Santa Lucia Bancorp 2009 Annual Report

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Santa Lucia Bancorp

Message from the President

Dear Shareholders, Customers and Friends,

In my letter to the shareholders last year I stated that we were looking forward to the challenges of 2009. At that time I had no idea how challenging 2009 would actually be. In looking back at one of the most severe economic downturns in my 47 year banking career, the Company found itself in the unfamiliar territory of reporting an annual net loss for the first time in 22 years. The fact that all of the independent banks in our market area likely experienced net losses for the year provides little comfort as this is not the kind of performance a bank with our history, experience and strength finds satisfactory. In this coming year, we are dedicated to increasing the financial strength of our Company while continuing to provide the safest and highest quality products and services to our customers.

The Company’s profitability declined from a net profit of $1,138,904 at December 31, 2008 to a net loss of $1,825,475 for the same period in 2009. Several factors contributed to this decline in profitability including an increase in non-performing loans, net loan losses, and substantially increased allocations to the allowance for loan losses.  In addition, there was a significant increase to the quarterly FDIC assessments, coupled with a large special assessment that was imposed on all financial institutions by the FDIC to increase its reserves. Our problem credits remain centered in our real estate portfolio where we were required to write down the collateral value of several loans due to the decline in the real estate market. Many of these write-downs arose and were addressed in the fourth quarter of 2009.  Further, our loan portfolio continued to grow during 2009 which also contributed to the need to increase the overall level of the allowance for loan losses. The allowance stood at $3.4 million or 1.67% of gross loans at year end 2009 compared to $2.3 million or 1.22% of gross loans at year end 2008.

John C. Hansen, President and Chief Executive Officer

Our history has always been to have conservative banking practices, particularly in our lending, and last year was no exception. However, the severity and depth of the current recessionary climate tested our experience and has required us to redouble our efforts. As we move into the new year, we have made significant progress toward improving our problem loans and strengthening our overall credit administration. To address all of our needs we have reorganized our credit administration, tightened our procedures and strengthened credit administration with the addition of a Senior Vice President with 15 years of credit experience who is familiar with the lending philosophy of Santa Lucia Bank.

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Santa Lucia Bancorp’s Board of Directors. Standing left to right—John C. Hansen, President and Chief Executive Officer, Jerry W. DeCou III, Chairman of the Board, Larry H. Putnam, Douglas C. Filipponi, Vice Chairman of the Board.

Seated left to right—Paul G. Moerman, D. Jack Stinchfield, Jean Hawkins, Stanley R. Cherry and Khatchik H. Achadjian.

There was some good news in 2009. We are pleased to report that the Company experienced substantial increases in both loans and deposits during the year. Total loans, net of unearned income increased 6.64% during the year to $201,484,990 at year end December 31, 2009 and total deposits increased 12.44% to $238,722,524 at year end December 31, 2009. This coupled with our strong capital position puts us in a good position to move forward in 2010.

While we are not sure that our local economy has completely turned the corner, we are cautiously optimistic as we move into the year. We are committed to continue to pursue our prudent, conservative banking practices upon which this Company was founded and which have held us in good stead over the past 24 years. On behalf of the entire Board of Directors, we extend our thanks to our shareholders for your continued support, to our customers for your business, and to our employees for their continued dedication to providing superior customer service.

John C. Hansen

President and Chief Executive Officer

Executive Management - John McNinch, John C. Hansen, James M. Cowan

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SANTA LUCIA BANK

(a wholly owned subsidiary of Santa Lucia Bancorp)

Executive Management

James M. Cowan, John C. Hansen, John McNinch

JOHN C. HANSEN

President and Chief

Executive Officer

JAMES M. COWAN

Executive Vice President

Chief Administrative Officer

Chief Credit Officer

JOHN McNINCH

Executive Vice President

Credit Administrator

Eager to service your banking needs

Accounting

Julie A. Joslin, Sharon Satterthwaite

SHARON SATTERTHWAITE

Vice President

Controller

JULIE A. JOSLIN

Vice President

Cashier

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Credit Administration

Standing left to right - Claudya Oglesby, John McNinch, James M. Cowan

Seated left to right - Larry Womack, Lila Bogardus

JAMES M. COWAN

Executive Vice President

Chief Administrative Officer

Chief Credit Officer

JOHN McNINCH

Executive Vice President

Credit Administrator

CLAUDYA OGLESBY

Senior Vice President

Credit Administration

LARRY WOMACK

Vice President

Assistant Credit Administrator

LILA BOGARDUS

Note Department Manager

Operations

Melodee Fontana, George Garcia, Kristie Keller

MELODEE FONTANA

Senior Vice President

Operations Administrator

KRISTIE KELLER

Vice President

Central Operations

GEORGE GARCIA

IT Manager

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Atascadero Office

7480 El Camino Real, Atascadero, California

Atascadero Officer Team

Jim Kelley, Karen Sampson, Kim Donaldson, J. Darren Barnes, Teri Davis

TERI DAVIS

Senior Vice President

Manager

KIM DONALDSON

Vice President

Operations Officer

JIM KELLEY

Vice President

Loan Officer

J. DARREN BARNES

Assistant Vice President

Loan Officer

KAREN SAMPSON

Assistant Operations Officer

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Paso Robles Office

1240 Spring Street, Paso Robles, California

Paso Robles Officer Team

Robert Covarrubias, Cheryl Mumford, Ryun McCrory, Joshua R. Bivin

ROBERT COVARRUBIAS

Senior Vice President

Manager

RYUN McCRORY

Vice President

Loan Officer

JOSHUA R. BIVIN

Vice President

Loan Officer

CHERYL MUMFORD

Assistant Vice President

Operations Officer

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Arroyo Grande Office

1530 East Grand Avenue, Arroyo Grande, California

Arroyo Grande Officer Team

Richard Allen, Michael W. McKenzie, Regina M. Sheldon, Jennifer Bassi Ginder

MICHAEL W. McKENZIE

Vice President

Manager

RICHARD ALLEN

Vice President

Loan Officer

JENNIFER BASSI GINDER

Vice President

Operations Officer

REGINA M. SHELDON

Assistant Vice President

Loan Officer

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Santa Maria Office

1825 South Broadway, Santa Maria, California

Santa Maria Officer Team

Leah T. West, James P. Burubeltz, Stella Martinez, Robert J. McConaghy

LEAH T. WEST

Vice President

Manager

JAMES P. BURUBELTZ

Vice President

Loan Officer

STELLA MARTINEZ

Operations Officer

ROBERT J. McCONAGHY

Loan Officer

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Santa Lucia Bancorp and Subsidiary

Consolidated Selected Financial Information

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Santa Lucia Bancorp and Subsidiary

General

Santa Lucia Bancorp (the “Company”) (OTC Bulletin Board SLBA.OB) 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.” The Bank was organized as a national banking association on December 19, 1984 and commenced operations on August 5, 1985. The Bank converted from a national to a California state-chartered bank on May 30, 1997.

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

The Bank’s operating policy since its inception has emphasized general commercial banking. Most of the Bank’s customers are small to mid-sized businesses and individuals. The business of the Bank emphasizes serving the needs of local businesses, professionals, and wage earners. The Bank provides services designed to meet the needs of the various segments of the markets it serves. These services include a full line of business loans, business leases, personal loans and deposit products.

Management’s Discussion and Analysis and Results of Operations

Certain statements contained in this report, including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company 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. Given these uncertainties, shareholders are cautioned not to place undue reliance on such forward-looking statements.  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.

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

Overview

The following sections set forth an analysis of the significant operating changes, business trends, financial condition, earnings, capital position and liquidity that have occurred in the three-year period ended December 31, 2009.

Consolidated Results of Operations

Highlights for the year ending December 31, 2009 were as follows:

·                  Net Loss for the twelve month period ending December 31, 2009 was $1,825,000 which reflects a decrease of $2,964,000 or 260.3% in net income when compared to a profit of $1,139,000 for the same period in 2008. The primary reason for this decrease was the addition of $5,460,000 to the allowance for loan losses.

·                  Earnings (loss) per common share (on a fully diluted basis) equaled ($1.05) for 2009. This compares to $0.58 in 2008 and $1.51 in 2007.

·                  Total assets, loans and deposits all increased in 2009 over 2008 by 7.2%, 6.1% and 12.4% respectively. Non interest bearing deposits were 29.3% of total deposits compared to 35.4% at year end 2008.

·                  Return on Average Assets equaled (0.69%) for 2009 compared to 0.46% in 2008 and 1.22% in 2007.

·                  Return on Average Equity equaled (7.18%) in 2009 compared to 5.19% in 2008 and 14.87% in 2007.

·                  A cash dividend of $0.25 per share was paid to shareholders in 2009 which represents a decrease of 50.0% compared to total cash dividends of $0.50 per share paid to shareholders in 2008. In 2007, total cash dividends of $0.45   per share were paid to shareholders. In addition, the Company also declared a 2% stock dividend to all shareholders of record as of September 30, 2009 reflecting the Board’s decision to issue stock dividends rather than cash dividends during these difficult economic conditions in order to maintain its high capital levels.

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·                  Total shareholders equity decreased to $23,030,000 as of December 31, 2009 compared to $25,551,000 as of December 31, 2008, representing a 9.9% decrease. Total shareholders equity stood at $21,189,000 as of December 31, 2007. The Company’s capital ratios at December 31, 2009 which were all well above regulatory requirements for “well capitalized” institutions were: Tier 1 Capital to Average Assets 10.28%; Tier 1 Capital to Risk-Weighted Assets 12.54%; and Total Capital to Risk-Weighted Assets 13.87%.

·                  Nonperforming assets increased to $6,835,000 as of December 31, 2009 compared to $1,614,000 for the same period in 2008. Nonperforming loans totaled 3.38% of total gross loans as of December 31, 2009, compared to 0.85% and 1.29% as of the same period in 2008 and 2007. The allowance for loan losses to total loans increased to $3,386,000 or 1.67% as of December 31, 2009 compared to $2,310,000 or 1.22% in 2008 and $1,673,000 or 0.99% in 2007.

In 2009 the Company recorded a net loss of $1,825,000, which reflects a decrease of $2,964,000 or 260.3% in net income over the previous year. In 2008, earnings were $1,139,000, a decrease of 62.1% from 2007’s earnings of $3,003,000. Earnings per common shares are calculated by using the Company’s net earnings (loss) of $1,825,000 less preferred stock dividends of $200,000 less accreted discount on preferred stock of $40,199 for net earning (loss) available to common shareholders of $2,065,674. Basic net earnings (loss) per common share in 2009 were ($1.05) compared with $0.59 and $1.55 for 2008 and 2007, respectively. This reflects a decrease from 2008 to 2009 of 278.0% and 61.9% from 2008 to 2007. Fully diluted earnings (loss) per common share for 2009, 2008, and 2007 were ($1.05), $0.58, and $1.51, respectively, a 281.0% decrease from 2008 to 2009 and 61.6% from 2008 to 2007. This is the first year end net loss that the Company has experienced in the last twenty two years.

Contributing largely to the decline in profitability was the $5,460,000 provision to the allowance for loan losses in 2009. This provision was made to cover net loan losses of $1,567,000, write-downs of the collateral value of several nonperforming loans of $2,817,000 required due to the decline in real estate values in the local market, the increase in nonperforming loans and the increase in new loans. Also contributing to the net loss for the year ended 2009 was the decrease in the net interest margin from 5.05% in December of 2008 to 4.49% for the same period in 2009, as well as a significant increase to the quarterly FDIC assessment coupled with a one time special assessment imposed on all financial institutions by the FDIC to increase reserves.

The Company paid cash dividends on its common shares totaling $0.25 per share and a 2% stock dividend during 2009 compared to $0.50 cash dividend paid in 2008 and $0.45 cash dividend paid in 2007. Return on average shareholder’s equity was (7.2%) in 2009 compared to 5.2% in 2008 and 14.9% in 2007. Return on average assets was (0.69%) in 2009 compared to 0.46% in 2008 and 1.22% in 2007.

The Company believes that the local economies in which it operates, Atascadero, Paso Robles, Arroyo Grande, and Santa Maria continue to decline as the loss of jobs increase, businesses cash flows continue to decline as a result of reduced consumer spending and the real estate market continued to suffer. During 2009 the company saw its first signs of deterioration in the real estate loan portfolio. Management continued to evaluate the loan portfolio as market values continued to decline. Based on managements’ evaluations the Company placed eight loans totaling $6,407,000 on nonaccrual, reversed accrued interest of approximately $179,000 and charged-off $4,384,000. The Company had one “other real estate owned” OREO property at December 31, 2009 of $428,000 and booked a second OREO property of $427,000 in January 2010. Management believes that it identified and wrote down loan balances on all nonperforming loans to reflect current market values on the problem loans in the loan portfolio existing at this time. As of December 31, 2009 managements’ analysis of the allowance for loan losses was considered adequate. However, there is no guarantee that 2010 will not require further adjustments. Management will monitor and reassess the loan portfolio throughout the year.

The University of California Santa Barbara Economic Forecast Project reports that the local real estate markets will continue to decline through the first quarter of 2010 and at best California may show signs of slow growth averaging 1.0% to 2.0% in 2010 and 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. Weakness in the commercial real estate sector is still intensifying. The decline in the labor market has produced a rapid decline in demand for office and industrial space and many retail store closings. However, both San Luis Obispo and Santa Barbara Counties have unemployment rates below the State and National averages.

Net Interest Income

Net interest income for the year ended December 31, 2009 decreased $569,000 or 5.0% to $10,830,000 compared to $11,399,000 and $12,895,000 for the years ended December 31, 2008 and December 31, 2007, respectively. Total interest income decreased $1,425,000 in 2009 while interest expense decreased $856,000 during the same period in 2009. The decrease in interest income was primarily due to a 103 basis point decrease in the yield on average earning assets from 6.77 % in 2008 to 5.74% in 2009, resulting from the increased amount of loans placed on nonaccrual and the lower rates received on the overall portfolio caused by a decline in the prime lending rate during the fourth quarter of 2008 of 1.75%.

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The net interest margin decreased 56 basis points from 5.05% in 2008 to 4.49% in 2009. The primary reason for this decrease was the decline in the yield on average earning assets coupled with interest reversals of $179,000 for loans that were placed on nonaccrual. Of the loans placed on nonaccrual, 5 loans were written down $2,818,000 due to the deterioration in real estate collateral values, 23 loans totaling $1,567,000 were charged off and one property for $428,000 was transferred to OREO. 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 83 basis points from 4.86% at December 31, 2008 to 4.03% for the same period in 2009.

Net interest income is the Company’s largest source of operating income and is derived from interest and fees received on interest earning assets, less interest expense incurred on interest bearing liabilities. The most significant impact on the Company’s net interest income between periods is derived from the interaction of changes in the volume of and rates earned or paid on interest earning assets and interest bearing liabilities.

Interest income decreased $1,425,000 or 9.3% from $15,276,000 in 2008 to $13,851,000 in 2009. This is compared to a decrease of $2,443,000 or 13.8% from 2007 to 2008 and an increase of $692,000 or 4.1% from 2006 to 2007. The decrease in interest income was primarily due to a 103 basis point decrease in the yield on average earning assets from 6.77% in 2008 to 5.74% in 2009, resulting from the reversal of approximately $181,000 in interest from loans placed on nonaccrual along with lower rates received on the overall portfolio caused by a decline in the prime lending rate during the fourth quarter of 2008 of 1.75%.

Total interest and fees produced a 5.7% yield on average earning assets for 2009, 6.8% for 2008 and 8.1% in 2007. The average loan to deposit ratio for 2009 was 87.8%, which represents an increase of 4.7% over the 83.8% average for 2008 which was an increase of 10.2% over the 76.1% average for 2007.

Total interest expense decreased $856,000 or 22.1% from $3,877,000 in 2008 to $3,021,000 in 2009 compared to a decrease of $947,000 or 19.6% from 2007 to 2008. The decrease in total interest expense in 2009 was due to decreasing interest rates for all deposit categories despite an overall increase in deposits for the year of 12.4%. The rate paid on interest-bearing liabilities decreased 76 basis points from 2.58% in 2008 to 1.82% in 2009.

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, 2009, 2008 and 2007. Nonaccrual loans are included in the calculation of the average balances of loans, and nonaccrued interest is excluded.

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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:

Noninterest Income

Noninterest income totaled $1,235,000 compared to $1,111,000 for the same period in 2008. That represents an increase of $124,000 or 11.2%. The increase was primarily due to the sale of $5,176,000 in mortgage backed securities which created a net gain of $225,000 compared to $108,000 for the same period in 2008. In addition, dividends on cash surrender value life insurance increased $10,000 and other income increased $35,000.

Service charges on deposit accounts totaled $517,000, which represents a decrease of $37,000 or 6.6% compared to a decrease of $29,000 or 5.0% over the same period 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 $102,000 or 1.0% in 2009 over 2008 from $9,763,000 to $9,865,000 as compared to an increase of $734,000 or 8.1% in 2008 over 2007. The overall increase can be largely attributed to the FDIC special assessment levied on all banks coupled with the increase in the quarterly assessment fees and the participation in the TGLP Transaction Account Guarantee Program.

Regulatory assessment fees for the year ended December 31, 2009 were $511,000, which reflects an increase of $343,000 or 204.2% compared to $168,000 for an increase of $104,000 or 162.5% over the same period in 2008. This was primarily due to the $120,000 special FDIC assessment levied on the bank during the first six months of 2009; the special assessment was levied against all financial institutions to replenish the FDIC’s deposit insurance fund. The FDIC also increased the deposit insurance premium during the last three quarters of 2009 and the additional expense of $9,000 for the participation in the TGLP Transaction Account Guarantee Program.

Salaries and related expenses decreased $291,000 or 5.2% from $5,650,000 in 2008 to $5,359,000 in 2009 compared to an increase of $391,000 or 7.4% between 2007 and 2008. The decrease 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 for the year ended December 31, 2009 totaled $663,000, which reflects an increase of $10,000 or 1.6% compared to an increase of $25,000 or 3.9% over the same period in 2008. This was primarily due to the depreciation of building repairs.

Equipment expense for the year ended December 31, 2009 totaled $633,000, which reflects a decrease of $37,000 or 5.5% compared to an increase of $4,000 or 0.6% over the same period in 2008.

Professional services for the year ended December 31, 2009 totaled $638,000, which reflects an increase of $37,000 or 6.2% compared to an increase of $174,000 or 40.9% over the same period in 2008. This was primarily due to the increases in legal fees related to the collection of nonaccrual loans.

Data processing expense for the year ended December 31, 2009 totaled $520,000, which reflects an increase of $16,000 or 3.1% compared to an increase of $16,000 or 3.3% from the same period in 2008. This was primarily due to the continued growth of the Company.

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Office expenses for the year ended December 31, 2009 totaled $413,000, which reflects an increase of $21,000 or 5.3% compared to an increase of $30,000 or 8.2% for the same period in 2008.

Messenger and courier expenses decreased $28,000 or 22.5% from $123,000 in 2008 to $95,000 in 2009. This decrease was due to the Bank switching to electronic cash letters.

Other expense increased $31,000 or 12.6% from $249,000 in 2008 to $280,000 in 2009. This increase was due to additional loan related expenses associated with the collection of nonaccrual loans coupled with Other Real Estate Owned expenses.

The Company’s efficiency ratio for 2009 was 81.8%. This represents a worsening from the 2008 efficiency ratio of 78.0%, which was a worsening from the 2007 ratio of 64.7%. The decrease in the efficiency ratio was primarily due to the decrease in net interest income coupled with the increase in non interest expense.

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

Income Taxes

The provision for income tax was ($1,434,000) in 2009, $633,000 in 2008 and $1,934,000 in 2007. The effective tax rate was (44.0%) in 2009 as compared to 35.7% in 2008 and 39.1% in 2007.

Financial Condition

In 2009, the Company’s consolidated total assets increased to $269,923,000 compared to $251,880,000 in 2008 and $248,640,000 in 2007 for increases of 7.2%, 1.3% and 3.3% respectively.

Total deposits increased $26,406,000 to $238,723,000 compared to $212,317,000 in 2008 and $212,718,000 in 2007 for an increase of 12.4% for 2009, compared to a decrease of 0.2% and 0.1% for 2008 and 2007 respectively. Despite deposit competition continuing to be very strong in both the traditional bank deposits and alternative investments available in the market place the Company’s total deposits increased significantly during the past year. The increase in deposits is largely due to the increased confidence in community banks and the increase in the FDIC insurance limits to $250,000 on Time Certificates of Deposit. The recent trend of customers depositing excess funds into Time Certificates of Deposit or other interest bearing accounts continued throughout 2009. Average time certificates of deposits increased $11,052,000, average money market accounts increased $6,126,000 and average savings increased $1,221,000 in 2009 compared to 2008. Despite this trend, the Company had 29.3% of total deposits in non-interest bearing deposits as of December 31, 2009 compared to 35.4% as of December 31, 2008. Non-interest bearing deposits at these levels continue to be above industry averages.

Securities available for sale totaled $40,990,000 at December 31, 2009, compared to $38,470,000 at December 31, 2008 and $56,107,000 at December 31, 2007. This represents an increase of $2,520,000 or 6.5% over December 31, 2008.

Loan Portfolio

Total loans outstanding averaged $199,228,000 in 2009 compared to $177,988,000 in 2008. This represents an increase of $21,240,000 or 11.9% in 2009 compared to an increase of $14,247,000 or 8.7% in 2008. Actual net loans at December 31, 2009 equaled $198,099,000 for an increase of $11,467,000 or 6.1% over 2008

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

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The following table sets forth the amount of total gross loans outstanding at December 31, 2009 by contractual maturity date:

A significant portion of the loan portfolio of the Company is collateralized by real estate. At December 31, 2009, real estate served as the principal source of collateral with respect to 78.5% of the Company’s loan portfolio. A decline in current economic conditions has had an adverse effect on the demand for new loans even as 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 and the market value of the Company’s common stock. Acts of nature, including earthquakes and floods, 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.

Real estate construction and other real estate loans equaled $158,641,000 or 78.5% of the total loan portfolio and $146,761,000 or 77.4% of the total loan portfolio at December 31, 2009 and 2008, 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, 2009, the Company had $90,610,000 or 45.0% of its loans in commercial real estate. Of this number, $53,404,000 or 58.9% is commercial real estate for owners use. No industry type exceeds 10.0% of total loans. The remaining $37,206,000 or 41.0% is commercial real estate for non-owners use. Commercial real estate loans for non-owners use as a percentage of total loans equates to 18.5%. 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 increased $11,879,958 or 8.1% in 2009 over 2008 compared to an increase of $17,047,000 or 13.1% in 2008 over 2007. The increase is spread throughout construction of residential units held for sale, construction of commercial properties and commercial income properties. The Company has seen a significant decrease in the number of residential construction loans, due to the softening in the real estate market. The Company has construction loans to customers with a long history of successful developments in our market areas, as well as a long-term relationship with Santa Lucia Bank. The Company has experience and knowledge in construction lending and does not feel that there is any undue risk to the Company. These loans are secured by real estate, and in general, do not exceed 70% of the appraised value on commercial residential real estate or 75% on an individual’s personal residence.

The Company makes commercial loans to small and mid-size businesses for various reasons, including working capital, inventory and equipment. Commercial loans equaled $41,744,000 or 20.6% of the total loan portfolio and $41,478,000 or 21.9% of the total loan portfolio at December 31, 2009 and 2008, respectively. Commercial loans increased $266,000 or 0.6% from 2009 to 2008 compared to an increase of $3,461,000 or 9.1% in 2008 over 2007.

Consumer and other loans equaled $1,783,000 or 0.9% of the total loan portfolio at December 31, 2009 compared to $1,415,000 or 0.7% at December 31, 2008. Consumer loans increased $368,000 or 26.0% in 2009 over 2008 compared to a decrease of $178,000 or 14.4% in 2008 over 2007.

The Company had undisbursed loans totaling $43,105,000, $57,168,000, and $57,326,000 as of December 31, 2009, December 31, 2008 and December 31, 2007, respectively. Standby Letters of Credit accounted for $1,298,000, $3,106,000 and $4,286,000 of the undisbursed loans as of December 31, 2009, December 31, 2008 and December 31, 2007, 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.

Loans with maturities greater than one year at December 31, 2009 totaled $145,812,000 and include approximately $4,754,000 of fixed rate loans or 2.3% of the total loan portfolio compared to $11,291,000 or 6.0% of the total loan portfolio as of December 31, 2008 and $7,704,000 or 4.6% of the total loan portfolio as of December 31, 2007. The balance of the loans that have maturities of one year or less, or are variable rate loans at December 31, 2009 totaled $197,414,000 or 97.7% compared to $178,363,000 or 94.0% as of December 31, 2008 and $161,265,000 or 95.4% as of December 31, 2007. The $97,053,000 in other real estate loans with five years or greater maturities are primarily owner occupied commercial properties.

Overall management of the Bank’s loan portfolio is considered good; however, loans have been adversely affected by the decline in the economy and its impact on our borrowers, especially in the real estate sector. Throughout 2009 the Bank tightened its overall underwriting standards and strengthened credit administration with the addition of a Senior Vice President who is familiar with the lending philosophy of Santa Lucia Bank.

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Troubled Debt Restructurings

The Bank has eight loans to three borrowers totaling $3,768,000, which were considered Troubled Debt Restructurings (TDR’s) as of December 31, 2009.

The loan categories and Interest Income received during 2009 are as follows:

As of December 31, 2009 all loans considered TDR’s were on 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.

The Residential Real Estate loans considered TDR’s were measured for impairment utilizing the expected future cash flows. This method was chosen as each property has a rental contract in place. The borrowers anticipate either selling the properties when the real estate market rebounds or they will obtain long term financing and retain the properties as rentals.

The remaining loans were analyzed utilizing the fair value of the collateral. The borrowers have the properties listed for sale and the Bank expects to receive repayment of the principal balances of the loans from sale proceeds. The determined impairments of these loans were reserved for in the allowance for loan losses, however no direct charge was made as the borrowers have additional repayment sources available should the sale of the collateral be insufficient.

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:

The Company had eight nonperforming loans totaling $6,407,000 as of December 31, 2009, compared to three nonperforming loan totaling $1,614,000 at December 31, 2008 and one nonperforming loan totaling $2,175,000 at December 31, 2007. The increase in nonperforming loans as of December 31, 2009 was a result of the current economic downturn and a reduction in real estate collateral values. For loans that were considered to be impaired, the Bank determined the fair value of the real estate collateral and charged-off the portions of such loans considered uncollectible based on these analyses.

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There are three nonperforming loans in the Commercial and Industrial category totaling $221,000 which are largely secured by real estate.

Nonperforming real estate secured loans consists of five loans totaling $6,186,000, which were written down in the aggregate total of $2,818,000 prior to year end. Two of these loans are on homes built for speculative purposes. The first home has been sold and escrow is expected to close in the first quarter of 2010. The Bank took the second home into “Other Real Estate Owned” OREO in January 2010. There is one loan for an individual’s personal residence within this category. The Bank is working with legal counsel and has begun the foreclosure process. The Bank placed an offsite development loan for a mixed use project on nonaccrual as of December 31, 2009. The development has not progressed and the Bank is exploring options (including legal) at this time. The last loan in this category is an offsite development loan that the Bank has a participation interest in totaling $1,576,000 after write-down. The property is located outside the Bank’s service area. One of the guarantors and the owner of additional collateral that was pledged in support of this loan have filed bankruptcy. The Bank is working with the originating bank and legal counsel to vigorously pursue the collection of this loan from both the borrower and guarantors.

The Company had one “Other Real Estate Owned” OREO property as of December 31, 2009 totaling $428,000 and added another property in the amount of $427,000 for an aggregate total of $855,000 as of January 31, 2010. The first property is actively being marketed for sale at this time with minimal loss anticipated. The second piece of property is currently in escrow and the Company anticipates closure in March 2010 with a minimal loss.