** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington D.C.  20549**

 

**FORM10-QSB**

 
| **ý** | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------|
| ** ** | **for the quarterly period ended September 30,  2004**                                 |

 
| **o**      | **Transition report under Section 13 or 15(d) of  the Securities Exchange Act of 1934 (No fee required)**                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **for the period from                   to                 ** |

 

**CommissionFile Number 0-27666**

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

**Incorporatedin the State of California**

 

**IRSEmployer Identification Number 77-0421107**

 

Address:**  601 Munras Avenue, Monterey,CA  93940**

 

Telephone: **(831) 649-4600**

 

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý                               No  o

 

As of November 3,2004, the Corporation had 1,566,658 shares of common stock out-standing.

 

 

----

 

**PARTI-FINANCIAL INFORMATION**

 

**Item 1.****                                   FINANCIALSTATEMENTS**

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEET

 
| ** **                                                                                                             | ** ** | **SEPTEMBER 30  2004** | ** ** | **DECEMBER 31  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ASSETS:                                                                                                                |       |                   |       |                  |       |
| Cash and Due  From Banks                                                                                               |       | 5,870,000              |       | 4,798,100             |       |
| Federal Funds  Sold                                                                                                    |       | 6,790,000              |       | 12,395,000            |       |
| Total Cash and  Cash Equivalents                                                                                       |       | 12,660,000             |       | 17,193,100            |       |
| Trading Assets                                                                                                         |       | 652,500                |       | 163,300               |       |
| Investment  Securities, available for sale (Note 1)                                                                    |       | 7,003,300              |       | 6,075,500             |       |
| Investment  Securities, held to maturity (Note 1)                                                                      |       | 4,440,400              |       | —                |       |
| Other  Investments                                                                                                     |       | 1,848,300              |       | 1,667,500             |       |
| Loans Held for  Sale                                                                                                   |       | 947,800                |       | 2,347,800             |       |
| Gross Loans  (Note 2)                                                                                                  |       | 89,294,200             |       | 75,528,400            |       |
| Allowance for  Possible Loan Losses (Note 3)                                                                           |       | (911,400               | )          | (774,800              | )          |
| Deferred  Origination Fees                                                                                             |       | (229,200               | )          | (193,000              | )          |
| Net Loans                                                                                                              |       | 88,153,600             |       | 74,560,600            |       |
| Bank Premises  and Equipment, Net                                                                                      |       | 2,224,500              |       | 2,197,700             |       |
| Cash Surrender  Value of Life Insurance                                                                                |       | 2,352,900              |       | 2,251,000             |       |
| Interest  Receivable and Other Assets                                                                                  |       | 3,252,400              |       | 1,415,500             |       |
| Total Assets                                                                                                           |       | 123,535,700            |       | 107,872,000           |       |
|                                                                                                                   |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                            |       |                   |       |                  |       |
| Total Deposits  (Note 4)                                                                                               |       | 92,033,800             |       | 78,132,400            |       |
| Federal Home  Loan Bank Borrowed Funds                                                                                 |       | 14,650,000             |       | 13,750,000            |       |
| Junior  Subordinated Debt Securities                                                                                   |       | 8,248,000              |       | 8,248,000             |       |
| Interest Payable  and Other Liabilities                                                                                |       | 1,354,700              |       | 1,331,100             |       |
| Total  Liabilities                                                                                                     |       | 116,286,500            |       | 101,461,500           |       |
|                                                                                                                   |       |                   |       |                  |       |
| Shareholders’  Equity:                                                                                            |       |                   |       |                  |       |
| Common Stock -  No Par Value  Authorized: 2,500,000 in 2004 and 2003  Outstanding:1,566,658 in 2004 and 1,528,711 2003 |       | 4,630,900              |       | 4,630,900             |       |
| Retained  Earnings                                                                                                     |       | 2,511,900              |       | 1,725,700             |       |
| Accumulated  Other Comprehensive Income (Loss)                                                                         |       | 106,400                |       | 53,900                |       |
| Total  Shareholders’ Equity                                                                                       |       | 7,249,200              |       | 6,410,500             |       |
| Total  Liabilities & Shareholders’ Equity                                                                     |       | 123,535,700            |       | 107,872,000           |       |

 

2

----

 

NORTHERNCALIFORNIA BANCORP, INC.

##### AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
| ** **                                                    | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| INTEREST INCOME:                                              |       |                                 |       |                                |       |   |   |   |   |
| Interest and  Fees on Loans                                   |       | 1,771,100                            |       | 1,360,400                           |       | 4,880,800 |   | 3,769,700 |   |
| Interest on  Investment Securities                            |       | 135,000                              |       | 49,700                              |       | 310,700 |   | 231,100 |   |
| Interest on Federal  Funds                                    |       | 39,700                               |       | 22,700                              |       | 91,600 |   | 74,000 |   |
| Total Interest  Income                                        |       | 1,945,800                            |       | 1,432,800                           |       | 5,283,100 |   | 4,074,800 |   |
|                                                          |       |                                 |       |                                |       |   |   |   |   |
| INTEREST  EXPENSE:                                            |       |                                 |       |                                |       |   |   |   |   |
| Interest-Bearing  Transaction Accounts                        |       | 15,400                               |       | 11,800                              |       | 47,500 |   | 35,900 |   |
| Savings Accounts                                              |       | 21,600                               |       | 15,000                              |       | 60,500 |   | 46,200 |   |
| Time Deposits                                                 |       | 343,200                              |       | 284,000                             |       | 909,500 |   | 862,400 |   |
| Notes Payable  and other                                      |       | 267,600                              |       | 174,800                             |       | 751,700 |   | 489,600 |   |
| Total Interest  Expense                                       |       | 647,800                              |       | 485,600                             |       | 1,769,200 |   | 1,434,100 |   |
|                                                          |       |                                 |       |                                |       |   |   |   |   |
| Net Interest  Income                                          |       | 1,298,000                            |       | 947,200                             |       | 3,513,900 |   | 2,640,700 |   |
| PROVISION FOR  LOAN LOSSES                                    |       | 30,000                               |       | 0                                   |       | 135,000 |   | 75,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |       | 1,268,000                            |       | 947,200                             |       | 3,378,900 |   | 2,565,700 |   |
|                                                          |       |                                 |       |                                |       |   |   |   |   |
| NONINTEREST  INCOME:                                          |       |                                 |       |                                |       |   |   |   |   |
| Service Charges  on Deposit Accounts                          |       | 131,800                              |       | 119,600                             |       | 390,100 |   | 375,900 |   |
| SBA Loan Sales  & Servicing Income                        |       | 227,900                              |       | 127,200                             |       | 628,600 |   | 418,200 |   |
| Other Operating  Income                                       |       | 762,200                              |       | 832,100                             |       | 2,239,400 |   | 2,246,100 |   |
| Total Noninterest  Income                                     |       | 1,121,900                            |       | 1,078,900                           |       | 3,258,100 |   | 3,040,200 |   |
|                                                          |       |                                 |       |                                |       |   |   |   |   |
| NONINTEREST  EXPENSE:                                         |       |                                 |       |                                |       |   |   |   |   |
| Salaries and  Employee Benefits                               |       | 722,400                              |       | 626,200                             |       | 2,240,900 |   | 1,837,800 |   |
| Occupancy and  Equipment Expense                              |       | 156,700                              |       | 124,500                             |       | 430,400 |   | 387,300 |   |
| Professional  Fees                                            |       | 33,800                               |       | 21,900                              |       | 104,300 |   | 70,600 |   |
| Data Processing                                               |       | 102,300                              |       | 87,300                              |       | 287,300 |   | 270,200 |   |
| FDIC & State  Assessments                                 |       | 10,300                               |       | 12,500                              |       | 29,200 |   | 27,400 |   |
| Other Operating  Expenses                                     |       | 791,600                              |       | 790,600                             |       | 2,203,500 |   | 2,103,700 |   |
| Income Tax  Expense                                           |       | 237,600                              |       | 154,000                             |       | 555,200 |   | 342,300 |   |
| Total  Non-interest Expense                                   |       | 2,054,700                            |       | 1,817,000                           |       | 5,850,800 |   | 5,039,300 |   |
| NET INCOME  (LOSS)                                            |       | 335,200                              |       | 209,100                             |       | 786,200 |   | 566,600 |   |
|                                                          |       |                                 |       |                                |       |   |   |   |   |
| Earnings per  common share                                    |       |                                 |       |                                |       |   |   |   |   |
| Primary                                                       |       | 0.214                                |       | 0.139                               |       | 0.502 |   | 0.377 |   |
| Diluted                                                       |       | 0.175                                |       | 0.117                               |       | 0.412 |   | 0.317 |   |

 

3

----

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS

NINE MONTHS ENDEDSEPTEMBER 30, 2004 AND 2003

 
| ** **                                                                         | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES                                              |       |        |       |        |       |
| Net income                                                                         |       | $           | 786,200    |        | $          | 566,600 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |        |       |        |       |
| Depreciation and  amortization expense                                             |       | 143,400     |       | 120,700     |       |
| Realized gain on  sales of available-for-sale securities, net                      |       | (45,300     | )          | (42,000     | )          |
| Amortization of  deferred loan (fees) costs                                        |       | 126,300     |       | 79,100      |       |
| Amortization  (accretion) of discounts and premiums on investment securities       |       | 17,900      |       | (61,600     | )          |
| Gain on sale of  equipment                                                         |       | (1,100      | )          | —      |       |
| Provision for  loan losses                                                         |       | 135,000     |       | 75,000      |       |
| (Increase)  decrease in trading assets                                             |       | (489,200    | )          | (76,900     | )          |
| (Increase)  decrease in interest receivable                                        |       | (69,300     | )          | (35,500     | )          |
| Increase in  other assets                                                          |       | (1,791,900  | )          | 459,200     |       |
| (Increase)  decrease in deferred tax asset                                         |       | (10,700     | )          | 9,500       |       |
| Increase  (decrease) in interest payable                                           |       | (7,700      | )          | (20,900     | )          |
| Increae(decrease)  in other liabilities                                            |       | 31,300      |       | 85,500      |       |
| Net cash  provided by operating activities                                         |       | (1,175,100  | )          | 1,158,700   |       |
|                                                                               |       |        |       |        |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                              |       |        |       |        |       |
| Proceeds from  maturity & sales of investment securities                       |       | 8,416,100   |       | 2,004,000   |       |
| Purchase of  investments                                                           |       | (13,945,400 | )          | (4,043,400  | )          |
| Net (increase)  decrease in loans                                                  |       | (27,577,200 | )          | (7,087,100  | )          |
| Loan purchases                                                                     |       | (7,410,800  | )          | (5,800,000  | )          |
| Loan sales                                                                         |       | 21,133,700  |       | 5,722,000   |       |
| (Increase)  decrease in loans held for sale                                        |       | 1,400,000   |       | (1,177,000  | )          |
| Proceeds from  sale of equipment                                                   |       | 3,900       |       | 2,100       |       |
| Additions to  bank premises and equipment                                          |       | (179,700    | )          | (123,200    | )          |
| Net cash used by  investing activities                                             |       | (18,159,400 | )          | (10,502,600 | )          |
|                                                                               |       |        |       |        |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                              |       |        |       |        |       |
| Net increase  (decrease) in deposits                                               |       | 13,901,400  |       | 5,931,000   |       |
| Proceeds from  borrowings                                                          |       | 8,900,000   |       | 5,827,800   |       |
| Repayments of  borrowings                                                          |       | (8,000,000  | )          | (1,172,200  | )          |
| Proceeds from  exercise of stock options                                           |       | —      |       | 82,500      |       |
| Repurchase of  common stock and stock options                                      |       | —      |       | (21,500     | )          |
| Net cash  provided (used) by financing activities                                  |       | 14,801,400  |       | 10,647,600  |       |
|                                                                               |       |        |       |        |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | (4,533,100  | )          | 1,303,700   |       |
|                                                                               |       |        |       |        |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING                                              |       | 17,193,100  |       | 13,017,100  |       |
|                                                                               |       |        |       |        |       |
| CASH AND CASH  EQUIVALENTS, ENDING                                                 |       | $           | 12,660,000 |        | $          | 14,320,800 |   |

 

4

----

 

See Note 5 forSupplemental Disclosures

 
| ** **                                    | ** ** | **SEPTEMBER 30  2004** | ** ** | **DECEMBER 31  2003** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| (NOTE 1)  INVESTMENT SECURITIES:              |       |                   |       |                  |       |
| Available for  sale:                          |       |                   |       |                  |       |
| Corporate Debt  Securities                    |       | 755,900                |       | 1,841,500             |       |
| Government  National Mortgage Association     |       | 1,521,500              |       | 2,246,100             |       |
| U.S. government  Agencies                     |       | 4,725,900              |       | 1,987,900             |       |
|                                          |       | 7,003,300              |       | 6,075,500             |       |
|                                          |       |                   |       |                  |       |
| Held to  maturity:                            |       |                   |       |                  |       |
| State/Local  Agency                           |       | 4,440,400              |       | —                |       |
|                                          |       |                   |       |                  |       |
| (NOTE 2) GROSS  LOANS:                        |       |                   |       |                  |       |
| Commercial and  Industrial                    |       | 17,543,900             |       | 16,869,700            |       |
| Construction                                  |       | 6,818,200              |       | 5,379,100             |       |
| Real Estate -  Mortgage                       |       | 64,394,100             |       | 52,698,400            |       |
| Installment                                   |       | 485,000                |       | 523,600               |       |
| Government  Guaranteed Loans Purchased        |       | 53,000                 |       | 57,600                |       |
| Gross Loans                                   |       | 89,294,200             |       | 75,528,400            |       |
|                                          |       |                   |       |                  |       |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES: |       |                   |       |                  |       |
| Balance at  Beginning of Period               |       | 774,800                |       | 636,900               |       |
| Recoveries                                    |       | 1,600                  |       | 1,300                 |       |
| Provision for  Possible Loan Losses           |       | 135,000                |       | 155,000               |       |
| Loans Charged  Off                            |       | —                 |       | (18,400               | )          |
| Balance at End  of Period                     |       | 911,400                |       | 774,800               |       |
|                                          |       |                   |       |                  |       |
| (NOTE 4)  DEPOSITS:                           |       |                   |       |                  |       |
| Demand                                        |       | 21,537,200             |       | 17,859,800            |       |
| Interest-Bearing  Transaction                 |       | 15,370,600             |       | 16,454,500            |       |
| Savings                                       |       | 8,359,500              |       | 8,444,900             |       |
| Time Under  $100,000                          |       | 26,111,200             |       | 19,241,100            |       |
| Time Equal to or  Greater than $100,000       |       | 20,655,300             |       | 16,132,100            |       |
|                                          |       | 92,033,800             |       | 78,132,400            |       |

 

 (Note 5) ****Basis of presentation****

 

The interim condensed financial statements of Northern CaliforniaBancorp, Inc. are unaudited and reflect all adjustments (consisting onlyof normal recurring adjustments), which are, in the opinion of management,necessary for a fair presentation, in all material respects, of the financialposition and operating results of the Company for the interim periods. The results of operations for the nine months ended September 30, 2004 arenot necessarily indicative of the results to be expected for the entire fiscalyear ending December 31, 2004.  The year-end balance sheet dataat December 31, 2003 was derived from the audited financialstatements.

 

This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Company’s Form10-KSB for the fiscal year ended December 31, 2003.

 

5

----

 

(Note 6) StockOption Plan

 

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148 “Accounting forStock-Based Compensation –Transition and Disclosure,” encourages all entitiesto adopt a fair value based method of accounting for employee stockcompensation plans, whereby compensation cost is measured at the grant datebased on the value of the award and is recognized over the service period,which is usually the vesting period. However, it also allows an entity to continue to measure compensationcost for those plans using the intrinsic value based method of accountingprescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” whereby compensation cost is the excess, if any,of the quoted market price of the stock at the grant date (or other measurementdate) over the amount an employee must pay to acquire the stock.  Stock options issued under the Corporation’sstock option plan have no intrinsic value at the grant date, and under OpinionNo. 25 no compensation cost is recognized for them.

 

**TheCorporation applies APB Opinion 25 and related Interpretations in accountingfor the plan.  Accordingly, nocompensation cost has been recognized. Had compensation cost for the Corporation’s stock-based compensationplan been determined based on the fair value at the grant date for awards underthe plan consistent with the method prescribed by SFAS No. 123, the Corporation’snet income and basic earnings per share would have been adjusted to the proforma amounts indicated below:**

 
| ** **                       | ** ** | **3 Months Ended  September 30** | ** ** | **9 Months Ended  September 30** | ** ** |
|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2004**                         | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income:                      |       |                             |       |                             |       |   |   |   |   |
| As reported                      |       | $                                | 335,200    |                             | $          | 209,100 |   | $ | 786,200 |   | $ | 566,600 |   |
| Pro forma                        |       | $                                | 335,200    |                             | $          | 208,900 |   | $ | 694,200 |   | $ | 541,800 |   |
|                             |       |                             |       |                             |       |   |   |   |   |
| Compensation  cost, net of taxes |       | $                                | —     |                             | $          | 200 |   | $ | 92,000 |   | $ | 24,800 |   |
|                             |       |                             |       |                             |       |   |   |   |   |
| Earnings per  share:             |       |                             |       |                             |       |   |   |   |   |
| Basic - as  reported             |       | $                                | 0.214      |                             | $          | 0.139 |   | $ | 0.502 |   | $ | 0.377 |   |
| Basic - pro  forma               |       | $                                | 0.214      |                             | $          | 0.139 |   | $ | 0.443 |   | $ | 0.360 |   |
|                             |       |                             |       |                             |       |   |   |   |   |
| Diluted - as  reported           |       | $                                | 0.175      |                             | $          | 0.117 |   | $ | 0.412 |   | $ | 0.317 |   |
| Diluted - pro  forma             |       | $                                | 0.175      |                             | $          | 0.117 |   | $ | 0.363 |   | $ | 0.303 |   |

 

The fair value of these options was estimated at the grant date usingthe Black-Scholes option pricing model with the following weighted-averageassumptions for 2004 and 2003: risk-free interest rate of 4.89% for both 2004and 2003; dividend yield of .017% and 0% for 2004 and 2003, respectively;expected option life of 4.7 years and 4.5 years for 2004 and 2003,respectively; and volatility of 20% and 30% in 2004 and 2003, respectively.

 

 

(NOTE 7) SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 
| **Payments during the period  ending:** | ** ** | **9/30/04** | ** ** | **9/30/03** | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------|------------|
| Interest                                |       | 1,777,000   |       | 1,485,300   |       |
| Income Taxes                            |       | 690,700     |       | 366,500     |       |

 

6

----

 
| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATION** |
|-------------|------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

 

The followingdiscussion reviews and analyzes the operating results and financial conditionof the Corporation, focusing on the Bank. It should be read in conjunction with the financial statements and theother financial data presented elsewhere herein.  The Corporation’ only activities have beeninvestments.

 

For the ninemonths ended September 30, 2004 net income was $786,200, an increase of $219,600when compared to the same period in 2003. The increase in earnings during this period resulted from an increase of$813,200 in net interest income after provision for loan losses, an increase of$217,900 in non-interest income, partially offset by an increase of $811,500 innon-interest expense.

 

7

----

 

The followingtable sets forth certain selected financial ratios of the Corporation at, andfor the nine months ended, September 30, 2004 and 2003.

 
| ** **                                         | ** ** | **For the nine months  Ended September 30, 2004** | ** ** | **For the nine months  Ended September 30, 2003** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **(Dollars in thousands except per share data)**  | ** ** |
| Summary of  Operating Results:                     |       |                                              |       |                                              |       |
|                                               |       |                                              |       |                                              |       |
| Total interest  income                             |       | 5,283                                             |       | 4,075                                             |       |
| Total interest  expense                            |       | 1,769                                             |       | 1,434                                             |       |
| Net interest  income                               |       | 3,514                                             |       | 2,641                                             |       |
|                                               |       |                                              |       |                                              |       |
| Provision for  possible loan losses                |       | 135                                               |       | 75                                                |       |
| Net interest  income after provision for loan loss |       | 3,379                                             |       | 2,566                                             |       |
|                                               |       |                                              |       |                                              |       |
| Total other  income                                |       | 3,258                                             |       | 3,040                                             |       |
| Total other  expense                               |       | 5,296                                             |       | 4,697                                             |       |
|                                               |       |                                              |       |                                              |       |
| Income (loss)  before taxes                        |       | 1,341                                             |       | 909                                               |       |
| Provision for  income tax                          |       | 555                                               |       | 342                                               |       |
|                                               |       |                                              |       |                                              |       |
| Net income  (loss)                                 |       | 786                                               |       | 567                                               |       |
|                                               |       |                                              |       |                                              |       |
| Per Common Share  Data:                            |       |                                              |       |                                              |       |
|                                               |       |                                              |       |                                              |       |
| Net income -  Primary (1)                          |       | 0.502                                             |       | 0.377                                             |       |
| Net income -  Diluted (2)                          |       | 0.412                                             |       | 0.317                                             |       |
| Book value, end  of period                         |       | 4.63                                              |       | 4.14                                              |       |
| Avg shares  outstanding (3)                        |       | 1,566,658                                         |       | 1,504,523                                         |       |
|                                               |       |                                              |       |                                              |       |
| Balance Sheet  Data:                               |       |                                              |       |                                              |       |
|                                               |       |                                              |       |                                              |       |
| Total loans, net  of unearned income (4)           |       | 89,101                                            |       | 69,277                                            |       |
| Total assets                                       |       | 123,536                                           |       | 98,692                                            |       |
| Total deposits                                     |       | 92,034                                            |       | 73,488                                            |       |
| Stockholders’  equity                         |       | 7,249                                             |       | 6,326                                             |       |

 

8

----

 
| ** **                                           | ** ** | **For the nine months  Ended September 30, 2004** | ** ** | **For the nine months  Ended September 30, 2003** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| Selected  Financial Ratios (5):                      |       |                                              |       |                                              |       |
|                                                 |       |                                              |       |                                              |       |
| Return on  average assets (6)                        |       | 0.89                                              | %          | 0.81                                              | %          |
| Return on  average stockholders’ equity (6)     |       | 15.44                                             | %          | 12.75                                             | %          |
| Net interest  spread                                 |       | 4.01                                              | %          | 3.88                                              | %          |
|                                                 |       |                                              |       |                                              |       |
| Net interest  margin                                 |       | 4.41                                              | %          | 4.24                                              | %          |
|                                                 |       |                                              |       |                                              |       |
| Avg  shareholders’ equity to average assets     |       | 5.75                                              | %          | 6.34                                              | %          |
|                                                 |       |                                              |       |                                              |       |
| Risked-Based  capital ratios                         |       |                                              |       |                                              |       |
| Tier 1                                               |       | 8.62                                              | %          | 9.61                                              | %          |
| Total                                                |       | 15.49                                             | %          | 12.29                                             | %          |
| Total loans to  total deposits at end of period      |       | 96.81                                             | %          | 94.27                                             | %          |
|                                                 |       |                                              |       |                                              |       |
| Allowance to  total loans at end of period           |       | 0.51                                              | %          | 1.00                                              | %          |
|                                                 |       |                                              |       |                                              |       |
| Nonperforming  loans to total loans at end of period |       | 0.01                                              | %          | 0.04                                              | %          |
|                                                 |       |                                              |       |                                              |       |
| Net charge-offs  to average loans                    |       | 0.00                                              | %          | 2.34                                              | %          |

 

----

(1)          Primary earnings pershare amounts were computed on the basis of the weighted average number ofshares of common stock outstanding during the year.  The weighted average number of common sharesused for this computation was 1,566,658 and 1,504,523 for September 30, 2004and 2003, respectively.

(2)          Dilutedearnings (loss) per share amounts were computed on the basis of the weightedaverage number of shares of common stock and common stock equivalentsoutstanding during the year.  Commonstock equivalents include director/employee stock options. The weighted averagenumber of shares used for this computation was 1,910,561 and 1,786,642 forSeptember 30, 2004 and 2003, respectively.

(3)          Weighted average commonshares.

(4)          Includes loans beingheld for sale.

(5)          Averages are of dailybalances.

(6)          Calculated on anannualized basis.

 

9

----

 

**NET INTEREST INCOME**

 

Net interestincome, the difference between (a) interest and fees earned on interest-earningassets and (b) interest paid on interest-bearing liabilities, is the mostsignificant component of the Bank’s earnings. Changes in net interest income from period to period result fromincreases or decreases in the average balances of interest-earning assetsportfolio, the availability of particular sources of funds and changes inprevailing interest rates.

 

Net interest income forthe nine-month period ended September 30, 2004 was $3,513,900 compared to $2,640,700for the same period in 2003.  Theincrease of $873,200 resulted from total interest income increasing $1,208,300,while total interest expense increased $335,100.  Average interest earning assets increased $24,390,000(29.35%), while the average rate earned increased 6 basis points.  Average interest bearing liabilitiesincreased $18,988,000 (26.45%), while the average rate paid decreased 6 basispoints.

 

The followingtable shows the components of the Bank’s net interest income, setting forth,for each the nine months ended September 30, 2004 and 2003, (i) average assets,liabilities and investments, (ii) interest income earned on interest-earningassets and interest expense paid on interest-bearing liabilities, (iii) averageyields earned on interest-earning assets and average rates paid oninterest-bearing liabilities, (iv) the net interest spread (i.e., the averageyield earned on interest-earning assets less the average rate paid oninterest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets).  Yields arecomputed on a tax-equivalent basis, resulting in an adjustment to interestearned on non-taxable securities of $40,700 for the nine months ended September30, 2004; no non-taxable securities were held in 2003.    Non-accrual loans and overdrafts are includedin average loan balances.  Average loansare presented net of unearned income.

 

10

----

 

**INTERESTSPREAD ANALYSIS:**

 
| ** **                            | ** ** | **The Nine Months  Ended September 30,** | ** ** | **The Twelve Months  Ended December 31,** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                 | ** ** | **2003**                                  | ** ** | **2003** | ** ** |
| ** **                            | ** ** | **Avg  Bal**                             | ** ** | **Int  Earn  Paid**                       | ** ** | **Avg  %  Rate** | ** ** | **Avg  Bal** | ** ** | **Int  Earn  Paid** | ** ** | **Avg  %  Rate** | ** ** | **Avg  Bal** | ** ** | **Int  Earn  Paid** | ** ** | **Avg  %  Rate** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**               | ** ** |
| Interest Earning  Assets:             |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Invest  securities - Taxable          |       | 9,400                                    |       | 218                                       |       | 3.09 |   | 8,096 |   | 231 |   | 3.81 |   | 8,113 |   | 299 |   | 3.69 |   |
| Invest  securities - Non-Taxable      |       | 2,160                                    |       | 131                                       |       | 8.10 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   |
| Federal funds  sold                   |       | 10,712                                   |       | 92                                        |       | 1.14 |   | 8,845 |   | 74 |   | 1.12 |   | 8,891 |   | 97 |   | 1.09 |   |
| Total  investments                    |       | 22,271                                   |       | 441                                       |       | 2.64 |   | 16,941 |   | 305 |   | 2.40 |   | 17,004 |   | 396 |   | 2.33 |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |       | 7,454                                    |       | 613                                       |       | 10.97 |   | 3,626 |   | 293 |   | 10.79 |   | 3,847 |   | 369 |   | 9.59 |   |
| Real estate                           |       | 58,305                                   |       | 3,220                                     |       | 7.36 |   | 46,303 |   | 2,611 |   | 7.52 |   | 47,264 |   | 3,585 |   | 7.59 |   |
| Installment                           |       | 544                                      |       | 31                                        |       | 7.57 |   | 478 |   | 29 |   | 8.17 |   | 494 |   | 38 |   | 7.62 |   |
| Commercial                            |       | 18,900                                   |       | 1,019                                     |       | 7.19 |   | 15,737 |   | 836 |   | 7.08 |   | 16,344 |   | 1,182 |   | 7.23 |   |
| Total loans                           |       | 85,204                                   |       | 4,883                                     |       | 7.64 |   | 66,144 |   | 3,770 |   | 7.60 |   | 67,949 |   | 5,174 |   | 7.61 |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest earning  assets        |       | 107,475                                  |       | 5,324                                     |       | 6.60 |   | 83,085 |   | 4,075 |   | 6.54 |   | 84,953 |   | 5,570 |   | 6.56 |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |       | 13,299                                   |       | 25                                        |       | 0.25 |   | 10,534 |   | 20 |   | 0.25 |   | 10,892 |   | 27 |   | 0.25 |   |
| Money market  savings                 |       | 3,683                                    |       | 23                                        |       | 0.82 |   | 2,401 |   | 16 |   | 0.91 |   | 2,592 |   | 22 |   | 0.86 |   |
| Savings deposits                      |       | 7,930                                    |       | 60                                        |       | 1.02 |   | 5,946 |   | 46 |   | 1.04 |   | 6,011 |   | 62 |   | 1.03 |   |
| Time deposits  >$100M              |       | 17,611                                   |       | 391                                       |       | 2.96 |   | 16,506 |   | 391 |   | 3.16 |   | 16,378 |   | 511 |   | 3.12 |   |
| Time deposits  <$100M              |       | 23,565                                   |       | 518                                       |       | 2.93 |   | 20,165 |   | 472 |   | 3.12 |   | 20,074 |   | 618 |   | 3.08 |   |
| Other Borrowing                       |       | 24,687                                   |       | 752                                       |       | 4.06 |   | 16,236 |   | 490 |   | 4.02 |   | 16,781 |   | 680 |   | 4.05 |   |
| Total interest bearing  liabilities   |       | 90,776                                   |       | 1,769                                     |       | 2.60 |   | 71,789 |   | 1,434 |   | 2.66 |   | 72,729 |   | 1920 |   | 2.64 |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                  |       |                                     |       | 3,554                                     |       |   |   |   |   | 2,641 |   |   |   |   |   | 3,649 |   |   |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                  |       |                                     |       |                                      |       | 4.01 |   |   |   |   |   | 3.88 |   |   |   |   |   | 3.92 |   |
|                                  |       |                                     |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest earning assets |       |                                     |       |                                      |       | 4.41 |   |   |   |   |   | 4.24 |   |   |   |   |   | 4.30 |   |

 

11

----

 
| ** **                       | ** ** | **Nine Months  Ended September 30,  2004 vs 2003** | ** ** | **Twelve Months  Ended December 31,  2003 vs 2002** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **Increase(Decrease)  Due to changes**             | ** ** | **Increase(Decrease)  Due to Changes**              | ** ** |
| ** **                       | ** ** | **Avg  Volume**                                    | ** ** | **Avg  Rate**                                       | ** ** | **Total** | ** ** | **Avg  Volume** | ** ** | **Avg  Rate** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**                         | ** ** |
| Interest Earning  Assets:        |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Invest  securities - Taxable     |       | 37                                                 |       | (50                                                 | )          | (13 | ) | (125 | ) | 7 |   | (118 | ) |
| Invest  securities - Tax Free    |       | 0                                                  |       | 131                                                 |       | 131 |   | — |   | — |   | — |   |
| Federal funds  sold              |       | 16                                                 |       | 2                                                   |       | 18 |   | 30 |   | (48 | ) | (18 | ) |
| Total  investments               |       | 53                                                 |       | 83                                                  |       | 136 |   | (96 | ) | (40 | ) | (136 | ) |
|                             |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Loans                            |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Construction                     |       | 310                                                |       | 10                                                  |       | 320 |   | 108 |   | (11 | ) | 97 |   |
| Real estate                      |       | 677                                                |       | (68                                                 | )          | 609 |   | 715 |   | 24 |   | 739 |   |
| Installment                      |       | 4                                                  |       | (2                                                  | )          | 2 |   | (18 | ) | (10 | ) | (28 | ) |
| Commercial                       |       | 168                                                |       | 15                                                  |       | 183 |   | 57 |   | (58 | ) | (1 | ) |
| Total loans                      |       | 1,159                                              |       | (45                                                 | )          | 1,113 |   | 862 |   | (55 | ) | 807 |   |
|                             |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets   |       | 1,211                                              |       | 37                                                  |       | 1,249 |   | 766 |   | (95 | ) | 671 |   |
|                             |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:      |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Int-bearing  demand              |       | 5                                                  |       | 0                                                   |       | 5 |   | (0 | ) | (46 | ) | (46 | ) |
| Money market  savings            |       | 9                                                  |       | (3                                                  | )          | 6 |   | 6 |   | (5 | ) | 1 |   |
| Savings deposits                 |       | 15                                                 |       | (1                                                  | )          | 14 |   | 23 |   | (16 | ) | 8 |   |
| Time deposits  >$100M         |       | 26                                                 |       | (26                                                 | )          | 0 |   | 12 |   | (101 | ) | (89 | ) |
| Time deposits  <$100M         |       | 80                                                 |       | (33                                                 | )          | 47 |   | (13 | ) | (195 | ) | (207 | ) |
| Other Borrowing                  |       | 255                                                |       | 7                                                   |       | 262 |   | 590 |   | (284 | ) | 306 |   |
|                             |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Total interest  bearing deposits |       | 390                                                |       | (55                                                 | )          | 335 |   | 618 |   | (646 | ) | (28 | ) |
|                             |       |                                               |       |                                                |       |   |   |   |   |   |   |   |   |
| Net change in  net interest      |       | 822                                                |       | 92                                                  |       | 914 |   | 148 |   | 550 |   | 699 |   |

 

12

----

 

**Provisionand Allowance for Loan Losses**

 

The provision forloan losses is an expense charged against operating income and added to theallowance for loan losses.  The allowancefor loan losses represents amounts which have been set aside for the specificpurpose of absorbing losses which may occur in the Bank’s loan portfolio.

 

The allowance for loanlosses reflects management’s ongoing evaluation of the risks inherent in theloan portfolio, both generally and with respect to specific loans, the state ofthe economy, and the level of net loan losses experienced in the past.  Management and the Board of Directors reviewthe results of the State Banking Department and FDIC examinations, independentaccountants’ observations, and the Bank’s internal review as additionalindicators to determine if the amount in the allowance for loan losses isadequate to protect against estimated future losses.  It is the Bank’s current practice, whichcould change in accordance with the factors mentioned above, to maintain anallowance that is at least equal to the sum of the following percentage of loanbalances by loan category.

 

| **Loan Category**                             | ** ** | **Reserve %** | ** ** |
|-----------------------------------------------|------------|---------------|------------|
|                                          |       |          |       |
| Classified  Loans:                            |       |          |       |
| Loans classified  loss                        |       | 100.00        | %          |
| Loans classified  doubtful                    |       | 50.00         | %          |
| Loans classified  substandard                 |       |          |       |
| Real Estate  Secured                          |       | 5.00          | %          |
| Non Real Estate  Secured                      |       | 20.00         | %          |
|                                          |       |          |       |
| Unclassified  Loans:                          |       |          |       |
| Real Estate -  Loan to value 80% or less      |       | 0.10          | %          |
| Real Estate -  Loan to value over 80%         |       | 0.70          | %          |
| Real Estate -  Construction                   |       | 0.25          | %          |
| Loans to  Individuals                         |       | 3.00          | %          |
| Commercial                                    |       | 2.00          | %          |
| SBA Loans –  Unguaranteed portion        |       | 2.00          | %          |
| Unfunded Loan  Commitments                    |       | .25           | %          |
| Concentration  Risk Factor – Real Estate |       | .10           | %          |
| Economic Risk  Factor                         |       | .25           | %          |
| SBA Loans -  Guaranteed portion               |       | 0.00          | %          |
| Cash Secured  Loans                           |       | 0.00          | %          |

 

Although no assurance canbe given that actual losses will not exceed the amount provided for in theallowance, management believes that the allowance is adequate to provide forall estimated credit losses in light of all known relevant factors. AtSeptember 30, 2004 and 2003 the Bank’s allowance stood at 1.02 percent and 1.00percent of gross loans plus loans held for sale, respectively.  A provision of $135,000 was made to theallowance during the nine months ended September 30, 2004, compared to aprovision of $75,000 in the same period in 2003.  No loans were charged during the nine monthsended September 30, 2004 compared with $18,400 for the same period in 2003.  Recoveries for the same periods were $1,600and $1,000, respectively.

 

13

----

 

The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.03 percent at September 30, 2004 compared with0.04 percent at September 30, 2003.

 

Based upon statisticsreleased by Federal and state banking authorities regarding banks of similarsize or otherwise located in California, Management believes that the Bank ‘sratios of delinquent and non performing loans to total loans are far betterthan average.  Prudent collectionefforts, and tighter lending controls, are responsible for the Bank’s strongperformance on these measures of credit quality.  However, no assurance can be given that theBank’s loan portfolio will continue to measure well against its peers on theseratios and quality measures, or that losses will not otherwise occur in thefuture.

 

**Non-InterestIncome**

 

Total non-interest incomefor the nine months ended September 30, 2004 was $3,258,100, compared with $3,040,200for the same period in 2003.  Theincrease of $217,900 was the result of increases of $14,200 in service chargeson deposit accounts, $210,400 income from SBA loan sales and servicing’ whileother service charges, commissions and fees decreased $6,700.

 

The sale of SmallBusiness Administration (SBA) guaranteed loans is a significant contributor tothe Bank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums which vary with market conditions.  SBA loans are guaranteed by the full faith ofthe United States Government from 75 to 85 percent of the principalamount.  The guaranteed portion has riskscomparable for an investor to a U. S. Government security and can usually besold in the secondary financial market, either at a premium or at a yield whichallows the Bank to maintain a significant spread for itself.

 

There can be noassurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA requires lenders share aportion of premiums in excess of 10% earned on the sale of the guaranteedportions, and to pay 50 basis points on the outstanding guaranteed balance.

 

**Non-InterestExpense**

 

Salary andbenefits expense for the nine months ended September 30, 2004 increased $403,100compared with the same period in 2003.  Theincrease was due to the addition of a Chief Lending Officer, merit payincreases and increased bonus accruals due to increased earnings.

 

Occupancy andequipment expense increased $43,100 compared with the same period in 2003.  Depreciation expense increased $15,900 andoccupancy expense increased $23,600.

 

14

----

 

Data processingexpense for the nine months ended September 30, 2004 increased $17,100 comparedto the same period in 2003.

 

For the ninemonths ended September 30, 2004 professional fees increased $33,700 compared tothe same period in 2003.  The increasewas due to increased audit/accounting fees, as the Bank engaged third partiesfor internal audit reviews.

 

Other expenses for thenine months ended September 30, 2004 totaled $2,203,500 compared with $2,103,700for the same period in 2003.  Significantchanges occurred in the following categories with increases in merchantprocessing expense $44,400, insurance expense $23,900, business development$22,500, entertainment and meals expense $12,200, telephone expense $6,900,travel expense $4,900; decreases occurred in collection expense $7,200,stationary and supplies $7,100, and memberships & dues $6,500

 

Income tax expense forthe nine months ended September 30, 2004 was $555,200 compared with $342,300for the same period in 2003.  The $212,900increase was due to a $432,500 increase in pretax.

 

 

**LOANS**

 

Loans represented 79.28%of average earning assets, and 72.47% of average total assets for the ninemonths ended September 30, 2004, compared with 79.61% and 71.45%, respectivelyduring 2003.  For the nine months endedSeptember 30, 2004 average loans increased 28.82% from $66,144,000 for the sameperiod in 2003 to $85,204,000. Average real estate increased $12,002,000 (25.92%)and average construction loans increased $3,828,000 (105.58%), average commercialloans increased $3,163,000 (20.10%) and average installment loans increased $66,000(13.68%).

 

The Bank’scommercial and industrial loans are generally made for the purpose of providingworking capital, financing the purchase of equipment or inventory, and otherbusiness purposes. Such loans generally have maturities ranging from one yearto several years.  Short-term businessloans are generally intended to finance current transactions and typicallyprovide for monthly interest payments with principal being payable at maturityor at 90-day intervals. Term loans (usually for a term of two to five years)normally provide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

 

The Bank is therecognized leader for Small Business Administration lending in Monterey County,and holds SBA’s coveted Preferred Lender Status.  Generally, SBA loans are guaranteed by theSBA for 75 to 85 percent of their principal amount, which can be retained inportfolio or sold to investors.  Suchloans are made at floating interest rates, but generally for longer terms (upto 25 years) than are available on a conventional basis to small businesses. The unguaranteed portion of the loans, although generally supported bycollateral, is considered to be more risky than conventional commercial loansbecause they may be based upon credit standards the Bank would not otherwiseapply, such as lower cash flow coverage, or longer repayment terms.

 

15

----

 

The Bank’s realestate loan portfolio consists both of real estate construction loans and realestate mortgage loans.  The Bank hasinitiated a program to generate more commercial and industrial real estate loans,which generally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. The Bank does not make real estate development loans.  Real estateconstruction loans are made for a much shorter term, and often at higherinterest rates, than conventional single-family residential real estateloans.  The cost of administering suchloans is often higher than for other real estate loans, as principal is drawnon periodically as construction progresses.

 

The Bank alsomakes real estate loans secured by a first deed of trust on single familyresidential properties and commercial and industrial real estate.  California commercial banks are permitted,depending on the type and maturity of the loan, to lend up to 90 percent of thefair market value of real property (or more if the loan is insured either byprivate mortgage insurers or governmental agencies).  In certain instances, the appraised value mayexceed the actual amount that could be realized on foreclosure, or declines inmarket value subsequent to making the loan can impair the Bank’s security.

 

Consumer loans are made for the purpose of financingthe purchase of various types of consumer goods, home improvement loans, autoloans and other personal loans.  Consumerinstallment loans generally provide for monthly payments of principal andinterest, at a fixed rate.  Most of theBank’s consumer installment loans are generally secured by the personalproperty being purchased.  The Bankgenerally makes consumer loans to those customers with a prior bankingrelationship with the Bank.

 

16

----

 

**Non-performingand Non-accrual Loans**

 

The Bank’s present policyis to cease accruing interest on loans which are past due as to principal orinterest 90 days or more, except for loans which are well secured or whencollection of interest and principal is deemed likely.  When a loan is placed on non-accrual, previouslyaccrued and unpaid interest is generally reversed out of income unless adequatecollateral from which to collect the principal of, and interest on, the loanappears to be available.

 

The following tablepresents information with respect to loans which, as of the dates indicated,were past due 90 days or more or were placed on non-accrual status (referred tocollectively as “non-performing loans”):

 
| ** **                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**           | ** ** |
| Accruing,                                                     |       |                                 |       |   |   |
| past due 90 days  or more:                                    |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real Estate                                                   |       | 0                                    |       | 0 |   |
| Commercial                                                    |       | 0                                    |       | 0 |   |
| Installment                                                   |       | 0                                    |       | 0 |   |
| Other                                                         |       | 0                                    |       | 0 |   |
| Total accruing                                                |       | 0                                    |       | 0 |   |
|                                                          |       |                                 |       |   |   |
| Nonaccrual  Loans:                                            |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real Estate                                                   |       | 0                                    |       | 0 |   |
| Commercial                                                    |       | 26                                   |       | 28 |   |
| Installment                                                   |       | 0                                    |       | 0 |   |
| Other                                                         |       | 0                                    |       | 0 |   |
| Total nonaccrual                                              |       | 26                                   |       | 28 |   |
|                                                          |       |                                 |       |   |   |
| Total  nonperforming                                          |       | 26                                   |       | 28 |   |
|                                                          |       |                                 |       |   |   |
| Total loans end  of period                                    |       | 89,101                               |       | 69,277 |   |
|                                                          |       |                                 |       |   |   |
| Ratio of  nonperforming loans to total loans at end of period |       | 0.03                                 | %          | 0.04 | % |

 

17

----

 

These ratios have beenmaintained as a result of a strengthening of underwriting criteria, frequentreview of new and delinquent loans and a firm collection policy (with theassistance of outside legal counsel). The Bank does not have any foreign loans or loans for highly leveragedtransactions.

 

**Summary of Loan Loss Experience**

 
| ** **                                                                     | ** ** | **Nine Months Ended  September 30, 2004** | ** ** | **Nine Months Ended  September 30, 2003** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **(Dollars in thousands)**                | ** ** |
| Average loans  outstanding                                                     |       | 85,204                                    |       | 66,144                                    |       |
|                                                                           |       |                                      |       |                                      |       |
| Allowance,  beginning of period                                                |       | 775                                       |       | 637                                       |       |
|                                                                           |       |                                      |       |                                      |       |
| Loans charged  off during period:                                              |       |                                      |       |                                      |       |
| Commercial                                                                     |       | 0                                         |       | 18                                        |       |
| Installment                                                                    |       | 0                                         |       | 0                                         |       |
| Real Estate                                                                    |       | 0                                         |       | 0                                         |       |
| Other                                                                          |       | 0                                         |       | 0                                         |       |
| Total charge  offs                                                             |       | 0                                         |       | 18                                        |       |
|                                                                           |       |                                      |       |                                      |       |
| Recoveries  during period:                                                     |       |                                      |       |                                      |       |
| Real Estate                                                                    |       | 0                                         |       | 0                                         |       |
| Commercial                                                                     |       | 2                                         |       | 1                                         |       |
| Installment                                                                    |       | 0                                         |       | 0                                         |       |
| Other                                                                          |       | 0                                         |       | 0                                         |       |
| Total recoveries                                                               |       | 2                                         |       | 1                                         |       |
|                                                                           |       |                                      |       |                                      |       |
| Net Loans  charged off during the period                                       |       | (2                                        | )          | 17                                        |       |
|                                                                           |       |                                      |       |                                      |       |
| Additions to  allowance for possible loan losses                               |       | 135                                       |       | 75                                        |       |
|                                                                           |       |                                      |       |                                      |       |
| Allowance, end  of period                                                      |       | 912                                       |       | 694                                       |       |
|                                                                           |       |                                      |       |                                      |       |
| Ratio of net  loans charged off to average Loans outstanding during the period |       | (0.00                                     | )%         | 0.03                                      | %          |
|                                                                           |       |                                      |       |                                      |       |
| Ratio of  allowance to total loans at end of period                            |       | 1.02                                      | %          | 1.00                                      | %          |

 

18

----

 

**Funding Sources**

 

Average deposits for thenine months ended September 30, 2004 were $85,293,000 an increase of 20.90%compared with the average balance for 2003. Average certificates of deposit represented 48.28% of average depositsfor the nine months ended September 30, 2004. Average interest checking accounts, money market and savings accounts asa group was 29.21% of average deposits. Average demand deposits represented 22.52% of average deposits.

 

**The Bank has lines of credit from the Federal Home LoanBank of San Francisco and Pacific Coast Bankers’ Bank with available borrowingcapacity on September 30, 2004 of $6,850,500 and $4,500,000, respectively.  The Federal Home Loan Bank line of credit hasa maximum borrowing capacity of twenty five percent (25%) of the Bank’s totalassets, adjusted quarterly.  The FederalHome Loan Bank line of credit is secured by some of the Bank’s real estatesecured loans and securities.  AtSeptember 30, 2004 the total principal balances of pledged loans was$27,385,600 and securities of $5,478,800. The following table provides information on seven advances totaling$14,650,000 outstanding at September 30, 2004**.

** **

| **Advance  Amount** | ** ** | **Interest  Rate** | ** ** | **Funding  Date** | ** ** | **Maturity  Date** | ** ** |
|---------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| 1,000,000           |       | 6.86               | %          | 8/10/00           |       | 8/10/05            |       |
| 3,900,000           |       | 2.83               | %          | 10/29/02          |       | 10/31/05           |       |
| 1,000,000           |       | 2.54               | %          | 2/4/03            |       | 2/6/06             |       |
| 1,000,000           |       | 1.77               | %          | 3/9/04            |       | 3/9/06             |       |
| 2,750,000           |       | 3.44               | %          | 9/27/02           |       | 9/27/07            |       |
| 1,000,000           |       | 7.72               | %          | 6/1/00            |       | 6/3/30             |       |
| 4,000,000           |       | 5.96               | %          | 8/2/04            |       | 7/28/34            |       |

 

The Bank has a $105,000letter of credit issued by the Federal Home Loan Bank of San Francisco tosecure the uninsured portion of local agency deposits maintained with theBank.  The letter of credit matures April17, 2006.

 

 

**Capital Resources**

 

The Company maintainscapital to comply with legal requirements, to provide a margin of safety forits depositors and stockholders, and to provide for future growth and theability to pay dividends.  At September30, 2004, stockholders’ equity was $7,249,100 versus $6,410,500 at December 31, 2003.  TheCompany paid a $0.15 per share cash dividend in 2003 and a ten (10%) percentstock dividend in 2002.  The Bank paid nocash dividends during the nine months ended September 30, 2004 and cashdividends totaling $50,000 to the Corporation in 2003.

 

19

----

 

The FDIC andFederal Reserve Board have adopted capital adequacy guidelines for use in theirexamination and regulation of banks and bank holding companies.  If the capital of a bank or bank holdingcompany falls below the minimum levels established by these guidelines, it maybe denied approval to acquire or establish additional banks or non-bankbusinesses, or the FDIC or Federal Reserve Board may take other administrativeactions.  The guidelines employ twomeasures of capital:  (1) risk-basedcapital and (2) leverage capital.

 

Under current rules, all banks were required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets.  On a consolidated basis the Company had aTier 1 risk-based capital ratio of 8.62% and a total risk-based capital ratioof 15.49% at September 30, 2004, well above the minimum regulatoryrequirements.   The Bank had a Tier 1 risk-based capital ratio of 11.60% and a totalrisk-based capital ratio of 12.47% at September 30, 2004, well above theminimum regulatory requirements.

 

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Company’s consolidated leveragecapital ratio was 7.09% at September 30, 2004 while the Bank’s leverage capitalratio was 10.43%.

 

**Liquidity**

 

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future cash needs.  For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course of theBank’s business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings. The Bank has a line of credit from theFederal Home Loan Bank of San Francisco of approximately $29,815,500, and a $4,500,000unsecured Federal Funds Purchased line of credit with the Pacific Coast Bankers’Bank, to meet temporary liquidity requirements.

 

As a matter of policy,the Bank seeks to maintain a level of liquid assets, including marketableinvestment securities, equal to at least 10 percent of total assets (“primaryliquidity”), while maintaining sources of secondary liquidity (borrowing linesfrom other institutions) equal to at least an additional 10 percent of assets.  Inaddition, it seeks to generally limit loans to not more than 90 percent oftotal funding sources (total deposits plus Federal Home Loan Bank advances). Within these ratios, the Bank generally has excess funds available to sell asfederal funds on a daily basis, and is able to fund its own liquidity needswithout the need of short-term borrowing. The Bank’s primary liquidity at September 30, 2004 was 10.24 percent, while its total loans to funding sourcesratio at September 30, 2004 was 83.79 percent.

 

**Interest Rate Risk**

 

Management of interest rate sensitivity(asset/liability management) involves matching and repricing rates ofinterest-earning assets with interest-bearing liabilities in a manner designedto optimize net interest income within the constraints imposed by

 

20

----

 

regulatory authorities,liquidity determinations and capital considerations.  The Bank instituted formal asset/liabilitypolicies at the end of 1989.

 

The purpose forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liabilitymanagement is managing the risk/return relationships between interest raterisk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidity concernsfollowed by capital adequacy, then interest rate risk and market risk in theinvestment portfolio.  The policy of theBank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain atotally earnings neutral position. Further, the actual timing of repricing of assets and liabilities doesnot always correspond to the timing assumed by the Bank for analyticalpurposes.  Therefore, changes in marketrates of interest will generally impact on the Bank’s net interest income andnet interest margin for long or short periods of time.

 

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  At September 30, 2004the affect of a 2% increase in the federal funds sold rate would result in a 6.16%increase in equity.  At September 30, 2004the fed funds target rate was 1.75%; therefore, the model assumed a 1% decreasein the fed funds rate resulting in negative affect on capital of 2.20%.

 

 

**InvestmentSecurities**

 

At September 30,2004 the Company, in addition to its investment in Monterey County Bank, heldinvestments of $652,500 in Trading Account Securities, $202,000 in DiversifiedHolding Corporation, $93,000 in Northern California Bancorp, Inc. Trust I and$155,000 in Northern California Bancorp, Inc. Trust II.

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at September 30, 2004:

 

21

----

 

INVESTMENTPORTFOLIO MIX

 
| ** **                                | ** ** | **Book  Value**            | ** ** | **Market  Value** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
| Available for  sale:                      |       |                       |       |              |       |
| Corporate Debt  Securities                |       | 750                        |       | 756               |       |
| Government  National Mortgage Association |       | 1,540                      |       | 1,521             |       |
| U.S. government  Agencies                 |       | 4,700                      |       | 4,726             |       |
|                                      |       | 6,990                      |       | 7,003             |       |
|                                      |       |                       |       |              |       |
| Held to Maturity                          |       |                       |       |              |       |
| State/Local  Agencies                     |       | 4,440                      |       | 4,512             |       |

 

The followingtable summarizes the maturity of the Bank’s investment securities at September30, 2004:

 

INVESTMENTPORTFOLIO MATURITIES

(Dollars inthousands)

 
| ** **                               | ** ** | **1 year  or less** | ** ** | **over 1  through  3 years** | ** ** | **over 3  through  5 years** | ** ** | **over 5  through****5 years** | ** ** | **over  15 years** | ** ** |
|------------------------------------------|------------|---------------------|------------|------------------------------|------------|------------------------------|------------|--------------------------------|------------|--------------------|------------|
| U. S. Agency  Securities                 |       | —              |       | 1,725                        |       | 992                          |       | 2,009                          |       | —             |       |
| Government National Mortgage Association |       | —              |       | —                       |       | —                       |       | 1,521                          |       | —             |       |
| Corporate Debt  Securities               |       | —              |       | —                       |       | —                       |       | 756                            |       | —             |       |
| State/Local  Agencies                    |       | —              |       | —                       |       | —                       |       | —                         |       | 4,440              |       |
|                                     |       |                |       |                         |       |                         |       |                           |       |               |       |
| Total                                    |       | —              |       | 1,725                        |       | 992                          |       | 4,286                          |       | 4,440              |       |

 

 

**Item 3.  Controls and Procedures**

 

(a) Evaluation ofDisclosure Controls and Procedures:  Anevaluation of the Company’s disclosure controls and procedures (as Defined inSection 13(a) – 14(c) of the Securities Exchange Act of 1934 (the “Act”) wascarried out under the supervision and with the participation of the Company’sChief Executive Officer, Chief Financial Officer and other members of theCompany’s management within the 90-day period preceding the filing date of thisquarterly report.  The Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures as currently in effect are effective inensuring that the information required to be disclosed by the Registrant in thereports it files or submits under the Act is (i) accumulated and communicatedto the Company’s management (including the Chief Executive Officer and ChiefFinancial Officer) in a timely manner, and (ii) recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms.

 

22

----

 

(b) Changes in Internal Controls: In the quarter ended September 30, 2004, the Company did not make anysignificant changes in, nor take any corrective actions regarding, its internalcontrols or other factor that could significantly affect these controls.

 

 

**PARTII-OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

None

 

**Item 4. Submission of Matters to a vote of Security Holders.**

 

None

 

#### **Item 5. Other Information.**

 

None

 

23

----

 

**Item 6. Exhibits and Reports on Form 8-K.**

** **

A.            EXHIBITS

 

31.1 Certificationof the Chief Executive Officer of Northern California Bancorp, Inc. pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

 

31.2 Certification of the Chief Financial Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Certification of the Chief Executive Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2 Certification of the Chief Financial Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

B.            Reports on Form 8-K

None

 

 

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

 
|   | NORTHERN CALIFORNIA BANCORP, INC. |
|--------|-----------------------------------|
|   |                              |
| Date:  | November 9, 2004                  |   | By: | /s/ | Charles T. Chrietzberg, Jr. |   |
|   |                              | Charles T. Chrietzberg, Jr. |
|   |                              | Chairman of the Board & |
|   |                              | Chief Executive Officer |
|   |                              |   |
|   |                              |   |
| Date:  | November 9, 2004                  |   | By: | /s/ | Bruce N. Warner |   |
|   |                              | Bruce N. Warner |
|   |                              | Chief Financial Officer and |
|   |                              | Principal  Accounting Officer |

 

----