~the ~~certain~~United ~~supervisory~~States ~~criteria~~in ~~that~~order ~~measure~~to anhelp ~~institution’s commercial~~detect ~~real~~and ~~estate~~prevent ~~portfolio~~money ~~against~~laundering ~~its~~connected ~~capital~~with ~~levels~~drug trafficking, ~~may~~terrorism beand ~~subject~~other criminal activities. The primary tool used to ~~such~~ ~~increased~~implement ~~regulatory~~BSA ~~scrutiny~~requirements is the filing of Suspicious Activity Reports. ~~Our commercial~~Today, ~~real~~the ~~estate~~BSA ~~portfolio~~requires ~~may~~that beall ~~viewed~~banking asinstitutions ~~falling~~develop ~~within~~and ~~one~~provide orfor ~~more~~the continued administration of ~~the~~ ~~foregoing~~a ~~categories,~~program ~~and~~reasonable ~~accordingly~~designed weto ~~may~~assure ~~become~~and ~~subject~~monitor tocompliance ~~increased~~with certain ~~regulatory~~recordkeeping ~~scrutiny~~and ~~because~~reporting ofrequirements ~~our~~regarding ~~commercial~~both ~~real~~to ~~estate~~domestic ~~portfolio~~and international currency transactions. IfThese itprograms ismust, ~~determined~~at bya ~~our~~minimum, ~~regulator~~provide ~~that~~for ~~we have~~a ansystem ~~undue~~of ~~concentration~~internal incontrols ~~commercial~~to ~~real~~assure ~~estate~~ongoing ~~lending~~compliance, weprovide ~~may~~for ~~be required~~independent totesting ~~maintain~~of ~~increased~~such ~~levels~~systems ofand ~~capital~~compliance, ~~and/or~~designate beindividuals ~~required~~responsible tofor ~~reduce our~~such ~~concentration~~compliance inand ~~commercial~~provide ~~real~~appropriate ~~estate~~personnel ~~loans~~training.

~~Recently enacted~~Commercial ~~legislation~~Real ~~and~~Estate other measures undertaken by the Treasury, the FRB and other governmental agencies may not help stabilize the U.S. financial system or improve the housing market, which in turn may have a material negative impact on our results of operations and financial condition..Lending

OnFederal ~~October 3,~~banking ~~2008, President~~regulators ~~Bush~~recently ~~signed~~issued ~~into~~final ~~law~~guidance ~~the~~regarding ~~Emergency~~commercial ~~Economic~~real ~~Stabilization~~estate ~~Act~~lending ofto ~~2008 (the~~address ~~“EESA”),~~a ~~which,~~concern ~~among~~that ~~other~~rising ~~measures,~~commercial ~~authorized~~real ~~the~~estate ~~Treasury~~lending ~~Secretary~~concentrations may expose institutions to ~~establish~~ unanticipated earnings and capital volatility in the ~~Troubled~~event ~~Asset~~of ~~Relief~~adverse ~~Program~~changes ~~(“TARP”)~~in the general commercial real estate market. ~~EESA~~ This ~~gives~~guidance ~~broad authority~~suggests that institutions that are potentially exposed to ~~Treasury~~significant commercial real estate concentration risk will be subject to ~~purchase,~~increased ~~manage~~regulatory scrutiny. Institutions that have experienced rapid growth in commercial real estate lending, ~~modify~~have notable exposure to specific types of commercial real estate lending, ~~sell~~or ~~and~~are ~~insure~~approaching ~~the~~or ~~troubled mortgage~~exceed ~~related~~certain ~~assets~~supervisory criteria that ~~triggered~~measure ~~the~~an ~~current~~institution’s ~~economic~~commercial ~~crisis~~real asestate ~~well~~portfolio asagainst its capital ~~other~~levels, ~~“troubled~~may ~~assets~~be subject to such increased regulatory scrutiny.~~” EESA~~ Our ~~includes~~commercial ~~additional~~real ~~provisions~~estate ~~directed~~portfolio ~~at bolstering~~may be viewed as falling within one or more of the ~~economy~~foregoing categories, ~~including:~~and accordingly we may become subject to increased regulatory scrutiny because of our commercial real estate portfolio. If it is determined by our regulator that we have an undue concentration in commercial real estate lending, we may be required to maintain increased levels of capital and/or be required to reduce our concentration in commercial real estate loans.

~~· Authority for the FRB to pay interest on depository institution balances;~~17

~~· Mortgage~~Monetary ~~loss~~Policy ~~mitigation~~ and ~~homeowner~~Economic ~~protection;~~ Controls

15The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve, whose actions directly affect the money supply which, in turn, affects banks’ lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.

~~Table~~ Deregulation of ~~Contents~~interest rates paid by banks on deposits and the types of deposits that may be offered by banks has eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks’ cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins.

~~· Temporary~~Future ~~increase~~Legislation inand ~~FDIC~~Regulatory ~~insurance coverage from $100,000 to $250,000 through December 31, 2009; and~~Initiatives

~~· Authority~~Various other legislative and regulatory initiatives, including proposals to overhaul the ~~SEC~~banking regulatory system are from time to ~~suspend~~time ~~mark-~~introduced in Congress and state legislatures, as well as regulatory agencies. Currently, the Congress is actively considering significant changes to the manner of regulating financial institutions. The Dodd-~~market~~Frank ~~accounting~~Act ~~requirements~~was an initial legislative act in this regard, but much of its impact cannot be understood until numerous rulemakings are completed. The current rulemakings and regulations being prepared under the Dodd-Frank Act and other future legislation regarding financial institutions may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or ~~for~~expand permissible activities or affect the competitive balance depending upon whether any ~~issuer~~of this potential legislation will be enacted, and if enacted, the effect that it or ~~class~~any implementing regulations, would have on the financial condition or results of ~~category~~operations of ~~transactions~~the Company or the Bank. The nature and extent of future legislative and regulatory changes affecting financial institutions is unpredictable at this time. We cannot determine the ultimate effect that such potential legislation, if enacted, would have upon our financial condition of operations.

~~Pursuant~~Where toYou ~~the~~Can ~~TARP,~~Find ~~the Treasury~~More has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Under the TARP, the Treasury has created a capital purchase program, pursuant to which it is providing access to capital to financial institutions through a standardized program to acquire preferred stock (accompanied by warrants) from eligible financial institutions that will serve as Tier 1 capital.Information

~~EESA~~Under ~~also~~the ~~contains~~Securities ~~a number~~Exchange Act of ~~significant~~1934 ~~employee~~Sections ~~benefit~~13 and ~~executive~~15(d), ~~compensation~~periodic ~~provisions~~and current reports must be filed with the SEC. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), ~~some~~ ofForm ARS ~~which~~(Annual ~~apply~~Report to ~~employee~~Shareholders), ~~benefit~~Form 10-Q ~~plans~~(Quarterly ~~generally~~Report), Form 8-K (Current Report), insider ownership reports and ~~others~~Form DEF ~~which impose~~14A on(Proxy ~~financial~~Statement). The ~~institutions~~Company ~~that~~may ~~participate~~file additional forms. The SEC maintains an Internet site, www.sec.gov. in which all forms filed electronically may be accessed. Additionally, all forms filed with the ~~TARP~~SEC ~~program~~and additional shareholder information is available free of charge using the Link on the Company’s website: www.santaluciabank.com. The Company makes these reports available to the ~~restrictions~~website as soon as reasonable practicable after filing them with the SEC. None of the information on ~~executive~~or ~~compensation~~hyperlinked from the Company’s website is incorporated into this Annual Report on Form 10-K.

~~EESA~~ITEM followed, and has been followed by, numerous actions by the Federal Reserve, Congress, Treasury, the SEC and others to address the liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 20071A. ~~These~~ ~~measures~~RISK include homeowner relief that encourage loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; coordinated international efforts to address illiquidity and other weaknesses in the banking sector.FACTORS

OnAn ~~October 14,~~investment ~~2008, the~~in ~~FDIC~~our ~~announced~~common ~~the~~stock ~~establishment~~is ofsubject ato ~~temporary~~risks ~~liquidity~~inherent ~~guarantee program~~ to ~~provide~~our ~~insurance~~business. The ~~for~~material ~~all~~risks ~~non-interest bearing transaction accounts~~ and ~~guarantees~~ ofuncertainties ~~certain~~that ~~newly~~Management ~~issued~~believes ~~senior~~may ~~unsecured~~affect ~~debt issued~~our ~~by financial~~business ~~institutions~~are ~~(such~~described asbelow. Before ~~the~~making ~~Bank)~~an ~~and~~investment ~~bank~~decision, ~~holding~~you ~~companies~~should ~~(such~~carefully ~~as the~~consider ~~Company). Under~~ the ~~program,~~risks ~~newly~~and ~~issued~~uncertainties ~~senior~~described ~~unsecured~~below ~~debt~~together ~~issued on~~with orall ~~before~~of ~~June 30, 2009 will be insured in~~ the ~~event~~other ~~the~~information ~~issuing institution~~included ~~subsequently~~or ~~fails,~~incorporated orby ~~its~~reference ~~holding~~in ~~company~~this ~~files~~Annual ~~for bankruptcy~~Report. The ~~debt~~risks ~~includes~~and ~~all~~uncertainties ~~newly~~described ~~issued~~below ~~unsecured~~are ~~senior~~not ~~debt (e.g.,~~the ~~promissory~~only ~~notes,~~ones ~~commercial~~facing ~~paper~~our ~~and inter-bank funding)~~business. Additional ~~The aggregate~~risks ~~coverage~~and ~~for~~uncertainties anthat ~~institution~~Management ~~may~~is not ~~exceed~~aware ~~125%~~ of ~~its~~or ~~debt outstanding~~focused on ~~December 31,~~or ~~2008~~ that ~~was~~Management ~~scheduled~~currently todeems ~~mature~~immaterial ~~before~~may ~~June 30, 2009. The~~also ~~guarantee~~impair ~~will~~our ~~extend~~business tooperations. This ~~June 30,~~Annual ~~2012~~Report ~~even~~is ifqualified ~~the~~in ~~maturity of~~its ~~the~~entirety ~~debt~~by isthese ~~after~~risk ~~that date~~factors.

On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill”), more commonly known as the economic stimulus or economic recovery package. The Stimulus Bill includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, the Stimulus Bill imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the Treasury.18

~~The~~If ~~actual~~any ~~impact~~of ~~that EESA,~~ the ~~Stimulus~~following ~~Bill~~risks ~~and~~actually ~~such~~occur, ~~related~~our ~~measures undertaken to alleviate the credit crisis will have generally on the~~ financial ~~markets,~~condition ~~including~~and ~~the extreme~~results ~~levels~~ of ~~volatility~~operations ~~and~~could ~~limited~~be ~~credit~~materially ~~availability~~and ~~currently~~adversely ~~being experienced, is unknown~~affected. ~~The~~ If ~~failure~~this ofwere ~~such measures~~ to ~~help~~happen, ~~stabilize~~ the ~~financial~~value ~~markets and a continuation or worsening~~ of ~~current~~our ~~financial market~~common ~~conditions~~stock could ~~materially~~decline ~~and adversely affect our business~~significantly, ~~financial condition,~~and ~~results~~you ofcould ~~operations,~~lose ~~access~~all ~~to credit~~ or ~~the~~part ~~trading price~~ of ~~our common~~your ~~stock~~investment.

~~Deposit~~Risks ~~insurance~~Associated ~~assessments will~~With ~~increase~~Our ~~substantially, which will adversely affect profits.~~Business

~~FDIC~~The ~~deposit~~California ~~insurance expense~~Department ~~for~~of ~~the~~Financial ~~year~~Institutions ~~ended December 31, 2009 was $468,830.00. Deposit insurance assessments~~ will ~~increased~~likely ininstitute ~~2009 due to the strains on the FDIC deposit insurance fund resulting from the cost of recent bank failures and~~ an ~~increase~~ inenforcement ~~the~~action ~~number~~against ofour ~~banks~~banking ~~likely to fail over the next few years. On December 16~~subsidiary, ~~2008,~~thereby ~~the~~materially ~~FDIC~~impacting ~~issued~~our ~~a final rule increasing that assessment range for the first quarter of 2009 and levied a special assessment on all Banks during the first six months of 2009~~operations. ~~During the last two quarters of 2009 the FDIC further levied a prepayment assessment on banks to be paid in December 2009 for the periods of January 2010 to December of 2012.~~

16The California Department of Financial Institutions (the “DFI”), the Bank’s primary state regulator, commenced its regular examination of the Bank on November 29, 2010 and completed said examination in the fourth quarter of 2010. Based on discussions the Bank had with the DFI following the examination, the Bank’s condition has been downgraded and it is expected that an enforcement action in the form of a Consent Order will be sought against the Bank (the “Anticipated Consent Order”). While it is expected that the content of the Anticipated Consent Order will be substantially similar to that of the Written Agreement, we anticipate that there will be one material difference. We expect that the Anticipated Consent Order will include specific minimum capital ratios that the Bank must meet for both tier 1 leverage and total risk-based capital ratios. At this time, the Bank has not been advised of the minimum capital ratios. However, those ratios will be in excess of the Bank’s current capital ratios. There can be no assurance that we will be able to comply fully with the Anticipated Consent Order. While we do not believe that compliance with the Anticipated Consent Order will materially impact our operations beyond the Written Agreement, a failure to comply fully with the Anticipated Consent Order could trigger further enforcement proceedings against the Bank that would materially impact our financial condition and results of operation.

~~Table~~ We may be subject to ongoing regulation, including restrictions on our lending activities, all of ~~Contents~~which will materially impact our operations.

~~Our~~Even ~~real~~though ~~estate~~the Bank remains adequately capitalized as of December 31, 2010, the regulatory agencies have the authority to restrict our operations to those consistent with under-capitalized institutions. For example, the regulatory agencies could impose restrictions that place limitations on our lending activities. The regulatory agencies also ~~exposes~~have usthe power to limit the ~~risk~~rates paid by the Bank to attract retail deposits in its local markets. The Bank will likely be required to reduce our levels of non-performing assets within specified time frames. These time frames might not necessarily result in maximizing the price that might otherwise be received for the underlying properties. In addition, if such restrictions were also imposed upon other institutions that operate in the Bank’s markets, multiple institutions disposing of ~~environmental~~properties ~~liabilities~~at the same time could further diminish the potential proceeds received from the sale of these properties.

InBoth the ~~course~~Company ~~of our business, we may foreclose~~ and ~~take~~ ~~title~~the toBank ~~real~~are ~~estate,~~operating ~~and~~under ~~could be subject to environmental liabilities with respect to these properties. We may be held liable to~~ a ~~governmental~~Written ~~entity~~Agreement ~~or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection~~ with ~~environmental~~the ~~contamination,~~FRBSF ~~or may be required~~ to ~~investigate~~ ~~or clean up hazardous or toxic substances~~address, oramong ~~chemical~~other ~~releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition~~things, ~~as the owner or former owner of a contaminated site~~lending, wecredit ~~may be subject to common law claims by third parties based on damages~~ and ~~costs~~capital ~~resulting~~related ~~from environmental contamination emanating from the property~~issues. ~~If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.~~

~~Our~~In ~~business~~light isof the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we are subject to ~~interest~~ ~~rate~~increased ~~risk~~regulatory scrutiny and ~~changes~~additional inregulatory ~~interest~~restrictions, ~~rates~~and have become subject to certain enforcement actions under a Written Agreement issued by the FRBSF on December 23, 2010. This enforcement action follows the FRBSF’s regularly scheduled examination of our banking subsidiary during the second and third quarter of 2010 and is based on discussions the Bank had following the examination. Such enforcement action places limitations on our business and may adversely affect our ability to implement our business plans. This enforcement action requires, among other things, the Bank to ~~performance~~take certain steps to strengthen its balance sheet, such as reducing the level of classified assets, increasing capital levels, and addressing other criticisms of the examination. This enforcement action is more fully discussed under “Supervision and Regulation” of Part 1 Business of this Form 10-K, Note 25. Subsequent Events of the consolidated financial ~~condition~~statements included in this Form 10-K as well as “Recent Developments” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. If the Company fails to comply with these enforcement actions, it may become subject to further regulatory enforcement actions up to and including the appointment of a conservator or receiver for the Bank.

~~Our~~The ~~earnings~~FRBSF ~~are~~has ~~impacted~~imposed byrestrictions ~~changing~~that ~~interest~~place ~~rates. Changes~~limitations inon ~~interest~~our ~~rates~~lending ~~impact~~activities. They ~~the~~also ~~demand~~have ~~for new loans,~~ the ~~credit~~power ~~profile of~~to ~~our~~limit ~~borrowers,~~ the rates ~~received on loans and securities and rates~~ paid ~~on deposits~~by ~~and borrowings. The difference between~~ the ~~rates~~Bank ~~received~~to onattract ~~loans~~retail ~~and securities and the rates paid on~~ deposits ~~and~~in ~~borrowings~~its islocal ~~known as interest rate spread~~markets. The ~~Given~~Bank ~~our~~is ~~current~~required ~~volume~~to ~~and~~reduce ~~mix~~the level of ~~interest~~non-~~bearing~~performing ~~liabilities and interest-earning~~ assets, weand ~~would expect our interest rate spread to increase~~ if ~~interest~~such ~~rates~~were ~~rise~~also ~~and,~~imposed ~~conversely,~~upon toother ~~decline~~institutions ifthat ~~interest~~operate ~~rates fall. Increasing levels of competition~~ in the ~~banking~~Bank’s ~~and~~markets, ~~financial~~multiple ~~services business~~institutions ~~may~~disposing ~~decrease our net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Although we believe our current level~~ of ~~interest~~properties ~~rate~~at ~~sensitivity~~the issame ~~reasonable,~~time ~~significant fluctuations~~could infurther ~~interest~~diminish ~~rates~~the ~~and~~potential ~~increasing~~proceeds ~~competition~~received ~~may~~from ~~have~~the ansale ~~adverse effect on our business, financial condition and results~~ of ~~operations~~these properties.

A sustained decrease in market interest rates could adversely affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates, prepaying their existing loans. Under those circumstances, we would not be able to reinvest those prepayments in assets earning interest rates as high as the rates on the prepaid loans. In addition, our commercial real estate and commercial loans, which carry interest rates that, in general, adjust in accordance with changes in the prime rate, will adjust to lower rates. We are also significantly affected by the level of loan demand available in our market. The inability to make sufficient loans directly affects the interest income we earn. Lower loan demand will generally result in lower interest income realized as we place funds in lower yielding investments.19

~~Economic conditions~~We inCannot ~~the~~Accurately ~~Central~~Predict ~~Coast~~the Effect of ~~California~~the ~~area~~Current ~~could~~Economic ~~adversely~~Downturn ~~affect~~on ~~our operations~~Our ~~and/~~Future Results of Operations or ~~cause~~Market usPrice toof ~~sustain~~Our ~~losses.~~Stock

~~Our retail~~The ~~and~~national ~~commercial~~economy ~~banking~~and ~~operations~~the ~~are~~financial ~~concentrated~~services ~~primarily~~sector in ~~San~~particular, ~~Luis Obispo~~are ~~and~~currently ~~northern~~facing ~~Santa~~challenges ~~Barbara~~of ~~Counties. As~~ a ~~result~~scope ofunprecedented ~~this geographic concentration, our results of operations depend largely upon economic conditions~~ in ~~this~~recent ~~area~~history. A ~~significant~~We ~~source~~cannot ofaccurately ~~risk~~predict ~~arises from~~ the ~~possibility~~ ~~that~~severity ~~losses~~or ~~will~~duration ~~be sustained if a significant number~~ of ~~our borrowers, guarantors and related parties fail to perform in accordance with~~ the ~~terms~~ ofcurrent ~~their~~economic ~~loans.~~downturn, ~~This~~which ~~risk~~has ~~increases~~adversely ~~when~~impacted the ~~economy~~markets iswe ~~weak~~serve. WeAny ~~have adopted~~further ~~underwriting~~deterioration ~~and~~in ~~credit monitoring procedures and credit policies, including~~ the ~~establishment~~economies ~~and review~~ of the ~~allowance~~nation ~~for~~as ~~credit~~a ~~losses,~~whole ~~that management~~or ~~believes~~in ~~are~~our ~~appropriate~~markets towould ~~minimize~~have ~~this~~an ~~risk~~adverse byeffect, ~~assessing~~which ~~the likelihood~~could ofbe ~~nonperformance~~material, ~~tracking~~on ~~loan~~our ~~performance~~business, ~~and~~financial ~~diversifying~~condition, ~~our credit~~results ~~portfolio.~~of ~~These~~operations ~~policies~~ and ~~procedures~~prospects, ~~however,~~and ~~may not prevent unexpected losses that~~ could ~~adversely~~also ~~affect~~cause ~~our results of operations in general and~~ the market ~~value~~price of our stock to decline.

WeOur ~~face strong~~Level ~~competition~~of ~~from~~Classified ~~financial~~Assets ~~service~~Expose ~~companies~~Us ~~and~~to ~~other~~Increased ~~companies~~Lending ~~that offer~~Risk. ~~banking~~Further, ~~services~~if ~~that~~Our ~~could~~Allowance ~~hurt~~for ~~our~~Loan ~~business.~~Losses is Insufficient to Absorb Losses in Our Loan Portfolio, Our Earnings Could Decrease

~~The~~ At December 31, 2010, loans that we have categorized as doubtful and substandard totaled $30.7 million of which approximately $23.9 million were non-accruing. These loans represent 16.3% of total gross loans as of December 31, 2010. If these loans do not perform according to their terms and / or the collateral is insufficient to pay any remaining loan balance, we may experience loan losses, which could have a material effect on our operating results. Like all financial ~~services~~institutions, ~~business~~we maintain an allowance for loan losses to provide for loans in our ~~market~~portfolio ~~areas~~that ismay ~~highly~~not ~~competitive~~be repaid in their entirety. ItAt December 31, 2010, our allowance for loan losses totaled $11.0 million, which represented 5.84% of total loans and 45.9% of non-performing loans. We believe that our allowance for loan losses is ~~becoming~~maintained ~~increasingly~~at ~~competitive~~a ~~due~~level adequate to ~~changes~~absorb probable losses inherent in ~~regulation~~our loan portfolio as of the corresponding balance sheet date. However, ~~technological advances~~our allowance for loan losses may not be sufficient to cover actual loan losses, and ~~the~~future ~~accelerating~~provisions ~~pace~~for ofloan ~~consolidation~~losses ~~among~~could ~~financial~~materially ~~services providers~~adversely affect our operating results. We ~~face~~make ~~competition~~various ~~both~~assumptions inand ~~attracting~~judgments ~~quality~~about ~~assets~~the ~~and~~collectability ~~deposits~~ of our loan portfolio, including the creditworthiness of our borrowers and intheir probability of making ~~loans.~~payment, Weas ~~compete~~well as the value of real estate and other assets serving as collateral for the repayment of many of our loans. ~~principally~~In ~~through~~determining the ~~interest rates~~amount ~~and~~of the allowance for loan ~~fees~~losses, significant factors we ~~charge~~consider ~~and~~include loss experience in particular segments of the ~~efficiency~~portfolio, trends and ~~quality~~absolute levels of ~~services~~classified ~~we provide.~~loans, ~~Increasing~~trends and absolute levels ofin ~~competition~~delinquent loans, trends in ~~the~~risk ~~banking~~ratings, trends in industry charge-offs by particular segments and ~~financial~~changes ~~services~~ in existing general economic and business conditions affecting our lending areas and the national economy. If our assumptions are incorrect, our allowance for loan losses may ~~reduce~~be insufficient to cover losses inherent in our ~~market~~loan ~~share~~portfolio, resulting in additions to our allowance. Material additions to our allowance could materially decrease ~~loan~~our ~~demand~~net income. Our regulators, ~~cause~~as ~~the~~an ~~prices~~integral ~~we charge~~part of their examination process, periodically review our allowance for loan losses and may require us to increase our ~~services~~allowance for loan losses by recognizing additional provisions for loan losses charged to ~~fall~~expense, or to decrease our ~~net~~allowance ~~interest~~for ~~margin,~~loan ~~which~~losses ~~is our~~by recognizing loan charge-offs, net ~~interest~~of ~~income~~recoveries. ~~divided~~Any bysuch ~~our~~additional ~~average~~provisions ~~earning~~for ~~assets~~loan losses or charge-offs, as required by ~~forcing~~these usregulatory agencies, could have a material adverse effect on our financial condition and results of operations. Please also refer to “Regulatory and Enforcement Proceedings” under the section “Supervision and ~~offer~~Regulation” ~~lower~~of ~~lending~~Item 1. Business of this Form 10-K for additional information on regulatory requirements regarding the Bank’s allowance for loan losses.

17We Are Highly Dependent On Real Estate and Any Further Downturn in the Real Estate Market May Hurt Our Business

~~Table~~A significant portion of ~~Contents~~our loan portfolio is dependent on real estate. At December 31, 2010, real estate served as the principal source of collateral with respect to approximately 80.9% of our loan portfolio. A decline in current economic conditions, a decline in the local housing market, both of which we are experiencing currently, or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general and the market value of our common stock. Acts of nature, including earthquakes, floods and fires, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

~~interest rates and pay higher deposit interest rates. Therefore, our results may differ in future periods depending upon the nature or level of competition.~~20

~~Technology and~~We ~~other~~Also ~~changes~~Have ~~are~~a ~~allowing~~Concentration parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in ~~brokerage~~Higher ~~accounts~~Risk orCommercial ~~mutual~~Real ~~funds.~~Estate Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have an adverse effect on our financial condition and results of operations.Loans

~~Failure~~We also have a high concentration in commercial real estate (“CRE”) loans. CRE loans as defined by final guidance issued by Bank regulators are defined as construction, land development, other land loans, loans secured by multifamily (5 or more) residential properties, and loans secured by non-farm nonresidential properties. Following this definition, approximately 43.3% of our lending portfolio can be classified as CRE lending as of December 31, 2010. CRE loans generally involve a higher degree of credit risk than residential mortgage lending due, among other things, to ~~successfully~~the ~~execute~~large amounts loaned to individual borrowers. Losses incurred on loans to a small number of borrowers could have a material adverse impact on our ~~strategy~~income and financial condition. In addition, unlike residential mortgage loans, commercial real estate loans generally depend on the cash flow from the property to service the debt. Cash flow may be significantly affected by general economic conditions. Losses incurred on loans to a small number of borrowers could ~~adversely~~have ~~affect~~a material adverse impact on our ~~performance~~financial condition and results of operations. Also, many of our commercial real estate and commercial and industrial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a 1-4 family residential mortgage loan.

~~Our financial~~Additionally, ~~performance~~federal ~~and~~banking ~~profitability~~regulators ~~depends~~recently onissued ~~our~~final ~~ability~~guidance regarding commercial real estate lending. This guidance suggests that institutions that are potentially exposed to ~~execute~~significant ~~our corporate~~commercial ~~growth~~real ~~strategy~~estate concentration risk will be subject to increased regulatory scrutiny. ~~Continued~~ Institutions that have experienced rapid growth, ~~however~~in commercial real estate lending, ~~may~~have ~~present~~notable ~~operating~~exposure ~~and~~to ~~other~~a ~~problems~~specific ~~that~~type ~~could~~of ~~adversely affect~~commercial ~~our~~real ~~business~~estate lending, ~~financial~~or ~~condition~~are ~~and~~approaching ~~results~~or ofexceed ~~operations. Factors~~certain supervisory criteria that measure an institution’s commercial real estate portfolio against its capital levels, may ~~adversely~~be ~~affect~~subject ~~our~~to ~~ability~~ such increased regulatory scrutiny. We have become subject to ~~attain~~increased regulatory scrutiny because of our ~~long-term~~real ~~financial~~estate ~~performance~~portfolio ~~goals~~and ~~include~~as ~~those~~a ~~stated~~result ~~elsewhere~~the Bank must develop inor ~~this~~revise, ~~section~~adopt, asand ~~well~~implement a plan to systematically reduce the amount of loans within this category as: outlined in the Written Agreement issued to the Bank on December 23, 2010.

~~· inability~~Liquidity toRisk ~~control~~Could ~~non-interest~~Impair ~~expense,~~Our ~~including,~~Ability ~~but not limited~~ to, ~~rising~~Fund ~~employee~~Operations and ~~healthcare~~Jeopardize ~~costs;~~Our Financial Condition

· Liquidity is essential to our business. An inability to ~~increase~~raise ~~non~~funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Additionally, we regularly monitor certain larger deposit relationships that we determine are not suitable for any form of long-~~interest~~term ~~income;~~investment or that possess a higher risk of leaving us. These balances are disclosed in “Deposits” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-K. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry in general.

~~· continuing~~We ~~ability~~Depend toOn ~~expand~~Cash Dividends From Our Subsidiary Bank To Meet Our Cash Obligations, ~~through~~but deOur Written ~~novo~~Agreement ~~branching~~Prohibit ~~and/or acquisitions~~the Payment of ~~other~~Such ~~banks.~~Dividends Without Prior Regulatory Approval, Which May Impair Our Ability to Fulfill Our Obligations

WeAs ~~may~~a ~~not~~holding becompany, ~~able~~dividends from our subsidiary bank provide a substantial portion of our cash flow used to ~~attract~~service ~~and~~the ~~retain~~interest ~~skilled people,~~payments ~~which~~on ~~could~~our ~~adversely~~trust ~~affect~~preferred securities, our ~~performance~~preferred stock and other obligations, including any cash dividends. Various statutory provisions restrict the amount of dividends our ~~ability~~subsidiary bank can pay to ~~compete~~us without regulatory approval. As outlined in the Written Agreement previously mentioned, the Bank cannot pay any cash dividends or other payments to the holding company without prior written consent of the regulatory authorities. Additionally, the Company cannot declare or pay any dividends (including those on outstanding preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program) or make any distributions of principal, interest or other sums on its ~~effectively~~trust preferred securities without prior written approval of the Federal Reserve.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most of our activities can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel could have an adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.21

~~Our internal~~The ~~operations~~Recession ~~are~~and ~~subject~~Changes toin aDomestic ~~number~~and ofForeign ~~risks~~Financial ~~that~~Markets ~~could~~Have ~~adversely affect~~Adversely ~~our~~Affected ~~financial~~Our ~~condition~~Industry and ~~results~~May Have a Material Negative Impact on Our Results of ~~operations.~~Operations and Financial Condition

WeEconomic ~~are~~indices ~~subject~~have ~~to certain~~shown ~~operations~~that ~~risks,~~since ~~including~~the fourth quarter of 2007, ~~but~~the ~~not~~United ~~limited~~States toeconomy has been in a recession. Although the recession technically ended in 2009, ~~data~~the ~~processing~~recovery ~~system~~ remains tepid and the economy strained. This has been reflected in significant business failures and ~~errors~~job losses. Further, ~~customer~~dramatic ordeclines ~~employee~~in ~~fraud~~the housing market, with decreasing home prices and ~~catastrophic~~increasing ~~failures resulting~~delinquencies ~~from~~and ~~terrorist~~foreclosures, ~~acts~~have ornegatively ~~natural~~impacted ~~disasters.~~the Wecredit ~~maintain~~performance aof ~~system~~mortgage and construction loans and resulted in significant write-downs of ~~internal~~ ~~controls~~assets toby ~~mitigate~~many ~~against~~financial ~~such~~institutions. ~~occurrences~~General ~~and~~downward ~~maintain~~economic ~~insurance coverage~~trends, ~~for~~reduced ~~such~~availability ~~risks~~of ~~that~~commercial ~~are~~credit ~~insurable~~and increased unemployment, ~~but~~have ~~should~~negatively ~~such~~impacted anthe ~~event~~performance ~~occur~~of ~~that~~commercial and consumer credit resulting in additional write-downs. Concerns over the isstability ~~not~~of ~~prevented~~the orfinancial ~~detected~~markets and the economy have resulted in decreased lending by ~~our~~financial ~~internal~~institutions ~~controls,~~to ~~uninsured~~their orcustomers inand ~~excess~~ to each other. This market turmoil and tightening of ~~applicable~~credit ~~insurance~~has ~~limits~~led to increased commercial and consumer delinquencies, itlack ~~could~~of customer confidence, increased market volatility and widespread reduction in general business activity. Financial institutions have aexperienced ~~significant~~decreased ~~adverse~~access ~~impact~~to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, or results of operations and stock price. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

~~Information Systems.~~ ¨ We ~~rely~~potentially ~~heavily~~face onincreased ~~communications~~regulation ~~and information~~of ~~systems to conduct~~ our ~~business. Any failure~~industry, ~~interruption~~compliance ~~or breach~~with inwhich ~~security~~may ofincrease ~~these systems could result in failures or disruptions in~~ our ~~customer~~costs ~~relationship management, general ledger, deposit, loan~~ and ~~other systems. While we have policies and procedures designed to prevent or~~ limit ~~the effect of the failure, interruption or security breach of~~ our ~~information systems,~~ability ~~there~~to ~~can~~pursue be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operationsopportunities.

~~Technological Advances.~~¨ The ~~financial~~ ~~services~~process ~~industry~~we isuse ~~continually~~to ~~undergoing~~estimate ~~rapid~~losses ~~technological change~~inherent ~~with~~in ~~frequent~~our ~~introductions~~credit ofexposure ~~new~~requires ~~technology-driven~~difficult, ~~products~~subjective and ~~services. The~~complex ~~effective~~judgments, ~~use~~including forecasts of ~~technology~~economic ~~increases~~conditions ~~efficiency~~ and ~~enables~~how ~~financial institutions~~these toeconomic ~~better~~conditions ~~serve~~might ~~customers~~impair ~~and~~the toability ~~reduce~~of ~~costs. Our future success depends, in part, upon~~ our ~~ability~~borrowers to ~~address~~repay ~~the~~their ~~needs~~loans. ofThe ~~our~~level ~~customers~~of ~~by using~~uncertainty ~~technology~~concerning toeconomic ~~provide~~conditions ~~products~~may ~~and~~adversely ~~services~~affect ~~that~~the ~~will~~accuracy ~~satisfy~~of ~~customer demands~~our estimates, aswhich ~~well~~may, asin toturn, ~~create~~impact ~~additional~~the ~~efficiencies~~reliability inof ~~our~~the ~~operations~~process.

18¨ The value of the portfolio of investment securities that we hold may be adversely affected.

~~Table~~ ¨ We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of ~~Contents~~the FDIC and reduced the ratio of reserves to insured deposits.

~~Natural Disasters,~~If ~~Acts~~current Oflevels ~~War Or Terrorism and Other External Events. Natural disasters, acts~~ of ~~war~~market ordisruption ~~terrorism~~ and ~~other~~volatility ~~adverse~~continue external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or ~~cause~~ ~~us to incur additional expenses. For example~~worsen, ~~the~~there ~~Central~~can ~~Coast region of California is subject to earthquakes and fires. Operations in our market could~~ be ~~disrupted~~no byassurance ~~both~~that ~~the evacuation of large portions of the population as well as damage and or lack of access to our banking and operation facilities. While~~ we ~~have~~will not ~~experienced~~experience ~~such~~ an ~~occurrence~~ toadverse ~~date~~effect, ~~other~~which ~~severe weather or natural disasters, acts of war or terrorism or other adverse external events~~ may ~~occur~~be ~~in the future. Although management has established disaster recovery policies and procedures~~material, ~~the occurrence of any such event could have an adverse effect~~ on our business, ~~which,~~ ~~in turn, could have an adverse effect on our~~ financial condition and results of operations.

WeRecently ~~depend on~~Enacted ~~cash~~Legislation ~~dividends~~and ~~from~~Other ~~our~~Measures ~~subsidiary~~Undertaken ~~bank~~by tothe ~~meet~~U.S. ~~our~~Treasury, ~~cash~~the ~~obligations~~FRB and Other Governmental Agencies May Not Help Stabilize the U.S. Financial System or Improve the Housing Market

AsOn aOctober 3, ~~holding company~~2008, ~~dividends~~President ~~from~~Bush ~~our~~signed ~~subsidiary~~into ~~bank~~law ~~provide~~the aEmergency ~~substantial~~Economic ~~portion~~Stabilization Act of ~~our~~ ~~cash~~2008 ~~flow~~(the ~~used~~“EESA”), towhich, ~~service~~among ~~our~~other ~~obligations~~measures, ~~including~~authorized ~~cash~~the ~~dividends. See~~Treasury Secretary to establish the Troubled Asset Relief Program (“~~Item~~TARP”). EESA 5gives —broad ~~Market~~authority ~~for~~to ~~Common~~Treasury ~~Equity~~to ~~and Related~~purchase, ~~Stockholder~~manage, ~~Matters.” Various statutory~~modify, ~~provisions~~sell ~~restrict~~and insure the ~~amount~~troubled ofmortgage ~~dividends~~related ~~our~~assets ~~subsidiary~~that ~~bank~~triggered ~~can pay~~the tocurrent useconomic ~~without~~crisis ~~regulatory~~as ~~approval~~well as other “troubled assets.” EESA includes additional provisions directed at bolstering the economy, including:

~~Risks~~¨ ~~Associated~~Authority ~~with~~for ~~our~~the ~~Industry.~~FRB to pay interest on depository institution balances;

We¨ ~~are~~Mortgage ~~subject~~loss tomitigation ~~government~~and ~~regulation that~~homeowner ~~could limit or restrict our activities, which in turn could adversely impact our operations.~~protection;

~~The~~¨ ~~financial~~Temporary ~~services industry~~increase isin ~~regulated~~FDIC ~~extensively.~~insurance ~~Federal~~coverage ~~and~~from ~~State~~$100,000 ~~regulation~~to is$250,000 ~~designed primarily~~through toDecember ~~protect~~31, ~~the~~2013; ~~deposit~~(this ~~insurance~~increase ~~funds~~was ~~and~~subsequently ~~consumers~~made permanent on July 21, ~~and~~2010 ~~not~~when ~~to benefit~~President ~~our~~Obama ~~shareholders.~~signed ~~These~~into ~~regulations~~law ~~can~~the ~~sometimes~~Dodd-Frank ~~impose~~Wall ~~significant limitations~~Street onReform ~~our~~and ~~operations~~Consumer Protection Act.) and

~~Further,~~¨ ~~federal~~Authority ~~monetary policy,~~to ~~particularly~~the asSEC ~~implemented~~to ~~through~~suspend ~~the~~mark-to-market ~~Federal~~accounting ~~Reserve~~requirements ~~System, significantly~~for ~~affects~~any ~~economic~~issuer ~~conditions~~or ~~for~~class usof category of transactions.

~~New legislative and regulatory proposals may affect our operations and growth.~~22

~~Proposals~~Pursuant to ~~change~~ the ~~laws~~TARP, ~~and~~the ~~regulations~~Treasury ~~governing~~has the ~~operations~~authority ~~and taxation~~to, ofamong other things, ~~and~~purchase ~~federal~~up ~~insurance~~to ~~premiums~~$700 ~~paid~~billion byof mortgages, ~~banks~~mortgage-backed securities and certain other financial instruments from financial institutions ~~and~~for ~~companies~~the ~~that~~purpose ~~control~~of ~~such~~stabilizing ~~institutions~~and ~~are~~providing ~~frequently~~liquidity ~~raised in~~to the U.S. ~~Congress,~~ ~~state~~financial ~~legislatures and before bank regulatory authorities~~markets. Under ~~The likelihood of any major changes in~~ the ~~future~~TARP, ~~and~~ the ~~impact such~~Treasury ~~changes~~has ~~might~~created ~~have~~a oncapital uspurchase ~~or our subsidiaries are impossible to determine. Similarly~~program, ~~proposals~~pursuant to ~~change~~which ~~the~~it ~~accounting~~is ~~treatment~~providing ~~applicable~~access to ~~banks~~capital ~~and other~~to ~~depository~~financial institutions ~~are~~through ~~frequently~~a ~~raised~~standardized byprogram ~~the~~to ~~SEC,~~acquire ~~the~~preferred ~~federal banking~~stock ~~agencies,~~(accompanied ~~the~~by ~~IRS~~warrants) ~~and~~from ~~other~~eligible ~~appropriate~~financial ~~authorities.~~institutions ~~The~~that ~~likelihood~~will ~~and impact~~serve ofas ~~any~~Tier ~~additional~~1 ~~future changes in law or regulation and the impact such changes might have on us or our subsidiaries are impossible to determine at this time~~capital.

~~Risks Associated~~EESA ~~with~~also ~~our~~contains ~~Stock~~a number of significant employee benefit and executive compensation provisions, some of which apply to employee benefit plans generally, and others which impose on financial institutions that participate in the TARP program restrictions on executive compensation.

~~Our outstanding~~EESA ~~preferred~~followed, ~~stock~~and ~~impacts~~has ~~net~~been ~~income~~followed ~~available~~by, numerous actions by the FRB, Congress, Treasury, the SEC and others to ~~our~~address ~~common stockholders~~the liquidity and ~~earnings~~credit ~~per~~crisis ~~common~~that ~~share~~has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourage loan restructuring and modification; the ~~warrant~~establishment ~~issued~~of tosignificant liquidity and credit facilities for financial institutions and investment banks; the ~~U.S. Treasury~~lowering asof ~~well~~the asfederal ~~other~~funds ~~potential~~rate; ~~issuances~~emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of ~~equity~~a ~~securities~~commercial ~~may~~paper ~~be dilutive~~funding facility to ~~holders~~provide ofback-stop ~~our~~liquidity ~~common~~to ~~stock~~commercial paper issuers; coordinated international efforts to address illiquidity and other weaknesses in the banking sector.

~~The dividends~~On ~~declared~~October 14, ~~and~~2008, the ~~accretion~~FDIC onannounced ~~our~~the ~~outstanding~~establishment ~~preferred~~of ~~stock~~a ~~will reduce~~temporary ~~the~~liquidity ~~net~~guarantee ~~income~~program ~~available~~ to ~~common~~provide ~~stockholders~~insurance ~~and~~for ~~our~~all ~~earnings~~non-interest ~~per common~~bearing ~~share. Our~~transaction ~~outstanding~~accounts ~~preferred stock~~and ~~will~~guarantees ~~also~~of ~~receive~~certain ~~preferential~~newly ~~treatment~~issued insenior ~~the~~unsecured ~~event~~debt issued ofby ~~our~~financial ~~liquidation, dissolution~~institutions or(such ~~winding-up. Additionally, the~~as ~~ownership interest of~~ the ~~existing~~Bank) ~~holders~~and ofbank ~~our~~holding ~~common~~companies ~~stock~~(such ~~will~~as ~~be diluted to~~ the ~~extent~~Company). Under the ~~warrant~~program, newly issued tosenior ~~the~~unsecured ~~U.S.~~debt ~~Treasury~~issued ison ~~exercised. Although~~or ~~the~~before ~~U.S.~~June 30, ~~Treasury~~2009 ~~has~~will ~~agreed~~be ~~not~~insured ~~to vote~~in ~~any~~the ofevent the ~~shares~~issuing ofinstitution ~~common~~subsequently ~~stock it receives upon exercise of the warrant~~fails, aor ~~transferee~~its ofholding ~~any~~company ~~portion~~files offor ~~the~~bankruptcy. The ~~warrant~~debt orincludes ofall ~~any~~newly ~~shares~~issued ofunsecured ~~common stock~~senior ~~acquired~~debt ~~upon~~(e.g., ~~exercise~~promissory ofnotes, ~~the~~commercial ~~warrant~~paper isand ~~not~~inter-bank ~~bound by this restriction~~funding). In ~~addition,~~The toaggregate ~~the~~coverage ~~extent~~for ~~options~~an ~~to purchase~~institution ~~common~~may ~~stock~~not ~~under~~exceed ~~our~~125% ~~employee~~of ~~and~~its ~~director~~debt ~~stock~~outstanding ~~option~~on ~~plans are exercised~~December 31, ~~holders~~2008 ofthat ~~our~~was ~~common~~scheduled ~~stock~~to mature ~~will~~before ~~incur~~June 30, ~~additional dilution~~2009. ~~Further,~~ The ifguarantee wewill ~~sell~~extend ~~additional~~to ~~equity~~June 30, ~~or convertible~~2012 ~~debt~~even ~~securities,~~if ~~such~~the ~~sales~~maturity ~~could~~of ~~result~~the indebt ~~increased~~is ~~dilution~~after ~~to our~~that ~~shareholders~~date.

19On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill”), more commonly known as the economic stimulus or economic recovery package. The Stimulus Bill includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, the Stimulus Bill imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the U.S. Treasury.

~~Table~~The actual impact that EESA, the Stimulus Bill and such related measures undertaken to alleviate the credit crisis will have generally on the financial markets, including the extreme levels of ~~Contents~~ volatility and limited credit availability currently being experienced, is unknown. The failure of such measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

~~Our stock~~Current ~~trades~~Levels ~~less~~of ~~frequently~~Market ~~than~~Volatility ~~others.~~are Unprecedented

~~Although~~The ~~our~~capital ~~common~~and ~~stock~~credit ismarkets ~~quoted~~have onbeen ~~the~~experiencing ~~over-the-counter~~volatility ~~market,~~and ~~the trading~~disruption ~~volume~~for inmore ~~our~~than ~~common~~two ~~stock~~years. isIn ~~less~~recent ~~than~~months, ~~that~~the ofvolatility ~~other~~and ~~larger~~disruption ~~financial services~~has ~~companies. A~~reached ~~public~~unprecedented ~~trading market~~levels. In ~~having~~some cases, the ~~desired~~markets ~~characteristics~~have ofproduced ~~depth,~~significant ~~liquidity~~downward ~~and~~pressure ~~orderliness depends~~ on ~~the~~stock ~~presence~~prices inand ~~the~~credit ~~marketplace~~availability offor ~~willing~~certain ~~buyers~~issuers ~~and~~without ~~sellers~~regard ofto ~~our common~~those ~~stock~~issuers’ atunderlying ~~any~~financial ~~given time~~strength. ~~This presence~~ ~~depends~~If oncurrent ~~the~~levels ~~individual decisions~~ of ~~investors~~market ~~and~~disruption ~~general economic~~ and ~~market~~volatility ~~conditions~~continue ~~over~~or ~~which~~worsen, wethere ~~have~~can be no ~~control. Given~~assurance ~~the~~that ~~lower~~we ~~trading~~will ~~volume~~not ofexperience ~~our~~an ~~common stock~~adverse effect, ~~significant~~which ~~sales~~may ofbe material, on our ~~common~~ability ~~stock,~~to oraccess ~~the~~capital ~~expectation~~and ofon ~~these sales~~our business, ~~could~~financial ~~cause~~condition ~~out~~and ~~stock~~results ~~price~~of ~~to fall~~operations.

~~Our stock~~FDIC ~~price~~Deposit isInsurance ~~affected~~Assessments byWill aIncrease ~~variety~~Substantially, ofWhich ~~factors.~~Will Adversely Affect Our Net Earnings

~~Stock~~FDIC ~~price~~deposit ~~volatility~~insurance ~~may~~expense ~~make~~for itthe ~~more~~year ~~difficult~~ended ~~for~~December 31, ~~you~~2010 was approximately $.7 million. Deposit insurance assessments will increase in 2011 due to ~~resell~~the ~~your common~~condition ~~stock~~of ~~when~~the ~~you~~Bank ~~want~~and recent strains on the FDIC deposit insurance fund resulting from the cost of recent bank failures and atan ~~prices~~increase ~~you~~in ~~find~~the ~~attractive~~number of banks likely to fail over the next few years. ~~Our~~ ~~stock~~The ~~price~~Bank ~~can~~currently ~~fluctuate~~anticipates ~~significantly in~~these ~~response~~costs to atotal ~~variety~~approximately $.9 million for 2011. During the last two quarters of ~~factors~~2009 ~~discussed~~the FDIC further levied a prepayment assessment on banks to be paid in ~~this~~December 2009 ~~section,~~for ~~including~~the ~~among other~~periods ~~things:~~of January 2010 to December of 2012.

~~· Actual or anticipated variations in quarterly results of operations~~23

~~· Shareholders~~Declines in Asset Values May Result in Impairment Charges and Adversely Affect the Value of Our Investments, Financial ~~hardships~~ Performance and Capital

~~· Recommendations~~We maintain an investment portfolio that includes, but is not limited to, mortgage-backed securities. The market value of investments in our portfolio had become increasingly volatile in 2009 but has stabilized in 2010. The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we evaluate investments and other assets for impairment indicators. We may be required to record impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has ~~analysts~~occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which may have a material adverse effect on our results of operations in the periods in which the write-offs occur. During 2010, the Bank determined that there was no other than temporarily impaired (“OTTI”) bonds within the investment portfolio.

~~· Operating~~Our ~~and~~Real ~~stock~~Estate ~~price performance~~Lending ofAlso ~~other~~Exposes ~~companies~~Us ~~that~~to ~~investors~~the ~~deem~~Risk ~~comparable~~of toEnvironmental ~~our company~~Liabilities

~~· News~~In ~~reports~~the ~~relating~~course of our business, we may foreclose and take title to ~~trends~~ real estate, ~~concerns~~and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and ~~other~~clean-up ~~issues~~costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial ~~services~~condition, ~~industry~~liquidity and results of operations could be materially and adversely affected.

~~· Perceptions~~Our Business Is Subject To Interest Rate Risk and Changes in ~~the marketplace~~Interest ~~regarding~~Rates ~~our~~May ~~company~~Adversely Affect Our Performance and~~/or~~ ~~its~~Financial ~~competitors~~Condition

Our ~~common~~earnings ~~stock~~and cash flows are highly dependent upon net interest income. Net interest income is ~~not~~the andifference ~~insured~~between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Our net interest income (including net interest spread and margin) and ultimately our earnings are impacted by changes in interest rates and monetary policy. Changes in interest rates and monetary policy can impact the demand for new loans, the credit profile of our borrowers, the yields earned on loans and securities and rates paid on deposits and borrowings. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, we would expect our interest rate spread (the difference in the rates paid on interest-bearing liabilities and the yields earned on interest-earning assets) as well as net interest income to increase if interest rates rise and, conversely, to decline if interest rates fall. Additionally, increasing levels of competition in the banking and financial services business may decrease our net interest spread as well as net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates (such as a sudden and substantial increase in Prime and Overnight Fed Funds rates) as well as increasing competition may require the Bank to increase rates on deposits at a faster pace than the yield it receives on interest-earning assets increases. The impact of any sudden and substantial move in interest rates and/or increased competition may have an adverse effect on our business, financial condition and results of operations, as the Bank’s net interest income (including the net interest spread and margin) may be negatively impacted.

~~Our~~Additionally, ~~common~~a ~~stock~~sustained isdecrease ~~not~~in amarket ~~bank~~interest ~~deposit~~rates ~~and~~could adversely affect our earnings. When interest rates decline, ~~therefore,~~ isborrowers ~~not~~tend ~~insured~~to ~~against~~refinance ~~loss~~higher-rate, byfixed-rate ~~the~~loans ~~FDIC~~at lower rates, ~~any~~prepaying ~~other~~their ~~deposit~~existing ~~insurance fund~~loans. Under orthose bycircumstances, ~~any~~we ~~other~~would ~~public~~not orbe ~~private~~able ~~entity.~~to ~~Investment~~reinvest those prepayments in ~~our~~assets ~~common~~earning ~~stock is~~interest ~~inherently~~rates ~~risky~~as ~~for~~high as the ~~reasons~~rates ~~described~~on inthe ~~this~~prepaid ~~“Risk~~loans. In ~~Factors”~~addition, ~~section~~ our commercial real estate and ~~elsewhere~~commercial loans, which carry interest rates that, in ~~this~~general, ~~report~~adjust ~~and~~in isaccordance ~~subject~~with tochanges in the ~~same~~prime ~~market~~rate, ~~forces~~will ~~that affect~~adjust to lower rates. We are also significantly affected by the ~~price~~level of ~~common~~loan ~~stock~~demand available in ~~any~~our ~~company~~market. The Asinability ato ~~result,~~make ifsufficient ~~you~~loans ~~acquire~~directly affects the interest income we earn. Lower loan demand will ~~our~~generally ~~common~~result ~~stock,~~in ~~you~~lower ~~may~~interest ~~lose~~income ~~some~~realized oras ~~all~~we ofplace ~~your~~funds ~~investment~~in lower yielding investments.

~~Our articles of incorporation and by-laws, as well as certain banking laws, may have an anti-takeover effect.~~24

~~Provisions~~Failure ~~of our articles of incorporation, bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party~~ to ~~acquire~~Successfully ~~us,~~Execute ~~even~~Our ifStrategy ~~doing~~May soAdversely ~~would~~Affect beOur perceived to be beneficial to our shareholders. The combination of these provisions may hinder a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.Performance

~~ITEM~~Our 1Bfinancial performance and profitability depends on our ability to execute our corporate growth strategy. Continued ~~Unresolved~~growth, ~~Staff~~however, ~~Comments~~may present operating and other problems that could adversely affect our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced. Factors that may adversely affect our ability to attain our long-term financial performance goals include those stated elsewhere in this section, as well as:

~~The Company~~¨ ~~has~~Inability noto ~~unresolved~~control ~~comments~~non-interest ~~received~~expense, ~~from~~including, ~~staff~~but atnot ~~the~~limited ~~SEC.~~to, rising employee, regulatory compliance, and healthcare costs;

~~ITEM~~¨ 2.Limitations ~~PROPERTIES~~imposed on us in the Consent Order and/or Written Agreement.

~~The~~¨ ~~Company~~Inability ~~conducts~~to ~~its banking~~increase ~~operations from four offices. The Company owns the land and building of its office located at 7480 El Camino Real, in Atascadero, California. The building is a two~~non-~~story~~interest ~~building~~income; ~~of approximately 16,500 square feet.~~and

~~The~~¨ ~~Company~~Continuing ~~owns~~ability ~~the~~to ~~land and building of its office located at 1240 Spring Street~~expand, ~~Paso~~through ~~Robles, California.~~de ~~The~~novo ~~Bank~~branching ~~occupies~~or ~~approximately~~finding ~~7,200~~acquisition ~~square~~targets ~~feet~~at onvaluation ~~the~~levels ~~ground floor~~we offind ~~the building and 2,800 square feet in the basement is used for records storage and as a staff room~~attractive.

~~The~~Economic ~~Company~~Conditions ~~owns~~in the ~~land and~~Central ~~building~~Coast of ~~its~~California ~~office~~Area ~~located~~May atAdversely ~~1530~~Affect ~~East~~Our ~~Grand~~Operations ~~Avenue~~and in/ ~~Arroyo Grande. The~~or ~~building~~Cause isUs ato ~~two-story building~~Sustain ~~of approximately 10,200 square feet.~~Losses

Our retail and commercial banking operations are concentrated primarily in San Luis Obispo and Santa Barbara Counties. As a result of this geographic concentration, our results of operations depend largely upon economic conditions in this area. A significant source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. This risk increases when the economy is weak. The ~~Company~~industries ~~owns~~of tourism, agriculture (specifically that related to the ~~land~~ production of wine) and hospitality represent a ~~two-story~~significant ~~building~~portion of ~~approximately~~economic ~~10,000~~activity ~~square~~in ~~feet~~our ~~which~~primary ~~houses~~market ~~its~~area have been impacted to some degree by the current economic ~~office~~downturn. Although ~~located~~the atCompany ~~1825~~has ~~South~~not ~~Broadway~~seen any significant increase in non-performing assets related to loans the Bank has made to borrowers in these industries, ~~Santa~~the ~~Maria~~Company believes a prolonged economic downturn may have an impact on such borrowers, ~~California~~which may result in further increases in the level of our non-performing assets.

20We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses that Management believes is appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our loan portfolio. These policies and procedures, however, may not prevent unexpected losses that may have material adverse affects on our results of operations in general and the market value of our stock.

~~Table~~Additionally, our primary market area is an increasingly competitive and overcrowded banking market. Our ability to achieve the growth outlined in our corporate strategic goals may be dependent in part on an ability to grow through the successful addition of ~~Contents~~new branches or the identification and acquisition of potential targets at acceptable pricing levels either inside or outside of our primary market. If we are unable to attract significant new business through strategic branching, or acquire new business through the acquisition of other banks, our growth in loans and deposits and, therefore, our earnings, may be adversely affected.

~~The~~We ~~Company~~Face ~~believes~~Strong ~~that all~~Competition offrom ~~its~~Financial ~~properties~~Service ~~are~~Companies ~~well~~and ~~maintained~~Other ~~and~~Companies ~~are~~That ~~suitable~~Offer ~~for~~Banking ~~their~~Services, ~~respective present~~Which ~~needs~~May ~~and~~Hurt ~~operations.~~Our Business

~~ITEM~~As 3previously mentioned, the financial services business in our market areas is highly competitive. It ~~LEGAL~~is ~~PROCEEDINGS~~becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting quality assets and deposits and in making loans. We compete for loans principally through the interest rates and loan fees we charge and the efficiency and quality of services we provide. Increasing levels of competition in the banking and financial services business may reduce our market share, decrease loan demand, cause the prices we charge for our services to fall, or decrease our net interest margin by forcing us to offer lower lending interest rates and pay higher rates on our deposits. Therefore, our results may differ in future periods depending upon the nature or level of competition.

The Company is, from time to time, subject to various pending and threatened legal actions which arise out of the normal course of its business. The Company is not a party to any pending legal or administrative proceedings (other than ordinary routine litigation incidental to the Company’s business) and no such proceedings are known to be contemplated.25

~~There~~Technology ~~are~~and noother ~~material proceedings~~changes ~~adverse~~are allowing parties to ~~the~~complete ~~Company~~financial totransactions ~~which~~that ~~any~~historically ~~director,~~have ~~officer~~involved banks through alternative methods. For example, ~~affiliate~~consumers ~~of the~~can ~~Company~~now maintain funds that would have historically been held as bank deposits in brokerage accounts or 5%mutual ~~shareholder~~funds. Consumers ofcan ~~the~~also ~~Company,~~complete transactions such as paying bills and/or ~~any~~transferring ~~associate~~funds directly without the assistance of ~~any~~banks. The ~~such director~~process of eliminating banks as intermediaries, ~~officer~~known as “disintermediation,” ~~affiliate~~could orresult 5%in ~~shareholder~~the loss of fee income, as well as the ~~Company~~loss isof acustomer ~~party,~~deposits and ~~none~~ the related income generated from those deposits. The loss of these revenue streams and the ~~above~~lower ~~persons~~cost ~~has~~deposits as a ~~material~~source ~~interest~~of funds could have a material adverse toeffect ~~the~~on ~~Company~~our financial condition and results of operations.

~~There~~We ~~are~~May noNot ~~material proceedings~~Be ~~adverse~~Able to ~~the~~Attract ~~Company~~and toRetain ~~which~~Skilled ~~any Director, Officer or affiliate of the Company is a party.~~People

~~ITEM~~Our 4success depends, in large part, on our ability to attract and retain key people. Competition ~~(REMOVED~~for ~~AND~~the ~~RESERVED)~~best people in most of our activities can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

~~PART~~Because IIof Our Participation in the Troubled Asset Relief Program (‘‘TARP’’), We Are Subject to Several Restrictions, Including Restrictions on Compensation Paid to Our Executives

~~ITEM~~Certain 5standards for executive compensation and corporate governance apply to us for the period during which the U.S. ~~MARKET~~Treasury ~~FOR~~holds ~~COMMON~~an ~~EQUITY~~equity position in us. These standards generally apply to our Chief Executive Officer, ~~RELATED~~Chief ~~STOCKHOLDER~~Financial ~~MATTERS~~Officer ~~AND~~and ~~ISSUER~~the ~~PURCHASES~~three OFnext ~~EQUITY~~most ~~SECURITIES~~highly compensated senior executive officers. The standards include, among other things, (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; and (4) agreement not to deduct for tax purposes, executive compensation in excess of $500,000 for each senior executive. In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods. Pursuant to the American Recovery and Reinvestment Act of 2009 (the ‘‘Stimulus Bill’’), more commonly known as the economic stimulus recovery package, further compensation restrictions, including significant limitations on incentive compensation, have been imposed on our senior executive officers and most highly compensated employees. Such restrictions and any future restrictions on executive compensation, which may be adopted, could adversely affect our ability to hire and retain senior executive officers.

~~Market Information~~Our Internal Operations Are Subject to a Number of Risks

~~The~~We ~~Company’s~~are ~~Common~~subject ~~Stock~~to iscertain ~~not~~operations ~~listed~~risks, onincluding, ~~any~~but ~~exchange~~not orlimited ~~market. However~~to, ~~Morgan~~data ~~Stanley,~~processing ~~Howe~~system ~~Barnes~~failures ~~Hoefer &~~and ~~Arnett~~errors, ~~Inc., Edward~~ ~~Jones,~~customer ~~Wedbush~~or ~~Morgan~~employee ~~Securities,~~fraud ~~UBS~~and ~~Financial~~catastrophic ~~Services, Inc~~failures resulting from terrorist acts or natural disasters., We ~~and McAdams~~maintain ~~Wright~~a system of internal controls to mitigate against such occurrences and ~~Ragen~~maintain ~~each~~insurance ~~actively~~coverage ~~make~~for asuch ~~market in the~~risks ~~Company’s~~that ~~Common~~are ~~Stock.~~insurable, ~~Certain~~but ~~information~~should ~~concerning~~such ~~the~~an ~~Common~~event ~~Stock~~occur that is ~~quoted~~ not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on ~~the~~our ~~OTC~~business, ~~Bulletin~~financial ~~Board~~condition ~~under~~or ~~the~~results ~~symbol~~of ~~“SLBA~~operations.~~OB”~~

~~The~~o ~~information~~Information in the following table indicates the high and low bid prices of the Company’s Common Stock for each quarterly period during the last two years based upon information provided by certain of the firms mentioned above who serve as the Company’s market makers. These prices do not include retail mark-ups, mark-downs or commission.Systems

		Bid Prices
Quarter Ended		Low		High
2009
	December 31	$	10.10	$	11.89
	September 30	11.55		15.00
	June 30	10.50		13.00
	March 31	8.20		14.75
2008
	December 31	$	13.50	$	19.00
	September 30	14.25		21.50
	June 30	20.00		24.25
	March 31	23.25		25.00

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

~~The foregoing table is based on data reported by the market makers named above. Does not include information on shares traded directly by shareholders or through other dealers.~~26

21o Technological Advances

~~Table~~The financial services industry is continually undergoing rapid technological change with frequent introductions of ~~Contents~~new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

~~Holders~~o Severe Weather, Natural Disasters, Acts of War or Terrorism and Other External Events

~~The~~Severe ~~Company~~weather, ~~has~~natural ~~two classes~~disasters, acts of ~~stock~~war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding —loans, ~~Common~~impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or ~~Series A~~cause ~~Preferred~~us to incur additional expenses. For Asexample, the Central Coast of ~~March 4~~California is subject to earthquakes and fires. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage and or lack of access to our banking and operation facilities. While we have not experienced such an occurrence to date, ~~2010~~ ~~there~~other ~~were~~severe ~~approximately~~weather or ~~367~~natural ~~record~~disasters, ~~holders~~acts of war or terrorism or other adverse external events may occur in the ~~Company’s~~future. Although ~~Common~~management ~~Stock~~has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

o We Depend On Cash Dividends From Our Subsidiary Bank To Meet Our Cash Obligations

~~The~~As ~~following~~a ~~table~~holding ~~sets~~company, ~~forth~~dividends from our subsidiary bank provide a substantial portion of our cash flow used to service the ~~per~~interest ~~share~~payments ~~amount~~on our trust preferred securities and ~~month~~other ~~of payment~~obligations, ~~for~~including ~~all~~any cash dividends. See ~~paid~~Item ~~since~~5. Market ~~January~~ for Common Equity and Related Stockholder Matters. Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval. Additionally, the Written Agreement we are operating under prohibit our banking subsidiary from paying dividends or any form of payment to the Holding Company that would represent a reduction in the subsidiary bank’s capital. For more information regarding the Written Agreement, please see the discussion titled “Written Agreement” under the section “Supervision and Regulation” of Item 1. Business, ~~2008:~~“Recent Developments” under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 25. Subsequent Events of the consolidated financial statements, filed on this Form 10-K.

Month Paid	Amount Per Share
March 2008	$	0.25
September 2008	$	0.25
March 2009	$	0.25

Risks Associated With Our Industry

~~The~~We ~~Company~~Are ~~has~~Subject ~~paid~~to aGovernment ~~cash~~Regulation ~~dividend~~That ~~for~~May ~~the~~Limit ~~past~~or 20Restrict ~~years~~Our ~~and~~Activities, ~~issued~~Which ~~a 2%~~in ~~stock~~Turn ~~dividend~~May inAdversely ~~October 2009.~~Impact Our Operations

The ~~Company~~financial isservices ~~a legal~~industry ~~entity~~is ~~separate~~regulated ~~and distinct from the Bank~~extensively. ~~The~~ Federal ~~Company’s~~and ~~shareholders~~State ~~are~~regulation ~~entitled~~is ~~to receive~~designed ~~dividends~~primarily ~~when declared by its Board of Directors, out of funds legally available therefore, subject~~ to ~~the~~protect ~~restrictions set forth in~~ the ~~California General~~deposit ~~Corporation~~insurance ~~Law~~funds ~~(the~~and Corporation law). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution. The Corporation Law also provides thatconsumers, inand ~~the event that sufficient retained earnings are~~ not ~~available for the proposed distribution, a corporation may, nevertheless, make a distribution~~ to ~~its~~benefit our shareholders. These ifregulations itcan ~~meets~~sometimes ~~two conditions,~~impose ~~which~~significant ~~generally~~limitations ~~states~~on ~~are~~our asoperations. New ~~follows:~~laws ~~(i) the~~and ~~corporation’s assets~~regulations ~~equal~~or ~~1-1/4~~changes ~~times~~in ~~its~~existing ~~liabilities,~~laws and ~~(ii) the~~regulations ~~corporation’s current assets equal at least its current liabilities~~ or, ifrepeal ~~the average~~ of ~~the corporation’s~~existing ~~earnings~~laws ~~before taxes on income~~ and ~~before~~regulations ~~interest~~may ~~expenses~~adversely ~~for the~~impact ~~two~~our ~~preceding~~business. We ~~fiscal~~anticipate ~~years~~that ~~was~~continued ~~less~~compliance ~~than~~with ~~the~~various ~~average~~regulatory ofprovisions ~~the~~will ~~corporation’s interest~~impact ~~expenses~~future ~~for~~operating ~~such fiscal years, then the corporation’s interest~~ expenses ~~for such fiscal years~~. Further, ~~then~~federal ~~the~~monetary ~~corporation’s current assets must equal at least 1-1/4 times its current liabilities. As a regulated bank holding company~~policy, ~~the~~particularly ~~Reserve~~as ~~Board’s~~implemented ~~restrictions~~through ~~may also limit~~ the ~~Company’s~~Federal ~~ability to pay cash dividends. Generally, a bank holding company must consult with the~~ Reserve ~~Board prior to payment of a proposed cash dividend~~System, ifsignificantly ~~the~~affects ~~company~~economic ~~did not~~conditions ~~have~~for ~~sufficient earnings in the prior four quarters at least equal to the proposed dividend and other holding company obligations~~us.

~~The~~New ~~ability~~Legislative of the Company to pay a cash dividend depends largely on the Bank’s ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject to restrictions set forth in the California Financial Code (the Financial Code). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by an majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the DFI, make a distribution to its shareholders in an amount not exceeding the greater of (x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year. In the event that the DFI determines that the shareholders’ equity of the bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the DFI may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment of such dividends, the bank would be included in one of the “undercapitalized” categories for capital adequacy purposes pursuant to federal law (See, “Item 1 — Prompt Corrective Action and ~~Other~~Regulatory ~~Enforcement~~Proposals ~~Mechanisms.”)~~May ~~Additionally, while~~Affect ~~the~~Our ~~Federal~~Operations Reserve Board has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Federal Reserve Board might, under certain circumstances, place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees to be paid by a subsidiary bank to its holding company on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm’s length transaction.Growth

~~The~~Proposals ~~Company’s~~to ~~junior subordinated~~change ~~debt~~the ~~agreements~~laws ~~contain~~and ~~provisions~~regulations ~~which~~governing ~~prohibit~~ the ~~paying~~operations and taxation of ~~dividends~~, ifand itfederal ~~defers~~insurance ~~payment~~premiums paid by, banks and other financial institutions and companies that control such institutions are frequently raised in the U.S. Congress, state legislatures and before bank regulatory authorities. The likelihood of ~~interest~~any major changes in the future and the impact such changes might have on ~~outstanding~~us ~~trust~~or ~~preferred securities~~our ~~(See~~subsidiaries ~~“Item~~are Iimpossible to determine. Similarly, ~~Business~~proposals —to ~~Supervision~~change the accounting treatment applicable to banks and ~~Regulation~~other —depository ~~Capital~~institutions are frequently raised by the SEC, the federal banking agencies, the IRS and other appropriate authorities. The likelihood and impact of any additional future changes in law or regulation and the impact such changes might ~~Standards”)~~have on us or our subsidiaries are impossible to determine at this time.

22Risks Associated With Our Stock

~~Table~~Our Participation in the U.S. Treasury’s Capital Purchase Program (“CPP”) May Pose Certain Risks to Holders of ~~Contents~~Our Common Stock

~~dividend~~On ~~declared unless~~December 19, ~~prior~~2008, ~~approval~~the ~~from~~Company ~~the~~entered ~~United~~into ~~States~~a ~~Treasury~~Purchase isAgreement ~~granted.~~with ~~Additionally,~~ the ~~Company~~United ~~will~~States beDepartment ~~prohibited~~of ~~from~~the ~~continuing~~Treasury to(the ~~pay~~“Treasury”), ~~dividends~~pursuant onto ~~its~~which ~~common stock unless~~ the Company ~~has~~agreed ~~fully~~to ~~paid~~issue ~~all~~and ~~required~~sell ~~dividends~~4,000 onshares ~~the~~of ~~preferred stock issued to~~ the ~~Treasury. The~~ Company’s ~~fully~~Preferred ~~expects~~Stock toas beFixed ~~able to~~Rate ~~pay~~Cumulative ~~all~~Perpetual ~~required~~Preferred ~~dividends~~Stock, onSeries A (the ~~preferred~~“Preferred ~~stock,~~Stock) ~~but~~and ifa ~~for~~Warrant ~~any reason the Company is unable~~ to dopurchase ~~so in the future~~38,869 ~~then~~shares of the Company’s ~~would~~Common beStock ~~precluded from~~(adjusted ~~paying~~for ~~dividends~~the ontwo ~~its~~subsequent ~~common~~2% stock~~. Based~~ ondividends) afor ~~number~~an ofaggregate ~~factors,~~purchase ~~including~~price ~~but~~of ~~not limited to the Company’s recent financial performance~~$4,000,000 ~~the~~in ~~economic~~cash. ~~climate,~~In ~~and~~connection ~~the~~with ~~restrictions described~~this ~~above,~~transaction the Company ~~has~~incurred ~~suspended~~$50,000 ~~its~~in ~~practice of paying cash dividends~~costs. ~~The Company will periodically review this suspension.~~

~~ITEM~~Under 6the terms of the CPP, the Company sold to the U. ~~SELECTED~~S. ~~FINANCIAL~~Treasury ~~DATA~~$4.0 million in preferred stock and a warrant to purchase approximately $.2 million of the Company’s common stock. Although the Company believes that its participation in the CPP is in the best interests of our shareholders in that it will enhance Company and Bank capital and provide additional funds for future growth, it may pose certain risks to the holders of our common stock such as the following:

~~The information~~o ~~required~~Under the terms outlined by ~~Item~~the 6U.S. ofTreasury ~~Form 10-K~~for isparticipants ~~incorporated~~in bythe ~~Reference from~~CPP, the ~~section~~Company ~~entitled~~issued ~~“Management’s~~a ~~Discussion~~warrant ~~and~~to ~~Analysis~~the ~~and~~U.S ~~Results~~Treasury to purchase shares of ~~Operations”~~ its common stock. The issuance of this warrant is dilutive to current common stockholders in that it reduces earnings per common share. Additionally, the ~~Company’s~~ownership ~~2009~~interest ~~Annual~~of ~~Report~~the existing holders of our common stock will be diluted to ~~Shareholders,~~the ~~included~~extent the warrant is exercised. The shares of common stock underlying the warrant represent approximately 2.0% of the shares of our common stock outstanding as anof ~~exhibit~~December to31, ~~this~~2010 ~~Annual Report~~(including the shares issuable upon exercise of the warrant in total shares outstanding).

~~ITEM~~o 7.Although ~~MANAGEMENT’~~the U.S. ~~DISCUSSION~~Treasury ~~AND~~has ~~ANALYSIS~~agreed OFnot ~~FINANCIAL~~to ~~CONDITION~~vote ~~AND~~any ~~RESULTS~~of OFthe ~~OPERATIONS~~shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction and therefore may become a significant holder of the Company’s common stock and possess significant voting power.

~~The information~~o ~~required~~Although bythe ~~Item~~preferred 7equity ofissued ~~Form 10-K~~to the U.S. Treasury is ~~incorporated~~non-voting, bythe ~~reference from~~terms of the ~~section~~CPP ~~entitled~~stipulate ~~“Management’s~~that ~~Discussion~~the ~~and~~U.S. ~~Analysis~~Treasury ~~and~~may ~~Results~~vote ~~of Operations”~~their insenior ~~the~~equity ~~Company’s~~in ~~2009~~matters ~~Annual~~deemed ~~Report~~by tothe ~~Shareholders,~~U.S. ~~included~~Treasury asto have an ~~exhibit~~impact toon ~~this~~their ~~Annual Report~~holdings.

~~ITEM~~o 7AAlthough the Company does not foresee any material changes to the terms associated with its participation in the CPP, the U.S. -Government, ~~QUANTITATIVE~~as ~~AND~~a ~~QUALITIVE~~sovereign ~~DISCLOSURES~~body, ~~ABOUT~~may ~~MARKET~~at ~~RISK~~any time change the terms of our participation in the CPP and or significantly influence Company policy.

~~Market~~For ~~risk~~more isinformation about the ~~risk of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The~~ Company’s ~~market~~participation ~~risk arises primarily from interest rate risk inherent~~ in ~~its lending and deposit taking activities. Management uses various asset/liability strategies to manage~~ the ~~re-pricing~~CPP, ~~characteristics~~see of“Note ~~the~~O ~~Company’s earning assets and funding liabilities to ensure that exposure to interest rate fluctuations is within its guidelines of acceptable risk~~-~~taking.~~ ~~Hedging strategies,~~Preferred ~~including~~Stock ~~the terms~~ and ~~pricing~~Related ~~of loans and deposits~~Warrant,” ~~and managing the deployment~~ of the ~~Company’s~~consolidated ~~securities~~financial ~~are~~statements ~~used~~filed toon ~~reduce~~this ~~mismatches~~Form ~~in interest rate re~~10-~~pricing opportunities of portfolio assets and their funding sources~~K.

~~Interest~~Our ~~rate~~Outstanding ~~risk~~Preferred isStock ~~addressed~~Impacts byNet ~~our~~Income ~~Asset Liability~~Available ~~Management~~to ~~Committee~~Our ~~(“ALCO”)~~Common ~~which~~Stockholders ~~is comprised of senior management officers of the bank. The ALCO monitors interest rate risk by analyzing the potential impact on the net equity value~~ and ~~net~~Earnings ~~interest~~Per ~~income~~Common ~~from~~Share ~~potential changes in interest rates,~~ and ~~considers~~Other ~~the~~Potential ~~impact~~Issuances of ~~alternative~~Equity ~~strategies or~~Securities ~~changes~~May inbe ~~balance~~Dilutive ~~sheet structure. The ALCO manages the Company’s balance sheet in part~~ to ~~maintain,~~Holders ~~within~~of ~~acceptable~~Our ~~ranges,~~Common ~~the potential impact on net equity value and net interest income despite fluctuations in market interest rates.~~Stock

~~Exposure~~The todividends ~~interest~~declared ~~rate~~and ~~risk~~the isaccretion ~~reviewed~~ on ~~at least~~our aoutstanding ~~quarterly~~preferred ~~basis~~stock bywill ~~the~~reduce ~~ALCO and~~ the ~~Board~~net ofincome ~~Directors.~~available ~~Interest~~to ~~rate risk~~common ~~exposure~~stockholders isand ~~measured~~our ~~using~~earnings ~~interest~~per ~~rate~~common ~~sensitivity~~share. ~~analysis~~The topreferred ~~determine the~~stock ~~change~~will inalso ~~net~~receive ~~portfolio~~preferential ~~value~~treatment in the event of ~~hypothetical~~the ~~changes~~Company’s ~~in interest~~liquidation, ~~rates~~dissolution or winding-down. In Ifaddition, ~~potential~~to ~~changes~~the extent options to ~~net~~purchase ~~equity~~common ~~value~~stock under our employee and ~~net~~director ~~interest income~~stock ~~resulting~~option ~~from~~plans ~~hypothetical~~are ~~interest~~exercised, ~~rate~~holders ~~changes~~of ~~are~~our ~~not~~common ~~within~~stock ~~the limits~~will ~~established~~incur byadditional dilution. Further, if the ~~Board~~Company ofsells ~~Directors,~~additional ~~management~~equity ~~may~~or ~~adjust~~convertible ~~the~~debt ~~asset and~~securities, ~~liability~~such ~~mix~~sales tomay ~~bring~~result ~~interest~~in ~~rate~~increased ~~risk~~dilution ~~within~~to ~~approved~~our ~~limits~~shareholders.

~~ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA~~28

~~The~~Our ~~financial~~Stock ~~statements and~~Trades ~~the~~Less ~~notes~~Frequently ~~thereto~~Than ~~required by Item 8 of Form 10-K are incorporated by reference from the Company’s 2009 Annual Report to Shareholders, included as an exhibit to this Annual Report.~~Others

~~ITEM~~Although 9our common stock is quoted on the over-the-counter market, the trading volume in our common stock is less than that of other larger financial services companies. A ~~CHANGES~~public INtrading ~~AND~~market ~~DISAGREEMENTS~~having ~~WITH~~the ~~ACCOUNTANTS~~desired ONcharacteristics ~~ACCOUNTING~~of ~~AND~~depth, ~~FINANCIAL~~liquidity ~~DISCLOSURE~~and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

~~None~~Our Stock Price is affected by a Variety of Factors

23Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among other things:

~~Table~~o Actual or anticipated variations in quarterly results of ~~Contents~~operations;

~~ITEM~~o 9ARecommendations ~~. CONTROLS AND~~by ~~PROCEDURES~~securities analysts;

~~Evaluation~~ o Operating and stock price performance of ~~Disclosure~~other ~~Controls~~companies ~~and~~that ~~Procedures~~investors deem comparable to our company;

~~The Company’s~~o ~~management~~News ~~carried~~reports ~~out~~relating an evaluation, under the supervision and with the participation of the Company’s President and Chief Executive Officer and the Company’s Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009, pursuant to ~~Exchange Act Rule 13a-15. Based upon that evaluation~~trends, ~~the~~concerns ~~Company’s President~~ and ~~Chief~~other ~~Executive~~issues ~~Officer along with the Company’s Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of December 31, 2009 are effective~~ in ~~timely alerting them to material information relating to~~ the ~~Company~~financial ~~(including~~services ~~its~~industry; ~~consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.~~and

~~Internal~~o ~~Control~~Perceptions ~~Over~~in ~~Financial Reporting~~the marketplace regarding our company and/or its competitors and the industry in which we operate.

~~(a)Management’s~~These ~~Annual~~factors ~~Report~~may onadversely ~~Internal~~affect ~~Control~~the ~~Over Financial~~trading ~~Reporting~~price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the public offering price. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of our common stock, regardless of our trading performance.

~~The~~Holders ~~management~~ of ~~the~~Our ~~Company~~Junior isSubordinated ~~responsible~~Debentures ~~for establishing~~Have ~~and~~Rights ~~maintaining~~That ~~adequate~~Are ~~internal~~Senior control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to ~~provide~~Those ~~reasonable assurance regarding the reliability~~ of ~~financial~~Our ~~reporting~~Common ~~and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.~~Shareholders

AsWe have supported our continued growth through the issuances of trust preferred securities from one special purpose trust. At December 31, ~~2009~~2010, ~~management~~we ~~assessed~~ had outstanding trust preferred securities totaling $5.0 million. Payments of the ~~effectiveness~~principal and interest on the trust preferred security of this special purpose trust is fully and unconditionally guaranteed by us. Further, the ~~Company’s~~accompanying ~~internal~~junior ~~control~~subordinated ~~over~~debenture ~~financial~~we ~~reporting based~~issued to the special purpose trust is senior to our shares of common stock. As a result, we must make payments on the ~~criteria~~junior ~~for~~subordinated ~~effective~~debenture before ~~internal~~any ~~control~~dividends ~~over~~can ~~financial~~be ~~reporting established~~paid inon ~~Internal Control—Integrated~~our ~~Framework~~common ~~issued~~stock byand, in the ~~Committee~~event of ~~Sponsoring Organizations~~our bankruptcy, dissolution or liquidation, the holders of the ~~Treadway~~junior ~~Commission~~subordinated ~~(“COSO”)~~debenture ~~and~~must ~~SEC~~be ~~guidance~~satisfied onbefore any ~~conducting~~distributions ~~such~~can ~~assessments.~~be ~~Based~~made on ~~the~~our ~~assessment,~~common ~~management~~stock. We ~~determined that~~have the ~~Company~~right ~~maintained~~to ~~effective~~defer ~~internal~~distributions ~~control~~on ~~over~~our ~~financial~~junior ~~reporting as~~subordinated ofdebentures ~~December 31,~~(and ~~2009~~the related trust preferred securities) for up to five years, ~~based~~during which time no cash dividends may be paid on ~~those~~our ~~criteria~~common stock.

~~The~~Following ~~Company’s~~consultation ~~management,~~with ~~including~~the ~~its~~Federal ~~Chief Executive~~Reserve ~~Officer~~Bank ~~and~~of ~~Chief~~San ~~Financial~~Francisco ~~Officer~~(the “FRB”), ~~does~~on ~~not~~August 31, ~~expect~~2010 ~~that~~the ~~its disclosure~~Company ~~controls~~elected ~~and~~to ~~procedures,~~defer orregularly ~~its~~scheduled ~~internal~~payments ~~controls~~on ~~will~~its ~~prevent~~outstanding ~~all error~~junior ~~and~~subordinated ~~all~~debenture ~~fraud.~~relating Ato ~~control~~its ~~system,~~outstanding no$5 ~~matter~~million ~~how~~trust ~~well~~preferred ~~conceived~~security ~~and operated,~~(the ~~can~~“Security”) ~~provide~~for ~~only~~a ~~reasonable,~~period ~~not~~of ~~absolute,~~up ~~assurance~~to ~~that~~20 consecutive quarters (the ~~objectives~~ “Deferral Period”). The terms of the ~~control~~Security ~~system~~and ~~are~~the ~~met.~~trust ~~Further,~~documents allow the ~~design~~Company ofto adefer ~~control system~~payments ~~must~~of ~~reflect~~interest for the ~~fact~~Deferral ~~that~~Period ~~there~~without ~~are~~default ~~resource~~or ~~constraints,~~penalty. During ~~and~~ the ~~benefit~~ ofDeferral ~~controls~~Period, ~~must~~the beCompany ~~considered~~will ~~relative~~continue to ~~their~~recognize ~~costs~~interest expense associated with the Security. Upon ~~Because~~the expiration of the ~~inherent~~ ~~limitations~~Deferral inPeriod, all ~~control~~accrued ~~systems,~~and nounpaid ~~evaluation~~interest ofwill ~~controls~~be ~~can provide~~due ~~absolute~~and ~~assurance~~payable. During ~~that~~the Deferral ~~all~~Period, ~~control~~the ~~issues~~Company ~~and~~is ~~instances~~prevented offrom ~~fraud,~~paying ~~if any,~~cash ~~within~~dividends ~~the~~to ~~Company~~shareholders ~~have~~or ~~been~~repurchasing ~~detected~~stock.

~~/s/ John C. Hansen /s/ James M. Cowan John C. Hansen James M. Cowan Chief Executive Officer Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer)~~29

~~(b) Changes~~Our inCommon ~~Internal~~Stock ~~Control~~is ~~Over Financial~~Not ~~Reporting.~~an Insured Deposit

~~No changes~~Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the ~~Company’s~~reasons ~~internal~~described ~~control~~in ~~over~~this ~~financial~~“Risk ~~reporting~~Factors” ~~have~~section ~~come~~and elsewhere in this report and is subject to ~~management’s~~ ~~attention~~the same market forces that ~~have~~affect ~~materially~~the ~~affected~~price of common stock in any company. As a result, orif ~~are~~you ~~reasonably~~acquire ~~likely to~~our ~~materially~~common ~~affect~~stock, ~~the~~you ~~Company’s~~may ~~internal~~lose ~~control~~some ~~over~~or ~~financial~~all ~~reporting~~of your investment.

~~ITEM~~Our ~~9B.~~Articles ~~OTHER~~of ~~INFORMATION~~Incorporation and By-Laws, As Well As Certain Banking Laws, May Have an Anti-Takeover Effect

~~None~~Provisions of our articles of incorporation, bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may hinder a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

24ITEM 1B. Unresolved Staff Comments

~~Table~~The ofCompany ~~Contents~~has no unresolved comments received from staff at the SEC.

~~PART~~ITEM ~~III~~2. PROPERTIES

~~ITEM~~The 10Company conducts its banking operations from four offices. The ~~DIRECTORS~~Bank owns the land and building of its office located at 7480 El Camino Real, ~~EXECUTIVE~~in ~~OFFICERS~~Atascadero, ~~AND~~California. ~~COPORATE~~The ~~GOVERNANCE~~building is a two-story building of approximately 16,500 square feet.

The ~~Company~~Bank ~~has~~owns ~~adopted~~the aland ~~Code of Business Conduct~~ and ~~Ethics~~building ~~that applies~~of toits ~~all~~office ~~employees~~located ~~and~~at ~~directors~~1240 ofSpring ~~the Company~~Street, ~~and~~Paso ~~complies~~Robles, ~~with~~California. ~~the SEC’s~~The ~~requirements~~Bank ~~for~~occupies aapproximately ~~code~~7,200 ofsquare ~~ethics~~feet ~~applicable~~on tothe ~~senior~~ground ~~executive officers. A~~floor ~~copy~~ of the ~~Code~~building ~~of Business Conduct~~ and ~~Ethics~~2,800 ~~was~~square ~~attached~~feet toin the ~~Form 10-K~~basement ~~filed~~is onused ~~March 30, 2009,~~ for ~~the~~records ~~year~~storage ~~ended~~and ~~December 31,~~as ~~2008~~a staff room.

~~During~~The ~~2007,~~Bank owns the ~~Board~~land ~~established a Corporate Governance Committee Charter~~ and ~~Corporate~~building ~~Governance Guidelines. A copy~~ of ~~the~~its ~~Corporate~~office ~~Governance Committee~~located ~~Charter~~at ~~and~~1530 ~~Guidelines~~East ~~was~~Grand ~~attached~~Avenue asin ~~“Exhibit A”~~Arroyo toGrande. The ~~the~~building ~~Proxy Statement~~is ~~filed~~a ~~with~~two-story ~~the~~building ~~SEC~~of onapproximately ~~February 15~~10,200 ~~2008~~square feet.

The ~~remainder~~Bank ofowns the ~~information~~land ~~required~~and bya ~~Item~~two-story 10building of ~~Form~~ approximately 10~~-K is~~,000 ~~incorporated~~square byfeet ~~reference~~which ~~from~~houses ~~the~~its ~~information~~office ~~contained~~located inat ~~the~~1825 ~~Company’s Proxy~~South ~~Statement~~Broadway, ~~for~~Santa ~~the~~Maria, ~~2010 Annual Meeting of Shareholders which has been filed pursuant to Regulation 14A~~California.

~~ITEM~~The ~~11.~~Company ~~EXECUTIVE~~believes ~~COMPENSATION~~that all of its properties are well maintained and are suitable for their respective present needs and operations.

~~The~~ITEM ~~information~~3. ~~required~~LEGAL by Item 11 of Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders which has been filed pursuant to Regulation 14A.PROCEEDINGS

~~ITEM~~The 12Company is, from time to time, subject to various pending and threatened legal actions which arise out of the normal course of its business. ~~SECURITY~~The ~~OWNERSHIP~~Company OFis ~~CERTAIN~~not ~~BENEFICIAL~~a ~~OWNERS~~party ~~AND~~to ~~MANAGEMENT~~any ~~AND~~pending ~~RELATED~~legal ~~STOCKHOLDER~~or ~~MATTERS~~administrative proceedings (other than ordinary routine litigation incidental to the Company’s business) and no such proceedings are known to be contemplated.

~~The~~There ~~information~~are ~~required~~no bymaterial ~~Item~~proceedings 12adverse ofto ~~Form 10-K~~the isCompany ~~incorporated by~~to ~~reference~~which ~~from~~any director, officer, affiliate of the ~~information~~Company ~~contained~~or in5% shareholder of the Company’s, ~~Proxy~~or ~~Statement for~~any associate of any such director, officer, affiliate or 5% shareholder of the ~~2010~~Company ~~Annual~~is ~~Meeting~~a party, and none of ~~Shareholders~~the ~~which~~above persons has ~~been~~a ~~filed~~material ~~pursuant~~interest adverse to ~~Regulation~~ ~~14A~~the Company.

~~ITEM~~There ~~13.~~are ~~CERTAIN~~no ~~RELATIONSHIPS~~material ~~AND~~proceedings ~~RELATED~~adverse ~~TRANSACTIONS~~to ~~AND~~the ~~DIRECTOR~~Company ~~INDEPENDENCE~~to which any Director, Officer or affiliate of the Company is a party.

~~The~~ITEM ~~information~~4. ~~required~~(REMOVED byAND Item 13 of Form 10-K is incorporated by reference from the information contained in the Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders which has been filed pursuant to Regulation 14A.RESERVED)

~~ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES~~30

~~The information required by Item 14 of Form~~PART ~~10K is incorporated by reference from the information contained in the Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders which has been filed pursuant to Regulation 14A.~~II

~~PART IV~~ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

~~ITEM~~Market ~~15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~Information

~~(a)~~ The ~~following~~Company’s ~~exhibits~~Common ~~are filed~~Stock asis ~~part~~not oflisted ~~the~~on ~~Form~~any exchange or market. However, Morgan Stanley, Howe Barnes Hoefer ~~10-K~~& Arnett, Inc., Edward Jones, Wedbush Morgan Securities, UBS Financial Services, Inc., and ~~this~~McAdams ~~list~~Wright ~~includes~~and ~~the~~Ragen ~~Exhibit~~each actively make a market ~~Index:~~in the Company’s Common Stock. Certain information concerning the Common Stock is quoted on the OTC Bulletin Board under the symbol “SLBA.OB”

~~Index~~The ~~to Exhibits~~information in the following table indicates the high and low bid prices of the Company’s Common Stock for each quarterly period during the last two years based upon information provided by certain of the firms mentioned above who serve as the Company’s market makers. These prices do not include retail mark-ups, mark-downs or commission.

Exhibit Number	Exhibit	Sequentially Numbered Pages
	Quarter Ended	Bid Prices
3.1	Articles of Incorporation of the Bancorp, as amended	13/
		Low		High
3.2	Bylaws of the Bancorp, as amended	13/
2010
	December 31	$	1.20	$	2.95
	September 30	$	1.90	$	6.70
	June 30	$	6.60	$	8.20
	March 31	$	7.35	$	11.76
2009
	December 31	$	10.10	$	11.89
	September 30	$	11.55	$	15.00
	June 30	$	10.50	$	13.00
	March 31	$	8.20	$	14.75

25The foregoing table is based on data reported by the market makers named above and does not include information on shares traded directly by shareholders or through other dealers.

~~Table of Contents~~Holders

3.3	Certificate of Amendment to Bylaws of Santa Lucia Bank, dated January 16, 2002	7/
3.4	Amendment to Bylaws of Santa Lucia Bank, dated January 21, 2009	17/
10.4	Santa Lucia Bank’s Employee Stock Ownership Plan	1/
10.5	Plan Administrator’s Guide for the Bank’s Employee Stock Ownership Plan	1/
10.6	Santa Lucia Bank’s Profit Sharing Plan	1/
10.9	Salary Continuation agreement by and between Santa Lucia Bank and Stanley R. Cherry, dated February 1, 1997	2/
10.10	Salary Continuation agreement by and between Santa Lucia Bank and Larry H. Putnam, dated February 1, 1997	2/
10.11	Deferred Fee Agreement by and Between Santa Lucia Bank and Khatchik Achadjian, dated February 1, 1997	2/
10.12	Deferred Fee Agreement by and Between Santa Lucia Bank and Dino Boneso, dated February 1, 1997	2/
10.13	Deferred Fee Agreement by and Between Santa Lucia Bank and Jerry W. DeCou, III, dated February 1, 1997	2/
10.14	Deferred Fee Agreement by and Between Santa Lucia Bank and Douglas C. Filipponi, dated February 1, 1997	2/
10.15	Deferred Fee Agreement by and Between Santa Lucia Bank and Jean Hawkins, dated February 1, 1997	2/
10.16	Deferred Fee Agreement by and Between Santa Lucia Bank and Paul G. Moerman, dated February 1, 1997	2/
10.17	Deferred Fee Agreement by and Between Santa Lucia Bank and Norman J. Norton, Jr., dated February 1, 1997	2/
10.18	Deferred Fee Agreement by and Between Santa Lucia Bank and William S. Osibin, dated February 1, 1997	2/
10.19	Deferred Fee Agreement by and Between Santa Lucia Bank and D. Jack Stinchfield, dated February 1, 1997	2/
10.20	Director Retirement Agreement by and between Santa Lucia Bank and Khatchik Achadjian, dated February 1, 1997	2/
10.21	Director Retirement Agreement by and between Santa Lucia Bank and Dino A. Boneso, dated February 1, 1997	2/
10.22	Director Retirement Agreement by and between Santa Lucia Bank and Jerry W. DeCou, III, dated February 1, 1997	2/
10.23	Director Retirement Agreement by and between Santa Lucia Bank and Douglas C. Filipponi, dated February 1, 1997	2/
10.24	Director Retirement Agreement by and between Santa Lucia Bank and Jean Hawkins, dated February 1, 1997	2/

The Company has two classes of stock outstanding — Common and Preferred Stock. As of February 23, 2011 there were approximately 371 record holders of the Company’s Common Stock.

26Dividends

~~Table~~The following table sets forth the per share amount and month of ~~Contents~~ payment for all cash dividends paid since January 1, 2008:

10.25	Director Retirement Agreement by and between Santa Lucia Bank and Paul G. Moerman, dated February 1, 1997		2/
Month Paid	Amount Per Share
10.26	Director Retirement Agreement by and between Santa Lucia Bank and Willard S. Osibin, dated February 1, 1997		2/
March 2008	$	0.25
10.27	Director Retirement Agreement by and between Santa Lucia Bank and D. Jack Stinchfield, dated February 1, 1997		2/
September 2008	$	0.25
10.28	Agreement for Data Processing Services between Santa Lucia Bank and Fiserv Savings and Community Bank Group, dated February 21, 1997		3/
March 2009	$	0.25
10.29	Equipment Sales Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.30	Equipment Sales Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.31	Equipment Sales Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.32	Software License Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.33	Product License Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.34	Product License Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.35	Product License Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.36	Services Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.37	Remote Access Support Agreement between Santa Lucia Bank and Information Technology, Inc., dated February 14, 1997		3/
10.38	Salary Continuation Agreement by and between Santa Lucia Bank and John C. Hansen, dated August 1, 1998		4/
10.39	Employment Agreement by and between Santa Lucia Bank and Stanley R. Cherry, dated August 1, 1998		4/
10.40	Employment Agreement by and between Santa Lucia Bank and Larry H. Putnam, dated August 1, 1998		4/
10.41	Employment Agreement by and between Santa Lucia Bank and John C. Hansen dated August 1, 1998		4/
10.42	Santa Lucia Bank 2000 Stock Option Plan and form of stock option agreement		5/
10.44	Amendment to Salary Continuation Agreement of Stanley R. Cherry, Dated April 15, 1998		6/
10.45	Amendment to Salary Continuation Agreement of Larry H. Putnam, dated April 15, 1998		6/
10.46	Amendment to Salary Continuation Agreement of		6/

27The Company had paid a cash dividend for 20 years however, it issued a 2% stock dividend in October 2009 and March 2010. As of August 2010, all dividend activity has been suspended.

~~Table of Contents~~31

	Stanley R. Cherry, dated May 10, 2000
10.47	Amendment to Santa Lucia Bank Director Retirement Agreement with Khatchik H. Achadjian	6/
10.48	Amendment to Santa Lucia Bank Director Retirement Agreement with Dino Boneso, dated January 10, 2001	6/
10.49	Amendment to Santa Lucia Bank Director Retirement Agreement with Jerry W. DeCou, III, dated January 10, 2001	6/
10.50	Amendment to Santa Lucia Bank Director Retirement Agreement with Douglas C. Filipponi, dated January 10, 2001	6/
10.51	Amendment to Santa Lucia Bank Director Retirement Agreement with Jean Hawkins, dated January 10, 2001	6/
10.52	Amendment to Santa Lucia Bank Director Retirement Agreement with Paul G. Moerman, dated January 10, 2001	6/
10.53	Amendment to Santa Lucia Bank Director Retirement Agreement with D. Jack Stinchfield, dated January 10, 2001	6/
10.54	Amendment to Salary Continuation agreement with Stanley R. Cherry, dated January 10, 2001	6/
10.55	Amendment to Salary Continuation agreement with Larry H. Putnam, dated January 10, 2001	6/
10.56	Amendment to Salary Continuation agreement with John C. Hansen, dated January 10, 2001	6/
10.57	401(K) Profit Sharing Plan adopted effective July 1, 2001	7/
10.59	Form of Note Purchase Agreement	9/
10.60	Subordinated Note	9/
10.62	Amendment to Employment Agreement by and between Santa Lucia Bank and John Hansen dated November 11, 2004	11/
10.63	Employment Agreement by and between Santa Lucia Bank and Jim Cowan dated November 11, 2004	11/
10.65	Santa Lucia Bancorp 2006 Equity Based Compensation Plan	12/
10.66	Amended and Restated Employment Agreement by and between Santa Lucia Bank and Larry H. Putnam dated December 15, 2006	13/
10.67	Amended and Restated Employment Agreement by and between Santa Lucia Bank and John C. Hansen dated December 15, 2006	13/
10.68	Amended and Restated Employment Agreement by and between Santa Lucia Bank and James M. Cowan dated December 15, 2006	13/
10.70	Amendment to the Salary Continuation Agreement by and between Santa Lucia Bank and Larry H. Putnam dated April 12, 2007.	14/
10.71	Amendment to the Salary Continuation Agreement by and between Santa Lucia Bank and John C. Hansen dated April 12, 2007.	14/

The Company is a legal entity separate and distinct from the Bank. The Company’s shareholders are entitled to receive dividends when declared by its Board of Directors, out of funds legally available therefore, subject to the restrictions set forth in the California General Corporation Law (the Corporation law). The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution. The Corporation Law also provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may, nevertheless, make a distribution to its shareholders if it meets two conditions, which generally are as follows: (i) the corporation’s assets equal 1-1/4 times its liabilities, and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation’s interest expenses for such fiscal years, then the corporation’s interest expenses for such fiscal years, then the corporation’s current assets must equal at least 1-1/4 times its current liabilities. As a regulated bank holding company, the Federal Reserve Board’s restrictions may also limit the Company’s ability to pay cash dividends. Generally, a bank holding company must consult with the Reserve Board prior to payment of a proposed cash dividend, if the company did not have sufficient earnings in the prior four quarters at least equal to the proposed dividend and other holding company obligations.

28The ability of the Company to pay a cash dividend depends largely on the Bank’s ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject to restrictions set forth in the California Financial Code (the Financial Code). The Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the bank’s retained earnings; or (b) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by an majority-owned subsidiary of the bank to the shareholders of the bank during such period. However, a bank may, with the approval of the DFI, make a distribution to its shareholders in an amount not exceeding the greater of (x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year. In the event that the DFI determines that the shareholders’ equity of the bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the DFI may order the bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if by payment of such dividends, the bank would be included in one of the “undercapitalized” categories for capital adequacy purposes pursuant to federal law (See, “Item 1 — Supervision and Regulation Prompt Corrective Action and Other Enforcement Mechanisms.”) Additionally, while the Federal Reserve Board has no general restriction with respect to the payment of cash dividends by an adequately capitalized bank to its parent holding company, the Federal Reserve Board might, under certain circumstances, place restrictions on the ability of a particular bank to pay dividends based upon peer group averages and the performance and maturity of the particular bank, or object to management fees to be paid by a subsidiary bank to its holding company on the basis that such fees cannot be supported by the value of the services rendered or are not the result of an arm’s length transaction.

~~Table~~The Company’s junior subordinated debt agreements contain provisions which prohibit the paying of ~~Contents~~ dividends if it defers payment of interest on outstanding trust preferred securities (See “Item I. Business — Supervision and Regulation — Capital Standards”)

10.72	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Larry H. Putnam dated March 19, 2008.	15/
10.73	First Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and John C. Hansen dated March 19, 2008.	15/
10.74	First Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and James Cowan dated March 19, 2008	15/
10.75	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Jerry W. DeCou dated March 19, 2008.	15/
10.76	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Douglas C. Filipponi dated March 19, 2008.	15/
10.77	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Khatchik Achadjian dated March 19, 2008.	15/
10.78	Third Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Stanley R. Cherry dated March 19, 2008.	15/
10.79	First Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Jean Hawkins dated March 19, 2008.	15/
10.80	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and Paul G. Moerman dated March 19, 2008.	15/
10.81	Second Amendment to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between Santa Lucia Bank and D. Jack Stinchfield dated March 19, 2008.	15/
10.82	Agreement made by and between Santa Lucia Bank and Jerry W. DeCou, III dated October 15, 2008	16/
10.83	Agreement made by and between Santa Lucia Bank and Douglas C. Filipponi dated October 15, 2008	16/
10.84	Agreement made by and between Santa Lucia Bank and Khatchik Achadjian dated October 15, 2008	16/
10.85	Agreement made by and between Santa Lucia Bank and Stanley R. Cherry dated October 15, 2008	16/
10.86	Agreement made by and between Santa Lucia Bank and Jean Hawkins dated October 15, 2008	16/
10.87	Agreement made by and between Santa Lucia Bank and Paul G. Moerman dated October 15, 2008	16/

The Company’s participation in the TARP Capital Purchase Program includes restrictions on the amount of dividends that can be paid to common shareholders. The Company can not pay a dividend greater than the prior dividend declared unless prior approval from the United States Treasury is granted. Additionally, the Company will be prohibited from continuing to pay dividends on its common stock unless the Company has fully paid all required dividends on the preferred stock issued to the Treasury.

29Following consultation with the Federal Reserve Bank of San Francisco (the “FRB”), on August 31, 2010 the Company elected to defer regularly scheduled dividends on the Preferred Stock. As of December 31, 2010, the Company has missed two dividend payments. By deferring the dividends on Series A Senior Preferred Stock for a total of six quarters, whether or not consecutive, the U.S. Treasury will have the right to elect two members of the Company’s Board of Directors, voting together with any other holders of preferred shares ranking pari passu with the Series A Senior Preferred Stock. These directors would serve on the Company’s Board of Directors until such time as the Company has paid in full all dividends not previously paid, at which time these directors’ terms of office would immediately terminate.

~~Table~~Further, under the Written Agreement with the FRBSF the Bank may not pay cash dividends or make other payments to the holding company without prior written consent of ~~Contents~~ the regulatory authorities. Additionally, the Company may not receive any dividends or other forms of payment from the Bank representing a reduction in the Bank’s capital or make payments to its shareholders without the prior approval of the FRBSF and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System.

10.88	Agreement made by and between Santa Lucia Bank and D. Jack Stinchfield dated October 15, 2008	16/
10.89	First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and Larry H. Putnam dated October 15, 2008	16/
10.90	First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and John C. Hansen dated October 15, 2008	16/
10.91	First Amendment to Amend and Restated Employment Agreement made by and between Santa Lucia Bank and James Cowan dated October 15, 2008	16/
10.92	Salary Continuation Agreement by and between Santa Lucia Bank and Larry H. Putnam dated December 17, 2008	17/
10.93	First Amended and Restated Salary Continuation Agreement by and between Santa Lucia Bank and Larry H. Putnam dated December 17, 2008	17/
10.94	Salary Continuation Agreement by and between Santa Lucia Bank and John C. Hansen dated December 17, 2008	17/
10.95	First Amended and Restated Salary Continuation Agreement by and between Santa Lucia Bank and John C. Hansen dated December 17, 2008	17/
10.96	First Amended and Restated Salary Continuation Agreement by and between Santa Lucia Bank and James M. Cowan dated December 17, 2008	17/
10.97	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and Jerry W. DeCou III dated December 17, 2008	17/
10.98	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and Douglas C. Filipponi dated December 17, 2008	17/
10.99	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and Khatchik H. Achadjian dated December 17, 2008	17/
10.100	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and Jean Hawkins dated December 17, 2008	17/
10.101	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and Paul G. Moerman dated December 17, 2008	17/
10.102	First Amended and Restated Deferred Fee Agreement by and between Santa Lucia Bank and D. Jack Stinchfield dated December 17, 2008	17/
10.103	First Amended and Restated Santa Lucia Bank Director Retirement Agreement by and between Santa Lucia Bank and Jerry W. DeCou III dated December 17, 2008	17/
10.104	First Amended and Restated Santa Lucia Bank Director Retirement Agreement by and between Santa Lucia Bank and Douglas C. Filipponi dated December 17, 2008	17/
10.105	First Amended and Restated Santa Lucia Bank Director Retirement Agreement by and between Santa Lucia Bank and Khatchik H. Achadjian dated December 17, 2008	17/
10.106	First Amended and Restated Santa Lucia Bank Director Retirement Agreement by and between Santa Lucia Bank and Jean Hawkins dated December 17, 2008	17/
10.107	First Amended and Restated Santa Lucia Bank Director Retirement Agreement	17/

30ITEM 6. SELECTED FINANCIAL DATA

~~Table of~~The ~~Contents~~table below provides selected financial data that highlights the Company’s performance results for the five years ended December 31, 2010, 2009, 2008, 2007 and 2006:

	by and between Santa Lucia Bank and Paul G. Moerman dated December 17, 2008
				Year Ended December 31,
10.108	First Amended and Restated Santa Lucia Bank Director Retirement Agreement by and between Santa Lucia Bank and D. Jack Stinchfield dated December 17, 2008		17/
	2010			2009			2008			2007			2006
13.1	Annual Report to Shareholders
	(dollars in thousands except per share data)
14.1	Code of Business Conduct and Ethics		17/
Summary of Operations:
23.1	Consent of independent accountants from Vavrinek, Trine, Day & Co., LLP
Interest Income	$	12,587		$	13,851		$	15,276		$	17,719		$	17,027
31.1	Certification of Chief Executive Officer pursuant to Rule 15d-14
Interest Expense		2,291			3,021			3,877			4,824			3,577
31.2	Certification of Chief Financial Officer pursuant to Rule 15d-14
Net Interest Income		10,296			10,830			11,399			12,895			13,450
32.1	Certification pursuant to Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
Provision for Loan Loss		15,198			5,460			975			-			240
99.1	Troubled Asset Relief Program Certification of Chief Executive Officer
Net Interest Income After Provision for Loan Losses		(4,902	)		5,370			10,424			12,895			13,210
99.2	Troubled Asset Relief Program Certification of Chief Financial Office
Noninterest Income		1,610			1,236			1,111			1,071			1,010
Noninterest Expense		10,655			9,865			9,763			9,029			8,590
Income Before Income Taxes		(13,947	)		(3,259	)		1,772			4,937			5,630
Income Tax, expense(benefit)		807			(1,434	)		(633	)		(1,934	)		(2,242	)
Net Income (loss)	$	(14,754	)	$	(1,825	)	$	1,139		$	3,003		$	3,388
Dividends and Accretion on Preferred Stock	$	240		$	240		$	-		$	-		$	-
Net (losses)/income Applicable to Common Shareholders	$	(14,994	)	$	(2,065	)	$	1,139		$	3,003		$	3,388
Cash Dividends Paid	$	-		$	483		$	963		$	871		$	768
Per Common Share Data:
Net Income - Basic	$	(7.49	)	$	(1.05	)	$	0.59		$	1.55		$	1.77
Net Income - Diluted	$	(7.49	)	$	(1.05	)	$	0.58		$	1.51		$	1.68
Dividends	$	-		$	0.25		$	0.50		$	0.45		$	0.40
Book Value	$	1.86		$	9.58		$	11.21		$	11.01		$	9.93
Common Outstanding Shares:		2,003,131			1,961,334			1,923,053			1,924,873			1,928,097
Statement of Financial Condition Summary:
Total Assets	$	249,801		$	269,923		$	251,880		$	248,640		$	240,738
Total Deposits		233,867			238,723			212,317			212,718			212,988
Total Net Loans		176,750			198,099			186,632			166,619			169,680
Allowance for Loan Losses		10,999			3,386			2,310			1,673			1,654
Total Shareholders' Equity		7,545			23,030			25,551			21,189			19,137
Asset Quality:
Loan on Non-Accrual	$	23,945		$	6,407		$	1,614		$	2,176		$	-
Loans Past Due >90 days and still accruing	$	-		$	-		$	-		$	-		$	550
OREO	$	2,123		$	428		$	-		$	-		$	-
Loans Past Due 30-89 days	$	606		$	5		$	2,674		$	-		$	-
Selected Ratios:
Return on Average Assets		-5.65	%		-0.69	%		0.46	%		1.22	%		1.42	%
Return on Average Equity		-107.53	%		-7.18	%		5.19	%		14.87	%		19.45	%
Net Interest Margin		4.16	%		4.49	%		5.05	%		5.92	%		6.38	%
Average Loans as a Percentage of Average Deposits		82.46	%		87.82	%		83.84	%		76.11	%		79.74	%
Allowance for Loan Losses to Total Loans		5.84	%		1.67	%		1.22	%		0.99	%		0.96	%
Company
Tier I Capital to Average Assets		4.02	%		10.28	%		11.89	%		10.50	%		10.00	%
Tier I Capital to Risk-Weighted Assets -		5.72	%		12.54	%		14.41	%		13.20	%		12.70	%
Total Capital to Risk-Weighted Assets -		8.30	%		13.87	%		15.92	%		14.60	%		14.40	%
Bank
Tier I Capital to Average Assets		4.75	%		9.71	%		11.44	%		9.85	%		9.11	%
Tier I Capital to Risk-Weighted Assets -		6.85	%		11.85	%		13.65	%		12.33	%		11.43	%
Total Capital to Risk-Weighted Assets -		8.16	%		13.18	%		15.17	%		13.80	%		13.13	%

~~1/ Incorporated by reference from the Bank’s Form 10-K for the year ended December 31, 1995~~33

~~2/ Incorporated~~ITEM by7. ~~reference~~MANAGEMENT’S ~~from~~DISCUSSION ~~the~~AND ~~Bank’s Form 10-K~~ANALYSIS ~~for~~OF ~~the~~FINANCIAL ~~year~~CONDITION ~~ended~~AND ~~December 31,~~RESULTS ~~1996~~OF OPERATIONS.

~~3/ Incorporated~~The byfollowing ~~reference~~is ~~from~~an analysis of the ~~Bank’s Form 10-K~~financial ~~for~~condition and results of operations of the ~~year~~Company as of and for years ended December 31, ~~1997~~2010, 2009 and 2008. The analysis should be read in connection with the consolidated financial statements and notes thereto appearing elsewhere in this report.

~~4/ Incorporated~~Financial ~~by reference from the Bank’s Form 10-K for the year ended December 31, 1998~~Overview

~~5/ Incorporated~~For the years ended December 31, 2010 and 2009, the Company recorded a net loss of approximately $15.0 million or ($7.49) per common share and $2.1 million or ($1.05) per common share, respectively. On a year over year basis, the net loss increased by ~~reference~~approximately ~~from~~$12.9 million. The primary factor behind the increase in the loss can be attributed to substantial provisions the Bank~~’s Form 10-K~~ made to the allowance for loan losses during 2010, resulting from, among other things, increases in non-performing loans due in part to continued weaknesses in local, state and economic conditions. For the year ended December 31, ~~1999~~2008, the Company earned $1.1 million or $0.58 per diluted common share.

~~6/ Incorporated~~2010 byproved ~~reference~~to ~~from~~be a challenging year as the ~~Bank~~Company’s results of operations were significantly impacted by a number of factors including, most notably, the additional provisions the Bank made to the allowance for loan losses. A challenging credit environment and continued economic weakness, among other things, led the Bank to increase its allowance for loan losses by approximately $7.6 million, net of charge-offs and recoveries, to $11.0 million or 5.84% of total gross loans. This compares to an allowance of $3.4 million or 1.67% of total gross loans as of December 31, 2009. During 2010 the Bank also saw a considerable increase in the level of criticized and classified loans as well as “watch list” loan balances, resulting in part from continued economic ~~Form 10~~stresses. As the level of criticized, classified and watch list balances increased, so also did the level of non-Kaccruing ~~for~~balances and ultimately charge-offs. For the year ended December 31, ~~2000~~2010 net charge-offs totaled approximately $7.6 million, representing 3.77% of average loan balances. This compares to net charge-offs of $4.4 million for 2009, representing 2.20% of average loan balances. The Bank recorded net charge offs of approximately $.3 million for 2008.

~~7/ Incorporated~~Operating byresults ~~reference~~for ~~from~~2010 were also impacted by the ~~Bank’s Form 10~~write-Kdown and expense for OREO property in the ~~year~~approximate ~~ended~~amount ~~December 31,~~of ~~2001~~$.6 million.

~~8/ Incorporated~~Although by2010 ~~reference~~marked ~~from~~a year of significant challenges with respect to the ~~Bank~~Company’s ~~Form 10-K~~ ~~for~~profitability, Management took considerable steps during the year ~~ended~~to ~~December 31~~reinforce the oversight of the loan portfolio, ~~2002~~specifically with respect to problem assets. The Bank’s problem credit department was expanded and the independent loan review was enhanced and moved to a bi-annual basis to augment Management’s ongoing internal review. Additionally, In August 2010, the Company announced that Claudya Ross was promoted to Executive Vice President and Chief Credit Officer. Ms. Ross brings over 24 years of banking experience to the Bank. Management believes the actions taken in 2010 to further enhance the Bank’s oversight of credit quality will enhance the Company’s ability to navigate through the continued weakened economy.

~~9/ Incorporated~~The byfollowing ~~reference~~provides ~~from~~a ~~the~~summary ~~Bank’s Form 10-Q~~of operating results for the ~~period~~year ended ~~September 30~~December 31, ~~2003~~2010:

~~10/ Incorporated~~o byInterest ~~reference~~income ~~from~~for the ~~Bank’s Form 10-K~~year ~~for~~ended December 31, 2010 was approximately $12.6 million, which represents a decline of approximately $1.3 million or 9.1% from the same period ~~ended~~in ~~December 31~~2009. Lower earning asset yields during 2010, ~~2003~~resulting from the current interest rate environment compounded by the large amount of loans on non-accrual, contributed significantly to the year over year decline.

~~11/ Incorporated~~o byInterest ~~reference~~expense for the year ended December 31, 2010 was approximately $2.3 million, which represents a decline of approximately $.7 million or 24.2% from the ~~Bank’s Form 10~~same period in 2009. Lower offering rates in conjunction with the re-Kpricing ~~for~~of floating rate deposit balances during 2010 contributed significantly to the ~~period~~decline ~~ended~~in ~~December 31,~~interest ~~2004~~expense.

~~12/ Filed~~o asAs ~~part~~a result of ~~Registrants~~the ~~Registration Statement~~items onmentioned ~~Form S-8~~above, ~~(File~~net ~~#333-137997)~~interest ~~(Filed~~income onfor the year ended December 31, 2010 was approximately $10~~/13/06)~~.3 million compared to $10.8 million for the same period in 2009. This represents a decrease of approximately $.5 million or 5.0%. For the year ended December 31, 2010 the Company’s net interest margin was 4.16% compared to the 4.49% reported for 2009, representing a decline of 33 basis points.

~~13/ Incorporated by reference from the Bank’s Form 10-K for the period ended December 31, 2006~~34

~~14/ Incorporated~~o byFor ~~reference~~the ~~from~~year ~~the~~ended ~~Bank’s Form 10~~December 31, 2010, non-Qinterest income totaled approximately $1.6 million, compared to $1.2 million for the same period ~~ended~~in ~~March 31~~2009. During 2010, ~~2007~~the Bank recognized gains on sales of investments of $.6 million compared to $.2 million in 2009. Thee gains account for the majority of the variance on a year over year basis.

~~15/ Incorporated~~o byNon-interest ~~reference~~expenses ~~from~~for the ~~Bank’s Form~~ year ended December 31, 2010 were approximately $10-Q.7 million or $.8 million higher than the $9.9 million reported for the same period ended ~~March 31~~a year earlier. Contributing to the increase in non-interest expense in 2010 were higher FDIC assessment costs, ~~2008~~$.6 million in OREO expense including write-downs and higher costs incurred related to the management of problem assets. For a more detailed discussion regarding non-interest expense please see “Non-Interest Expense” of Management’s Discussion and Analysis filed on this Form 10-K.

~~16/ Incorporated~~o byThe ~~reference~~operating ~~from~~efficiency ratio for the ~~Bank’s Form 10-Q~~year ended December 31, 2010 was 89.5% compared to 81.8% for the ~~period~~year ended ~~September 30~~December 31, ~~2008~~2009.

~~17/ Incorporated~~The byfollowing ~~reference~~provides ~~from~~a ~~the~~summary ~~Bank’s Form 10-K~~of ~~for~~significant ~~the~~year ~~period~~to ~~ended~~date changes in financial condition balances as of December 31, ~~2008~~2010:

o Total assets at December 31, 2010 were approximately $249.8 million, approximately $20.1 million or 7.5% less than that report at December 31, 2009.

~~Table~~o ofFed ~~Contents~~Funds sold and interest bearing due from balances totaled approximately $15.5 million at December 31, 2010, approximately $13.0 million or 520.0% higher than that reported at December 31, 2009. A significant decrease in total loans along with the Bank’s plan to increase liquidity in response to our Written Agreement with the FRBSF accounts for the high balances in this category.

~~SIGNATURES~~o Available for sale investment securities totaled approximately $32.5 million at December 31, 2010, approximately $8.4 million or 20.6% less than that reported at December 31, 2009. As mentioned, the Bank’s current plan is to retain excess liquidity in the overnight interest bearing due from balances until such time that there is trending evidence of no reputation risk as the result of regulatory action. The Bank has not experienced any such reputation risk to date.

Ino ~~accordance~~Gross ~~with~~loans ~~Section~~ totaled approximately $188.4 million at December 31, 2010, representing a decrease of approximately $13.8 million or ~~15(d) of~~6.8% ~~the~~over ~~Exchange~~that ~~Act, the~~reported ~~registrant~~at ~~caused~~December ~~this~~31, ~~report~~2009. In addition to beloan ~~signed~~demand onbeing ~~its~~soft ~~behalf~~throughout the year, the Bank was also restricted by regulatory CRE levels as the ~~undersigned~~ result of the significant losses experienced during the year. For a more detailed discussion regarding the loan portfolio, ~~thereunto~~please ~~duly~~see ~~authorized~~“Loans” of Management’s Discussion and Analysis filed on this Form 10-K.

	SANTA LUCIA BANCORP
By:	/s/ John C. Hansen
	JOHN C. HANSEN
	President and Chief Executive Officer
	(Principal Executive Officer)
	Dated: March 26, 2010
By:	/s/ James M. Cowan
	JAMES M. COWAN
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)
	Dated: March 26, 2010

Total deposits were approximately $233.9 million at December 31, 2010, approximately $4.9 million or 2.0% less than that reported at December 31, 2009. Time certificates of deposits decreased by $7.2 million or 8.4% due to the reshaping of the balance sheet in the absence of loan demand. Core deposits (defined as total deposits less time certificates of deposit of $100,000 or more) represented 78.1% and 78.2% at December 31, 2010 and 2009, respectively. For a more detailed discussion regarding deposits, please see “Deposits” of Management’s Discussion and Analysis filed on this Form 10-K.

32o Shareholders’ equity totaled approximately $7.5 million at December 31, 2010, representing a decrease of approximately $15.5 million or 67.2% from that reported at December 31, 2009. The primary factor for the decrease is the net loss of $15.0 million reported for 2010.

~~Table~~The following provides an overview of ~~Contents~~asset quality as of and for the year ended December 31, 2010:

Ino ~~accordance~~At ~~with~~December ~~the~~31, ~~requirements~~2010 ofnon-performing ~~the~~assets ~~Securities Exchange~~totaled ~~Act~~approximately of$26.1 ~~1934~~million, ~~this~~an ~~report~~increase ~~has~~of ~~been~~approximately ~~signed~~$19.3 ~~below~~million byor ~~the~~281.4% ~~following persons~~over onthat ~~behalf~~reported at December 31, 2009. The ratio of ~~the~~non-performing ~~registrant~~assets ~~and~~to intotal ~~the~~assets ~~capacities~~was ~~and~~10.44% onat December 31, 2010 compared to the ~~dates indicated~~2.53% reported at December 31, 2009.

		Dated:
/s/ John C. Hansen	President and	March 26, 2010
JOHN C. HANSEN	Chief Executive Officer
/s/ Jerry W. DeCou	Chairman of the	March 26, 2010
JERRY W. DECOU III	Board of Directors
/s/ Douglas C. Filipponi	Vice Chairman	March 26, 2010
DOUGLAS C. FILIPPONI	of the Board of Directors
/s/ Khatchik H. Achadjian	Director	March 26, 2010
KHATCHIK H. ACHADJIAN
/s/ Stanley R. Cherry	Director	March 26, 2010
STANLEY R. CHERRY
/s/ Jean Hawkins	Director	March 26, 2010
JEAN HAWKINS
/s/ Paul G. Moerman	Director	March 26, 2010
PAUL G. MOERMAN
/s/ Larry H. Putnam	Director	March 26, 2010
LARRY H. PUTNAM
/s/ D. Jack Stinchfield	Director	March 26, 2010
D. JACK STINCHFIELD

Non-performing loans totaled approximately $23.9 million at December 31, 2010, an increase of approximately $17.5 million or 273.7% over that reported at December 31, 2009. Non-performing loans represented 12.71% of total gross loans as of December 31, 2010 compared to 3.17% reported for December 31, 2009. At December 31, 2010 non-performing loans as a percent of the allowance for loan losses was 217.7% compared to 189.2% reported at December 31, 2009.

3335

~~Table~~o The allowance for loan losses was approximately $11.0 million at December 31, 2010, approximately $7.6 million higher than that reported at December 31, 2009. During 2010, the Bank made approximately $15.2 million in provisions to the allowance for loan losses and charged-off approximately $7.8 million in loan balances. At December 31, 2010 the allowance as a percentage of ~~Contents~~total gross loans was 5.84% compared to the 1.67% reported at December 31, 2009.

~~EXHIBIT~~o ~~INDEX~~Net charge-offs for 2010 totaled approximately $7.6 million compared to the $4.4 million reported for 2009. Net charge-offs to average loans was 3.77% for 2010 compared to 2.20% reported for 2009.

Exhibit Sequential Number		Description
13.1		Annual Report to Shareholders
23.1		Consent of independent accountants from Vavrinek, Trine, Day & Co., LLP
31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14
31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14
32.1		Certification pursuant to Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code
99.1		Troubled Asset Relief Program Certification of Chief Executive Officer
99.2		Troubled Asset Relief Program Certification of Chief Financial Office

Other real estate owned totaled approximately $2.1 million at December 31, 2010, compared to $0.4 million reported at December 31, 2009.

34For additional information regarding asset quality, the allowance for loan losses and provisions for loan losses, please see “Troubled Debt Restructurings,” “Non-Performing Assets,” and “Allowance for Loan Losses” of Management’s Discussion and Analysis filed on this Form 10-K.

Recent Regulatory Developments

As discussed previously, on December 23, 2010, the Company the Bank and the FRBSF entered into the Written Agreement (the “Written Agreement”), effective December 23, 2010, addressing, among other items, management, operations, lending, asset quality and increased capital for the Bank and the Company, as appropriate.

In addition, the DFI completed an examination of the Bank in the fourth quarter of 2010. Based upon discussion with the DFI following the examination, the Bank’s condition has been further downgraded. Further, the Bank likely will receive some form of formal enforcement action from the DFI. While we expect the action from the DFI to be similar in scope to the Written Agreement, it will differ in at least one important respect. While the Written Agreement requires the Bank to submit a capital plan to the FRBSF, the agreement does not specify a particular level of capital the Company or Bank must maintain. The DFI has indicated that its action will include specific minimum capital ratios that the Bank must meet for both the tier 1 leverage and total risk based capital ratios. At this time, the Bank has not been advised of the minimum capital ratios sought by the DFI. However, those ratios will be in excess of the Bank’s current capital ratios.

Many of the requirements of the Written Agreement reflect recommendations or requirements from the examination that the Bank has been working on since the date of the examination. Subsequent to the examination and in order to enhance the Bank’s ability to remedy many of the noted criticisms, the Bank made several changes in the executive structure to include a newly appointed Chief Credit Officer (CCO) and Chief Financial Officer. In addition, Stanley R. Cherry, Director and former President and CEO rejoined the Bank as SVP- credit administration and will be working closely with the CCO to manage the day-to-day credit functions. The Company and Bank will continue their efforts to comply with all provisions of the Written Agreement, and believe they are taking the appropriate steps necessary to comply in a timely fashion.

Our capital has been significantly reduced as a result of the losses in 2009 and 2010. We must now recapitalize the Company and the Bank. As discussed previously, the Written Agreement requires the Company and Bank to submit a capital plan to the FRBSF containing minimum capital ratios for the Bank that would raise them above their current levels. In addition, the Anticipated Consent Order will, among other things, require that the Bank achieve and then maintain certain capital ratios significantly in excess of current capital levels. Although we have not yet received the Anticipated Consent Order, as of December 31, 2010, based on our capital plan submitted to the FRBSF we estimate that we needed to achieve a combination of new equity capital and earnings of approximately $8.7 million in order to appropriately recapitalize the Company and Bank. To achieve such a result, we must:

increase the Bank’s capital through a combination of new equity capital and its earnings;

minimize future losses from the $23.9 million in non-performing loans we had at December 31, 2010 or from other assets; and/or

reduce assets from the amount at year end 2010.

If we do not achieve all these goals, we will not be able to adequately recapitalize the Company, which would have a material adverse effect on the Company and the Bank and our ability to continue as a going concern. In addition, until we receive the Anticipated Consent Order we will not know if $8.7 million will be adequate to satisfy the DFI, and the FRBSF has not yet approved our capital plan. Failing to adequately recapitalize the Company or satisfy our regulatory capital requirements could lead to, among other things, additional regulatory enforcement actions including the imposition of civil monetary penalties against the Company, the Bank or both, the termination of insurance of the Bank’s deposits by the FDIC or the closing of the Bank with the imposition of a conservator or receiver.

We currently hold in escrow approximately $1.2 million through our efforts in a recent private placement (the “Private Placement”). While this amount of capital would be a material addition to the Company’s capital levels, we believe this amount of capital will not adequately recapitalize the Bank, bring the Bank into compliance with any capital ratio requirement the DFI will set, nor will it be sufficient for purposes of satisfying the Written Agreement. Because of this likely shortfall in the Private Placement, the Company has elected to keep those proceeds in escrow, and is contemplating a rights offering to its current common shareholders in an effort to further augment capital. There can be no assurance that such a rights offering will be successful, or raise enough capital when combined with the net proceeds of the Private Placement to fully satisfy the capital requirements imposed by our regulators.

We view satisfying our capital requirements as only the first step in our recapitalization. We anticipate that further capital will be necessary in order to (i) execute our growth strategy once our financial position improves and (ii) keep us in compliance with the written agreement and likely consent order. The economic recession has provided a number of opportunities for expansion for a well-capitalized institution which is in satisfactory regulatory condition.

Results of Operations

The Company reported a net loss of $15.0 million for the year ended December 31, 2010 compared to a net loss of $2.1 million and income of $1.1 million for the years 2009 and 2008, respectively. For the years ended December 31, 2010 and 2009, the Company reported a net loss of $7.49 and $1.05 per common share, respectively. For the year ended 2008 the Company reported basic and diluted earnings per share of $0.59 and $0.58, respectively. Earnings were negatively impacted on a year over year basis due in large part to the substantial increase in provisions the Bank made to the allowance for loan losses. Provision for loan losses was $15.2 million for the year ended December 31, 2010 compared to $5.5 million for the same period for 2009. The Allowance for Loan and Lease Losses (the “ALLL”) was $11.0 million and $3.4 million at December 31, 2010 and December 31, 2009, respectively. As a percent of total gross loans, the ALLL was 5.84% and 1.67% at December 31, 2010 and December 31, 2009, respectively.

Net Interest Income

Net interest income is the Company’s largest source of operating income and is derived from interest and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The net interest margin (NIM) is the amount of net interest income expressed as a percentage of average earning assets. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities. Factors considered in the analysis of net interest income are the composition and volume of earning assets and interest-bearing liabilities, the amount of non-interest-bearing liabilities, non-accruing loans, and changes in market interest rates.

Net interest income for the year ended December 31, 2010 was $10.3 million compared to $10.8 million and $11.4 million for the years ended December 31, 2009 and December 31, 2008, respectively. This represents a year over year decrease of 4.9% and 5.0%. Total interest income decreased $1.3 million in 2010 and interest expense decreased $.7 million compared to the same period in 2009. The decrease in interest income was primarily due to a 50 basis point decrease in the yield on average loans and to the decrease of 116 basis points in the yield on investment securities. The volume of average loans remained relatively static with only an average increase of $1.8 million, however, the average amount of loans on non-accrual increased by more than $18.9 million. The foregone interest on this level of loans in 2010 and 2009 was approximately $1.0 million and $.1 million, respectively. The impact of the large amount of average non-accrual loans in 2010 to the yield on average loans represents the entire 50 basis point decrease in yield over the previous year. Further, this created a negative impact to the NIM of 41 basis points which is 8 basis points higher than the variance on a year over year basis.

The net interest margin decreased 33 basis points from 4.49% in 2009 to 4.16% in 2010. The primary reason for this decrease was the decline in the yield on average earning assets noted in the paragraph above that was offset to some degree by the decrease in total interest bearing liabilities. Further, lower interest rates on new investments that were purchased to replace previous investments that were either sold, matured or called, decreased the average investment yield 116 basis points from 4.03% at December 31, 2009 to 2.87% for the same period in 2010.

Total interest income and fees produced a 5.08% yield on average earning assets for 2010, 5.74% for 2009 and 6.77% in 2008. The average loan to average deposit ratio for 2010 was 82.5%, which represents a decrease of 5.3% over the 87.8% average for 2009, which was an increase of 4.0% over the 83.8% average for 2008.

Total interest expense decreased $.7 million or 24.2% from $3.0 million in 2009 to $2.3 million in 2010 and also decreased from $3.9 million in 2008 to $3.0 million in 2009. The decrease in total interest expense in 2010 was due to management action to re-price all deposit categories while remaining competitive in the primary market. The soft loan demand and decreasing loan portfolio allowed management to aggressively re-price with the anticipation of some decrease in higher cost deposits. While average deposits increased overall in 2010 from 2009, actual balances decreased by approximately $4.9 million with time deposits decreasing by $7.2 million. This would be reflective of management’s re-pricing actions that occurred in the last four months of 2010. The rate paid on interest-bearing liabilities decreased 55 basis points from 1.82% in 2009 to 1.27% in 2010.

The following table shows the composition of average earning assets and average interest-bearing liabilities, average yields and rates, and the net interest margin for the years ended December 31, 2010, 2009 and 2008.

	Year Ended December 31
	2010								2009								2008
	(dollars in thousands)								(dollars in thousands)								(dollars in thousands)
	Average					Yield/			Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Loans	$	201,037		$	11,456		5.70	%	$	199,228		$	12,355		6.20	%	$	177,988		$	12,994		7.30	%
Investment securities		38,978			1,117		2.87	%		37,019			1,491		4.03	%		46,440			2,258		4.86	%
Federal funds sold		7,554			14		0.19	%		5,082			5		0.10	%		1,309			24		1.83	%

Total average interest-earning assets		247,569			12,587		5.08	%		241,329			13,851		5.74	%		225,737			15,276		6.77	%
Other assets		25,967								25,402								26,120
Less allowance for loan losses		(8,082	)							(2,407	)							(1,739	)
Total average assets	$	265,454							$	264,324							$	250,118

Liabilities and Shareholders' Equity:
Interest Bearing Liabilities:
Deposits
Interest-bearing demand – NOW	$	13,517		$	32		0.24	%	$	13,628		$	49		0.36	%	$	12,636		$	41		0.32	%
Money Market		44,133			539		1.22	%		32,196			589		1.83	%		26,070			541		2.08	%
Savings		28,195			65		0.23	%		27,387			68		0.25	%		26,166			88		0.34	%
Time certificate of deposits		89,371			1,523		1.70	%		82,723			2,046		2.47	%		71,671			2,605		3.63	%
Total average interest-bearing deposits		175,216			2,159		1.23	%		155,934			2,752		1.76	%		136,543			3,275		2.40	%

Short-term borrowings		19			-		0.00	%		3,177			79		2.49	%		6,612			191		2.89	%
Long -term borrowings		5,883			132		2.24	%		6,555			190		2.90	%		7,106			411		5.78	%
Total interest-bearing liabilities		181,118			2,291		1.26	%		165,666			3,021		1.82	%		150,261			3,877		2.58	%

Demand deposits		68,590								70,935								75,752
Other liabilities		1,802								2,281								2,170
Shareholders' equity		13,944								25,442								21,935
Total average liabilities and shareholders' equity	$	265,454							$	264,324							$	250,118

Net interest income				$	10,296							$	10,830							$	11,399
Net interest margin							4.16	%							4.49	%							5.05	%

Nonaccrual loans are included in the calculations of the average balances of loans and non-accrued interest is excluded.

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

	Year Ended December 31, 2010									Year Ended December 31, 2009									Year Ended December 31, 2008
	over									over									over
	Year Ended December 31, 2009									Year Ended December 31, 2008									Year Ended December 31, 2007
	Increase (Decrease) Due to									Increase (Decrease) Due to									Increase (Decrease) Due to
	Change in (000's)									Change in (000's)									Change in (000's)
	Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change
Interest-bearing Assets:
Net Loans		111			(1,010	)		(899	)		1,421			(2,060	)		(639	)		1,228			(3,265	)		(2,037	)
Investment Securities		75			(449	)		(374	)		(415	)		(352	)		(767	)		(127	)		(53	)		(180	)
Federal funds sold		3			6			9			20			(39	)		(19	)		(121	)		(105	)		(226	)
Interest-earning deposits		-			-			-			-			-			-			-			-			-
Total interest income		189			(1,453	)		(1,264	)		1,026			(2,451	)		(1,425	)		980			(3,423	)		(2,443	)

Interest-bearing Liabilities:
Interest-bearing demand – NOW		-			(17	)		(17	)		3			5			8			(3	)		(11	)		(14	)
Money Market		180			(230	)		(50	)		117			(69	)		48			32			(213	)		(181	)
Savings		2			(5	)		(3	)		8			(28	)		(20	)		(1	)		(200	)		(201	)
Time Certificates of deposit		154			(676	)		(522	)		360			(919	)		(559	)		163			(715	)		(552	)
Short-term borrowings		(79	)		-			(79	)		(88	)		(24	)		(112	)		167			(27	)		140
Long-term borrowings		(20	)		(38	)		(58	)		16			(237	)		(221	)		16			(155	)		(139	)

Total interest expense		237			(966	)		(729	)		416			(1,272	)		(856	)		374			(1,321	)		(947	)

Interest differential or net interest income	$	(48	)	$	(487	)	$	(535	)	$	610		$	(1,179	)	$	(569	)	$	606		$	(2,102	)	$	(1,496	)

Noninterest Income

Noninterest income totaled $1.6 million for the year ended December 31, 2010 compared to $1.2 million for the same period in 2009. That represents an increase of $.4 million or 30.3%. The increase was primarily due to the gain on sale of investment securities totaling $.6 million in 2010 compared to a gain on sale of investment securities of $.2 million in 2009. The Bank also had a gain on sale of securities in 2008 of $.1 million.

Service charges on deposit accounts totaled $.5 million, which represents a decrease of $38 thousand or 7.4% for the year ended December 31, 2010 compared to the same period in 2009. This category also experienced a $37 thousand decrease in 2009 from that reported in 2008. The decrease in services charges was primarily due to the decrease in non sufficient fund fees collected.

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

Noninterest Expense

Noninterest expense increased $.8 million or 8.0% in 2010 over 2009 from $9.9 million to $10.7 million as compared to an increase of $.1 million or 1.0% in 2009 over 2008. The overall increase can be largely attributed to the $.2 million increase in FDIC premiums and $.6 million increase in costs associated with OREO including the write down of value.

Regulatory assessment fees for the year ended December 31, 2010 were $.7 million which reflects an increase of $.2 million or 40.3% compared to $.5 million for the same period in 2009. The increase in premiums on a year over year basis is even in the absence of a special one-time fee assessed in June 2009 of $.1 million. The special assessment was levied against all financial institutions to replenish the FDIC’s deposit insurance fund. The FDIC increased the deposit insurance premium during the last two quarters of 2010 as a result of the Written Agreement. The Bank expects to have premiums of up to $.9 million in 2011.

Salaries and related expenses decreased $.2 million or 3.4% from $5.4 million in 2009 to $5.2 million in 2010 compared to a decrease of $.3 million or 5.2% between 2009 and 2008. The decrease in 2010 compared to 2009 is the result of a continued salary freeze and the reduction of staff through attrition. The decrease for 2009 over 2008 is attributed to the retirement of Larry H. Putnam, the freezing of officer salaries and the reduction in salary continuation plan expense due to the retirement of Mr. Putnam.

Occupancy expense remains relatively static with only a minor decrease of $16 thousand in 2010 compared to 2009. For the year ended December 31, 2009 occupancy expense was $11 thousand greater compared to the same period in 2009. The Bank owns all four facilities and provides for the appropriate upkeep to maintain the value of the properties.

Equipment expense for the years ended December 31, 2010, 2009 and 2008 totaled $.6 million, $.6 million and $.7 million, respectively. The Bank has not made any major purchases of equipment over the past three years and the declining expense associated with equipment is reflective of full depreciation for older items.

Professional services for the years ended December 31, 2010, 2009 and 2008 totaled $.8 million, $.6 million and $.6 million, respectively. During 2010, the Bank increased the scope and frequency of independent third party loan quality review that accounted for approximately $42 thousand in expense. In addition, with the regulatory issues facing the Bank, additional costs of $177 thousand over that experienced in 2009 were incurred for legal services.

Data processing expense for the years ended December 31, 2010, 2009 and 2008 remained static at approximately $.5 million for each year.

Office expenses for the years ended December 31, 2010, 2009 and 2008 experienced only small increases of $7 thousand and $21 thousand, respectively. These small increases were driven primarily by telephone expenses.

Messenger and courier expenses decreased for the years ended December 31, 2010, 2009 and 2008 have been decreasing by small amounts primarily due to the Bank switching to electronic cash letters.

Other expense increased $124 thousand or 44.3% for the year ended December 31, 2010 compared to the same period in the 2009. This was driven by increased loan related costs of $55 thousand, the valuation of repossessed other assets of $28 thousand and the excise tax cost for three surrendered BOLI policies insuring terminated employees of $24 thousand. Most other line items within the category had smaller increases on a year over year basis.

The Company’s efficiency ratio for 2010 was 89.5% compared to 81.8% and 78.0% in 2009 and 2008, respectively. The negative impact to the efficiency ratio is driven by the decrease in net interest income along with increases in non-interest expense.

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

Income Taxes

As a result of the increase in the Bank’s reported losses, during the first quarter of 2010 we increased the valuation allowance on deferred tax assets because the benefit of such assets is dependent on future taxable income. As a result, income tax expense for the year ended December 31, 2010 was $807,000 despite the pre-tax losses reported. As the Company implements plans to return to profitability, future operating earnings, if any, would benefit from significant net operating loss carry-forwards.

The income tax expense (benefit) was ($1.4) million in 2009 and $.6 million 2008. The effective tax rate was 44.0% in 2009 as compared to 35.7% in 2008.

Financial Condition

At December 31, 2010 and 2009, the Company’s consolidated total assets totaled $249.8 million and $269.9 million, respectively. This represents a decrease of $20.1 million or 7.5% that was driven by a decreasing loan portfolio as the result of soft demand, net charge-offs and the Bank’s restrictions to make loans that would exacerbate the already high regulatory CRE levels.

At December 31, 2010 and 2009, the Company’s total deposits totaled $233.9 million and $238.7 million, respectively. This represents a decrease of $4.9 million or 2.0%. This decrease was the result of a planned effort to reduce high cost deposit products, specifically in the absence of the need for funding loan demand. The re-pricing efforts extended to all interest bearing deposit products in the last four months of the year while continuing to remain competitive with rates in the primary market.

Securities available for sale totaled $32.5 million and $41.0 million at December 31, 2010 and 2009, respectively. The decrease was the result of principal pay downs, maturities, calls and sales, net of new purchases.

Loan Portfolio

At December 31, 2010 and 2009, total gross loans outstanding were $188.4 million and $202.2 million, respectively. This represents a decrease of $13.8 million or 6.8% in 2010 compared to 2009. The decrease is the direct result of soft loan demand and $7.6 million in net charge offs. A decline in current economic conditions has had an adverse effect on the demand for new loans even as rates declined. It is also understood that the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans has had a negative impact on the origination of quality loans.

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

	Year Ended December 31
	2010			2009			2008			2007			2006
	(dollars in thousands)
Commercial	$	34,232		$	41,744		$	41,478		$	38,017		$	36,407
Real Estate – construction		38,143			47,458			52,389			47,819			55,307
Real Estate – other		114,332			111,183			94,372			81,895			78,757
Consumer		1,663			1,783			1,415			1,237			1,604

Total gross loans		188,370			202,168			189,654			168,968			172,075
Less: unearned fees		(621	)		(683	)		(712	)		(676	)		(741	)
Less: allowance for loan losses		(10,999	)		(3,386	)		(2,310	)		(1,673	)		(1,654	)

Total net loans	$	176,750		$	198,099		$	186,632		$	166,619		$	169,680

Weighted average yield on loans for the year		5.7	%		6.2	%		7.3	%		9.2	%		9.1	%

A significant portion of the loan portfolio of the Company is collateralized by real estate. At December 31, 2010, real estate served as the principal source of collateral with respect to 80.9% of the Company’s loan portfolio.

Real estate construction and other real estate loans equaled $152.5 million or 80.9% of the total loan portfolio and $158.6 million or 78.5% of the total loan portfolio at December 31, 2010 and 2009, respectively. Other real estate loans are comprised of loans to individuals for their businesses, consumer real estate loans including home equity lines of credit and loans for farmland. The Company has known for some time that it has a concentration in commercial real estate loans. As a means to more closely monitor this concentration, the Company has instituted the use of NAICS codes, individual commercial real estate stress tests and an overall portfolio stress test to monitor industry trends within its commercial real estate portfolio. As of December 31, 2010, the Company had $92.5 million or 49.1% of its loans in commercial real estate. Of this number, $51.8 million or 56.0% is commercial real estate for owners use. No industry type exceeds 11.0% of total loans. The remaining $40.7 million or 44.0% is commercial real estate for non-owners use. Commercial real estate loans for non-owners use as a percentage of total loans equates to 21.6%. We watch the commercial real estate loans for non-owners use along with changes within our owners use very closely and are familiar with the individuals and projects.

Total real estate loans decreased $6.2 million or 3.9% in 2010 over 2009 compared to an increase of $11.9 or 8.1% in 2009 over 2008. The decrease in total real estate related loans in 2010 is attributable to the construction and land portfolio of the Bank. The loan category of 1-4 family residential construction decreased from $8.1 million at December 31, 2009 to $4.8 million for the same period in 2010. All other construction and land loans decreased from $40.1 million at December 31, 2009 to $33.3 million for the same period in 2010. This aggregate decrease of $10.0 million for the two categories is the net result of $2.0 million in charge-offs net of recoveries, $1.5 migration to OREO and pay downs in the normal course of projects finalizing. The Bank has seen a significant decrease in the number of construction loans in general due to the softening in the real estate market and the Bank’s concentration in real estate loans that due to capital levels are outside of regulatory guidelines and places limits on the Bank’s ability to make originations. Because of the deteriorating economic environment over the past several years, almost half of all construction/land related loans are classified as having some form of credit weakness. This will be discussed further in the section regarding “Nonperforming loans” found elsewhere in this document. The construction loans that are in the portfolio are to customers with a long history of successful developments in our market areas, as well as a long-term relationships with the Bank.

The Company makes commercial loans to small and mid-size businesses for various reasons, including working capital, inventory and equipment. Commercial loans equaled $34.2 million or 18.2% of the total loan portfolio and $41.7 million or 20.6% of the total loan portfolio at December 31, 2010 and 2009, respectively. Commercial loans decreased $7.5 million or 18.0% from 2009 to 2010 compared to an increase of $266 thousand or 0.6% in 2009 over 2008. The decrease for 2010 is the result of $5.0 million in charge-offs net of recoveries and pay downs in the normal course of business and the lack of demand during distressed economic times. This area of the portfolio has experienced the largest dollar and percentage of charge offs due to the economic stress on borrowers combined with the typical lack of real property as collateral. This will be discussed further in the section regarding “Nonperforming loans” found elsewhere in this document.

Consumer and other loans equaled $1.7 million or 0.9% of the total loan portfolio at December 31, 2010 compared to $1.8 million or 0.9% at December 31, 2009. Consumer loans increased $368 thousand or 26.0% in 2009 over 2008.

The Company had undisbursed loans totaling $31.6 million, $43.1 million, and $57.2 million as of December 31, 2010, December 31, 2009 and December 31, 2008, respectively. Standby Letters of Credit accounted for $1.6 million, $1.3 million and $3.1 million of the undisbursed loans as of December 31, 2010, December 1, 2009 and December 31, 2008, respectively. The Company uses the same credit policies in making these commitments as is done for all of its lending activities. As such, the credit risk involved in these transactions is the same as that involved in extending loan facilities to customers.

The following table sets forth the amount of total gross loans outstanding at December 31, 2010 by contractual maturity date:

			After One
	One Year		Year Through		After
	or Less		Five Years		Five Years		Total
	(dollars in thousands)
Commercial	$	16,986	$	9,363	$	7,883	$	34,232
Real Estate - construction		19,512		14,204		4,427		38,143
Real Estate - other		4,226		14,958		95,148		114,332
Consumer		966		274		423		1,663
Total Gross Loans	$	41,690	$	38,799	$	107,881	$	188,370

The following table sets forth the amount of total gross loans outstanding at December 31, 2010 by sensitivity to interest rates and re-pricing opportunities:

			After One
	One Year		Year Through		After
	or Less		Five Years		Five Years		Total
	(dollars in thousands)
Commercial	$	24,041	$	10,009	$	182		34,232
Real Estate - construction		34,054		4,089		-		38,143
Real Estate - other		61,883		52,309		140		114,332
Consumer		419		480		764		1,663
Total Gross Loans	$	120,397	$	66,887	$	1,086	$	188,370

Fixed Rate Loans	$	10,912	$	7,837	$	1,086	$	19,835
Variable Rate Loans		109,485		59,050		-		168,535
Total Gross Loans	$	120,397	$	66,887	$	1,086	$	188,370

Total loans on non-accrual at $23.9 million are considered to be immediately re-priceable in the table above.

The Bank has access to an Asset/Liability Management system that models various interest rate environments for all rate sensitive assets and liabilities. At December 31, 2010, the simulation indicated that a +100 basis point move in rates would increase interest income on loans by approximately $.5 million. This is primarily the result of a considerable number of loans currently at floors significantly higher that the current prime rate.

Troubled Debt Restructurings

The Bank has twenty-five loans to fourteen borrowers totaling $16.0 million which were considered Troubled Debt Restructurings (TDR’s) as of December 31, 2010.

The loan categories and Interest Income received during 2010 are as follows:

	Principal Balance		Interest Paid			Interest Earned
	(dollars in thousands)
Residential Real Estate	$	614	$	-		$	21
Commercial Property for Owners Use		1,282		-			35
Offsite Development		2,279		-			176
Land		5,632		45			197
Residential Construction 1-4 SFR		557		-			8
Construction-Owner Use		4,343		-			156
Commercial and Industrial		1,269		20			45
Consumer, Other		21		-	#		-

	$	15,997	$	65	#	$	638

As of December 31, 2010 all loans with the exception of three that were considered TDR’s were on non-accrual status. The Bank generally returns loans to accrual status after six monthly payments are made on a timely basis.

Concessions granted by the Bank were reductions in interest rate. Thus far, the concessions granted have allowed the borrowers to retain their properties and/or to continue to operate their business.

Typically Real Estate loans considered TDR’s are measured for impairment utilizing current appraisals to determine the fair value of the collateral with any deficiency charged off during the period of measurement. The Bank has complied with this in all cases but one where the borrower had additional means of repayment and the discounted cash flow method was used to determine impairment. The deficiency as a result of the measurement at December 31, 2010 was $2.5 million and is carried as a valuation allowance within the allowance for loan losses.

Nonperforming loans

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

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

	Year Ended December 31
	2010		2009		2008		2007		2006
	(dollars in thousands)
Nonaccrual loans:
Commercial	$	2,437	$	221	$	714	$	113	$	-
Real estate		21,408		6,186		900		2,062		-
Consumer		100		-		-		-		-

Total		23,945		6,407		1,614		2,175		-

Loans 90 days or more past due and still accruing:
Real estate		-		-		-		-		-
Consumer		-		-		-		-		-
Commercial		-		-		-		-		550

Total		-		-		-		-

Filing Compare · Santa Lucia Bancorp