**U.S. SECURITIES AND EXCHANGECOMMISSION**

** **

**Washington D.C.  20549**

** **

**FORM 10-QSB**

 

| **ý**                          | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                             |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                                                                                                                                               |
|                                | **for the quarterly period ended June  30, 2003**                                                                                                                                                                                                                                                  |
|                                |
| **o**                               | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No  fee required)**                                                                                                                                                                                         |
|                                |                                                                                                                                                                                                                                                                                               |
|                                | **for the period  from                      to                      ** |
|                                |
| **Commission  File Number 0-27666** |

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of Small BusinessIssuer in its Charter)

 

Incorporated in the Stateof California

IRS EmployerIdentification Number **77-0421107**

Address:  **601 MunrasAvenue, Monterey, CA  93940**

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

 

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   ý          No  o

 

As of August 5, 2003, the Corporation had 1,528,711shares of common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

NORTHERN CALIFORNIABANCORP, INC.AND SUBSIDIARYCONSOLIDATED BALANCE SHEET

 
|                                                                                                                      |   | **JUNE 30  2003** |   | **DECEMBER  31  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------------|--------|
| ASSETS:                                                                                                                   |   |              |   |                   |   |
| Cash and Cash  Equivalents                                                                                                |   | 13,973,300        |   | 13,017,100             |   |
| Trading Account                                                                                                           |   | 108,100           |   | 82,200                 |   |
| Investment  Securities, available for sale (Note 1)                                                                       |   | 6,806,400         |   | 6,039,800              |   |
| Other  Investments                                                                                                        |   | 2,107,500         |   | 1,210,500              |   |
| Loans Held for  Sale                                                                                                      |   | 2,129,100         |   | 982,500                |   |
| Gross Loans  (Note 2)                                                                                                     |   | 66,200,400        |   | 60,041,300             |   |
| Allowance for  Possible Loan Losses (Note 3)                                                                              |   | (694,300          | )      | (636,900               | )      |
| Deferred  Origination Fees                                                                                                |   | (137,500          | )      | (130,000               | )      |
| Net Loans                                                                                                                 |   | 65,368,600        |   | 59,274,400             |   |
| Bank Premises  and Equipment, Net                                                                                         |   | 2,250,400         |   | 2,243,700              |   |
| Cash Surrender  Value of Life Insurance                                                                                   |   | 2,214,100         |   | 2,160,400              |   |
| Interest  Receivable and Other Assets                                                                                     |   | 1,395,400         |   | 1,268,700              |   |
| Total Assets                                                                                                              |   | 96,352,900        |   | 86,279,300             |   |
|                                                                                                                      |   |              |   |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                               |   |              |   |                   |   |
| Total Deposits  (Note 4)                                                                                                  |   | 71,596,100        |   | 67,616,400             |   |
| Short-term  Borrowing                                                                                                     |   | —            |   | 200,000                |   |
| Long-term  Borrowing                                                                                                      |   | —            |   | 972,200                |   |
| Federal Home  Loan Bank Borrowed Funds                                                                                    |   | 14,750,000        |   | 10,750,000             |   |
| Junior  Subordinated Debt Securities                                                                                      |   | 3,000,000         |   | —                 |   |
| Interest Payable  and Other Liabilities                                                                                   |   | 992,100           |   | 1,101,800              |   |
| Total  Liabilities                                                                                                        |   | 90,338,200        |   | 80,640,400             |   |
|                                                                                                                      |   |              |   |                   |   |
| Shareholders’  Equity:                                                                                               |   |              |   |                   |   |
| Common Stock -  No Par Value  Authorized: 2,500,000 in 2003 and 2002  Outstanding:1,500,552 in 2003 and 1,479,175 in 2002 |   | 4,512,400         |   | 4,500,400              |   |
| Retained  Earnings                                                                                                        |   | 1,478,500         |   | 1,120,900              |   |
| Accumulated  Other Comprehensive Income (Loss)                                                                            |   | 23,800            |   | 17,600                 |   |
| Total  Shareholders’ Equity                                                                                          |   | 6,014,700         |   | 5,638,900              |   |
| Total  Liabilities & Shareholders’ Equity                                                                        |   | 96,352,900        |   | 86,279,300             |   |

 

2

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NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF OPERATIONS

 
|                                                          |   | **Three Months Ended  June 30** |   | **Six Months Ended  June 30** |   |
|---------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                          |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| INTEREST INCOME:                                              |   |                            |   |                          |   |   |   |   |   |
| Interest and  Fees on Loans                                   |   | 1,213,800                       |   | 1,080,500                     |   | 2,409,300 |   | 2,140,900 |   |
| Interest on Time  Deposits with Financial Institutions        |   | —                          |   | 800                           |   | — |   | 1,700 |   |
| Interest on  Investment Securities                            |   | 99,200                          |   | 73,100                        |   | 181,400 |   | 186,600 |   |
| Interest on  Federal Funds                                    |   | 31,600                          |   | 33,800                        |   | 51,300 |   | 60,400 |   |
| Total Interest  Income                                        |   | 1,344,600                       |   | 1,188,200                     |   | 2,642,000 |   | 2,389,600 |   |
|                                                          |   |                            |   |                          |   |   |   |   |   |
| INTEREST  EXPENSE:                                            |   |                            |   |                          |   |   |   |   |   |
| Interest on  Interest-Bearing Transaction Accounts            |   | 11,900                          |   | 29,200                        |   | 24,100 |   | 55,900 |   |
| Interest on  Savings Accounts                                 |   | 17,000                          |   | 14,700                        |   | 31,200 |   | 28,500 |   |
| Interest on Time  Deposits                                    |   | 284,000                         |   | 366,700                       |   | 578,400 |   | 771,700 |   |
| Interest on  Other Borrowed Funds                             |   | 171,500                         |   | 82,400                        |   | 314,800 |   | 163,900 |   |
| Total Interest  Expense                                       |   | 484,400                         |   | 493,000                       |   | 948,500 |   | 1,020,000 |   |
|                                                          |   |                            |   |                          |   |   |   |   |   |
| Net Interest  Income                                          |   | 860,200                         |   | 695,200                       |   | 1,693,500 |   | 1,369,600 |   |
| PROVISION FOR  POSSIBLE LOAN LOSSES                           |   | 25,000                          |   | 15,000                        |   | 75,000 |   | 52,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |   | 835,200                         |   | 680,200                       |   | 1,618,500 |   | 1,317,600 |   |
|                                                          |   |                            |   |                          |   |   |   |   |   |
| NONINTEREST  INCOME:                                          |   |                            |   |                          |   |   |   |   |   |
| Service Charges  on Deposit Accounts                          |   | 118,800                         |   | 117,200                       |   | 256,300 |   | 238,800 |   |
| SBA Loan Sales  & Servicing Income                        |   | 112,800                         |   | 172,500                       |   | 291,000 |   | 245,300 |   |
| Other Operating  Income                                       |   | 785,100                         |   | 553,800                       |   | 1,414,000 |   | 1,140,800 |   |
| Total  Noninterest Income                                     |   | 1,016,700                       |   | 843,500                       |   | 1,961,300 |   | 1,624,900 |   |
|                                                          |   |                            |   |                          |   |   |   |   |   |
| NONINTEREST  EXPENSE:                                         |   |                            |   |                          |   |   |   |   |   |
| Salaries and  Employee Benefits                               |   | 600,200                         |   | 498,100                       |   | 1,211,600 |   | 1,029,300 |   |
| Occupancy and  Equipment Expense                              |   | 122,000                         |   | 92,800                        |   | 262,800 |   | 176,500 |   |
| Professional  Fees                                            |   | 26,800                          |   | 21,700                        |   | 48,700 |   | 40,400 |   |
| Data Processing                                               |   | 92,200                          |   | 88,100                        |   | 182,900 |   | 167,200 |   |
| FDIC & State  Assessments                                 |   | 7,400                           |   | 7,100                         |   | 14,900 |   | 14,200 |   |
| Other Operating  Expenses                                     |   | 682,800                         |   | 643,500                       |   | 1,313,100 |   | 1,242,700 |   |
| Income Tax  Expense                                           |   | 109,100                         |   | 72,000                        |   | 188,300 |   | 77,600 |   |
| Total  Noninterest Expense                                    |   | 1,640,500                       |   | 1,423,300                     |   | 3,222,300 |   | 2,747,900 |   |
| NET INCOME  (LOSS)                                            |   | 211,400                         |   | 100,400                       |   | 357,600 |   | 194,600 |   |
|                                                          |   |                            |   |                          |   |   |   |   |   |
| Earnings Per  Common Share                                    |   |                            |   |                          |   |   |   |   |   |
| Primary                                                       |   | 0.14                            |   | 0.07                          |   | 0.24 |   | 0.13 |   |
| Diluted                                                       |   | 0.12                            |   | 0.06                          |   | 0.20 |   | 0.11 |   |

 

3

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NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS

SIX MONTHS ENDED JUNE 30,2003 AND 2002

 
|                                                    |   | **2003**   |   | **2002**   |   |
|---------------------------------------------------------|--------|------------|--------|------------|--------|
| NET INCOME                                              |   | 357,600    |   | 194,600    |   |
| Adjustments to  net income:                             |   |       |   |       |   |
| Depreciation and  amortization expense                  |   | 81,700     |   | 60,900     |   |
| Amortization/Accretion  on investments                  |   | (15,700    | )      | (2,100     | )      |
| (Gain) loss on  sale of securities                      |   | (2,300     | )      | (17,800    | )      |
| Provision for  possible loan losses                     |   | 75,000     |   | 52,000     |   |
| Increase  (decrease) in accrued expenses                |   | (32,400    | )      | 65,100     |   |
| (Increase)  decrease in prepaid expenses                |   | 556,800    |   | 204,900    |   |
| Increase  (decrease) in interest payable                |   | (77,300    | )      | (146,000   | )      |
| (Increase)  decrease in interest receivable             |   | (41,800    | )      | (14,700    | )      |
| (Increase)  decrease in loans held for sale             |   | (1,146,600 | )      | (1,061,100 | )      |
| Total  adjustments to net income                        |   | (602,600   | )      | (858,800   | )      |
| Net cash  provided (used) by operations                 |   | (245,000   | )      | (664,200   | )      |
|                                                    |   |       |   |       |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                   |   |       |   |       |   |
| Proceeds from  maturity of investments                  |   | 1,297,700  |   | —     |   |
| Proceeds from  sale of investments                      |   | 6,300      |   | 10,801,900 |   |
| Purchase of  securities                                 |   | (2,969,500 | )      | (4,741,900 | )      |
| Net (increase)  decrease in loans                       |   | (6,864,400 | )      | (2,250,100 | )      |
| Proceeds from  sale of equipment                        |   | 2,100      |   | —     |   |
| Proceeds from  exercise of stock options                |   | 15,700     |   | 30,300     |   |
| Repurchase of  common stock and stock options           |   | (3,700     | )      | (20,600    | )      |
| Capital  expenditures                                   |   | (90,500    | )      | (93,200    | )      |
| Net cash  provided (used) in investing activities       |   | (8,606,300 | )      | 3,726,400  |   |
|                                                    |   |       |   |       |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                   |   |       |   |       |   |
| Net increase  (decrease) in deposit accounts            |   | 3,979,700  |   | 2,227,700  |   |
| Net increase  (decrease) in borrowed funds              |   | 5,827,800  |   | —     |   |
| Net cash provided  (used) by financing activities       |   | 9,807,500  |   | 2,227,700  |   |
|                                                    |   |       |   |       |   |
| Net increase  (decrease) in cash & cash equivalents |   | 956,200    |   | 5,289,900  |   |
| Cash & cash  equivalents - beginning of year        |   | 13,017,100 |   | 11,492,900 |   |
|                                                    |   |       |   |       |   |
| Cash & cash  equivalents - end of period            |   | 13,973,300 |   | 16,782,800 |   |

 

4

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NOTES TO FINANCIAL STATEMENTS

 
|                                          |   | **JUNE 30  2003** |   | **DECEMBER  31  2002** |   |
|-----------------------------------------------|--------|-------------------|--------|------------------------|--------|
| (NOTE 1)  INVESTMENT SECURITIES:              |   |              |   |                   |   |
| Available for  sale:                          |   |              |   |                   |   |
| U S Government  Agencies                      |   | 1,006,700         |   | —                 |   |
| Government  National Mortgage Association     |   | 3,230,200         |   | 4,553,300              |   |
| Corporate Debt  Securities                    |   | 2,569,500         |   | 1,486,500              |   |
| Total Securities  Available for Sale          |   | 6,806,400         |   | 6,039,800              |   |
|                                          |   |              |   |                   |   |
| (NOTE 2) GROSS  LOANS:                        |   |              |   |                   |   |
| Commercial and  Industrial                    |   | 13,788,800        |   | 13,449,900             |   |
| Construction                                  |   | 2,640,100         |   | 4,066,300              |   |
| Real Estate -  Mortgage                       |   | 49,270,000        |   | 41,999,800             |   |
| Installment                                   |   | 441,000           |   | 461,900                |   |
| Government  Guaranteed Loans Purchased        |   | 60,500            |   | 63,400                 |   |
| Gross Loans                                   |   | 66,200,400        |   | 60,041,300             |   |
|                                          |   |              |   |                   |   |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES: |   |              |   |                   |   |
| Balance at  Beginning of Period               |   | 636,900           |   | 566,300                |   |
| Recoveries                                    |   | 800               |   | 13,300                 |   |
| Provision for  Possible Loan Losses           |   | 75,000            |   | 117,000                |   |
| Loans Charged  Off                            |   | (18,400           | )      | (59,700                | )      |
| Balance at End  of Period                     |   | 694,300           |   | 636,900                |   |
|                                          |   |              |   |                   |   |
| (NOTE 4)  DEPOSITS:                           |   |              |   |                   |   |
| Demand                                        |   | 16,450,600        |   | 15,023,700             |   |
| Interest-Bearing  Transaction                 |   | 12,185,800        |   | 12,653,400             |   |
| Savings                                       |   | 5,746,700         |   | 4,667,900              |   |
| Time Under  $100,000                          |   | 21,076,000        |   | 19,143,900             |   |
| Time Equal to or  Greater than $100,000       |   | 16,137,000        |   | 16,127,500             |   |
|                                          |   | 71,596,100        |   | 67,616,400             |   |

 

(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 six months ended June 30, 2003 are notnecessarily indicative of the results to be expected for the entire fiscal yearending December 31, 2003.  The year-end balance sheet dataat December 31, 2002 was derived from the audited financial statements.

 

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, 2002.

 

5

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(Note 6) StockOption Plan

 

Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148“Accounting for Stock-Based Compensation –Transition and Disclosure,”encourages all entities to adopt a fair value based method of accounting foremployee stock compensation plans, whereby compensation cost is measured at thegrant date based on the value of the award and is recognized over the serviceperiod, 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, ifany, of the quoted market price of the stock at the grant date (or othermeasurement date) over the amount an employee must pay to acquire thestock.  Stock options issued under theCorporation’s stock option plan have no intrinsic value at the grant date, andunder Opinion No. 25 no compensation cost is recognized for them.

 

The Corporation applies APB Opinion 25 and related Interpretations inaccounting for the plan.  Accordingly,no compensation 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, theCorporation’s net income and basic earnings per share would have been adjustedto the pro forma amounts indicated below:

 
|                  |   | **2003** |    | **2002** |   |
|-----------------------|--------|----------|---------|----------|--------|
| Net income:           |   |     |    |     |   |
| As reported           |   | $        | 357,600 |     | $      | 194,600 |   |
| Pro forma             |   | $        | 338,600 |     | $      | 157,300 |   |
|                  |   |     |    |     |   |
| Earnings per share:   |   |     |    |     |   |
| Basic - as reported   |   | $        | 0.239   |     | $      | 0.131 |   |
| Basic - pro forma     |   | $        | 0.227   |     | $      | 0.106 |   |
|                  |   |     |    |     |   |
| Diluted - as reported |   | $        | 0.201   |     | $      | 0.111 |   |
| Diluted - pro forma   |   | $        | 0.190   |     | $      | 0.090 |   |

 

The fair value of these options was estimated at the grant date usingthe Black-Scholes option pricing model with the following weighted-averageassumptions for 2003 and 2002: risk-free interest rate of 4.57 percent;dividend yield of 0 percent; expected option life of 5.0 years; andvolatility of 30 percent.

 

(NOTE 7) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|                                |   | **6/30/03** |   | **6/30/02** |   |
|-------------------------------------|--------|-------------|--------|-------------|--------|
| Payments during the period  ending: |   |        |   |        |   |
| Interest                            |   | 992,000     |   | 1,177,000   |   |
| Income Taxes                        |   | 203,400     |   | 77,600      |   |

 

6

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**Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

**OVERVIEW**

 

The following discussion reviews and analyzes theoperating results and financial condition of the Corporation, focusing on theBank.  It should be read in conjunctionwith the financial statements and the other financial data presented elsewhereherein.

 

For the six months, ended June 30, 2003 net income was$357,600, an increase of $162,900 when compared to the same period in2002.  The increase in earnings duringthis period was the result of a $300,900 increase in net interest income afterprovision for loan losses and a $336,400 increase in non-interest income,partially offset by a $474,400 increase in non-interest expense.

 

7

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The following table sets forth certain selectedfinancial ratios of the Corporation at and for the six months ended, June 30,2003 and 2002.

 
|                                                  |   | **For the six months  Ended June 30, 2003**      |   | **For the six months  Ended June 30, 2002** |   |
|-------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------------|--------|
|                                                  |   | **(Dollars in thousands except per share data)** |   |
| Summary of Operating Results:                         |   |                                             |   |                                        |   |
|                                                  |   |                                             |   |                                        |   |
| Total interest  income                                |   | 2,642                                            |   | 2,390                                       |   |
| Total interest  expense                               |   | 948                                              |   | 1,020                                       |   |
| Net interest  income                                  |   | 1,694                                            |   | 1,370                                       |   |
|                                                  |   |                                             |   |                                        |   |
| Provision for  possible loan losses                   |   | 75                                               |   | 52                                          |   |
| Net interest  income after provision for loan loss    |   | 1,619                                            |   | 1,318                                       |   |
|                                                  |   |                                             |   |                                        |   |
| Total other  income                                   |   | 1,961                                            |   | 1,625                                       |   |
| Total other  expense                                  |   | 3,034                                            |   | 2,670                                       |   |
|                                                  |   |                                             |   |                                        |   |
| Income (loss)  before taxes                           |   | 546                                              |   | 272                                         |   |
| Provision for  income tax                             |   | 188                                              |   | 78                                          |   |
|                                                  |   |                                             |   |                                        |   |
| Net income  (loss)                                    |   | 358                                              |   | 195                                         |   |
|                                                  |   |                                             |   |                                        |   |
| Per Common Share  Data:                               |   |                                             |   |                                        |   |
|                                                  |   |                                             |   |                                        |   |
| Net income -  Primary (1)                             |   | 0.24                                             |   | 0.15                                        |   |
| Net income -  Diluted (2)                             |   | 0.20                                             |   | 0.12                                        |   |
| Book value, end  of period                            |   | 4.01                                             |   | 3.59                                        |   |
| Avg shares  outstanding (3)                           |   | 1,493,605                                        |   | 1,480,925                                   |   |
|                                                  |   |                                             |   |                                        |   |
| Balance Sheet  Data:                                  |   |                                             |   |                                        |   |
|                                                  |   |                                             |   |                                        |   |
| Total loans, net  of unearned income (4)              |   | 68,192                                           |   | 56,437                                      |   |
| Total assets                                          |   | 96,353                                           |   | 85,636                                      |   |
| Total deposits                                        |   | 71,596                                           |   | 70,560                                      |   |
| Stockholders’  equity                            |   | 6,015                                            |   | 5,307                                       |   |
| Selected Financial Ratios  (4):                       |   |                                             |   |                                        |   |
|                                                  |   |                                             |   |                                        |   |
| Return on  average assets(5)                          |   | 0.79                                             | %      | 0.49                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Return on average  stockholders’ equity(6)       |   | 12.35                                            | %      | 7.53                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Net interest  spread                                  |   | 3.85                                             | %      | 3.37                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Net interest  margin                                  |   | 4.19                                             | %      | 3.92                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Avg  shareholders’ equity to average assets      |   | 6.36                                             | %      | 6.50                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Risked-Based  capital ratios                          |   |                                             |   |                                        |   |
| Tier 1                                                |   | 11.95                                            | %      | 9.30                                        | %      |
| Total                                                 |   | 14.27                                            | %      | 10.28                                       | %      |
| Total loans to  total deposits at end of period       |   | 95.25                                            | %      | 79.98                                       | %      |
|                                                  |   |                                             |   |                                        |   |
| Allowance to  total loans at end of period            |   | 1.02                                             | %      | 1.09                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Non-performing  loans to total loans at end of period |   | 0.03                                             | %      | 0.19                                        | %      |
|                                                  |   |                                             |   |                                        |   |
| Net charge-offs  to average loans                     |   | 0.03                                             | %      | 0.00                                        | %      |

 

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(1)   Primary earnings per share amounts werecomputed on the basis of the weighted average number of shares of common stockoutstanding during the year.  Theweighted average number of common shares used for this computation was1,493,605 and 1,480,925 for June 30, 2003 and 2002, respectively.

 

(2)   Diluted earnings (loss) per share amountswere computed on the basis of the weighted average number of shares of commonstock and common stock equivalents outstanding during the year.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,782,722 and 1,755,802 for June 30, 2003 and 2002, respectively.

 

(3)   Weighted average common shares.

 

(4)   Includes loans being held for sale.

 

(5)   Averages are of daily balances.

 

(6)   June 30, 2003 calculated on an annualizedbasis.

 

8

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**NETINTEREST INCOME**

 

Net interest income, the difference between (a)interest and fees earned on interest-earning assets and (b) interest paid oninterest-bearing liabilities, is the most significant component of the Bank’searnings.  Changes in net interestincome from period to period result from increases or decreases in the averagebalances of interest earning assets portfolio, the availability of particularsources of funds and changes in prevailing interest rates.

 

Net interest income for the six-month period endedJune 30, 2003 was $1,693,500 compared to $1,369,600 for the same period in2002.  The increase of $323,900 resultedfrom total interest income increasing $252,400, while total interest expensedecreased $71,500.  Average interestearning assets increased $10,620,000 (15.19%) with average loans increasing$9,325,000 and investments increasing $1,295,000, while the average rate earneddecreased 27 basis points.  The averageinterest rate earned on loans decreased 25 basis points while the averageinterest rated earned on investments decreased 53 basis points.  Average interest bearing liabilitiesincreased $11,620,000 (19.76%), while the average rate paid decreased 78 basispoints.

 

The following table shows the components of the Bank’snet interest income, setting forth, for each the six months ended June 30, 2003and 2002 and for the twelve months ended December 31, 2002, (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, no tax-exempt investments were held in 2003or 2002.  Non-accrual loans andoverdrafts are included in average loan balances.  Average loans are presented net of unearned income.

 

9

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**INTERESTSPREAD ANALYSIS:**

 
|                                  |   | **The Six Months  Ended June 30,** |   | **The Twelve Months  Ended December 31,** |   |
|---------------------------------------|--------|------------------------------------|--------|-------------------------------------------|--------|
|                                  |   | **2003**                           |   | **2002**                                  |   | **2002** |   |
|                                  |   | **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:             |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 0                                  |   | 0                                         |   | 0.00 |   | 100 |   | 2 |   | 3.49 |   | 88 |   | 3 |   | 3.30 |   |
| Invest  securities - Taxable          |   | 7,364                              |   | 181                                       |   | 4.93 |   | 7,085 |   | 187 |   | 5.27 |   | 7,490 |   | 387 |   | 5.17 |   |
| Federal funds  sold                   |   | 8,614                              |   | 51                                        |   | 1.19 |   | 7,249 |   | 60 |   | 1.67 |   | 7,063 |   | 115 |   | 1.63 |   |
| Total  investments                    |   | 15,978                             |   | 232                                       |   | 2.91 |   | 14,434 |   | 249 |   | 3.45 |   | 14,641 |   | 505 |   | 3.45 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 4,027                              |   | 177                                       |   | 8.78 |   | 2,002 |   | 123 |   | 12.24 |   | 2,870 |   | 272 |   | 9.46 |   |
| Real estate                           |   | 44,781                             |   | 1,783                                     |   | 7.96 |   | 37,129 |   | 1,527 |   | 8.23 |   | 37,729 |   | 2,846 |   | 7.54 |   |
| Installment                           |   | 450                                |   | 21                                        |   | 9.42 |   | 729 |   | 33 |   | 8.94 |   | 704 |   | 57 |   | 8.12 |   |
| Commercial                            |   | 15,540                             |   | 428                                       |   | 5.51 |   | 15,615 |   | 458 |   | 5.87 |   | 15,454 |   | 1,191 |   | 7.71 |   |
| Total loans                           |   | 64,799                             |   | 2,409                                     |   | 7.44 |   | 55,474 |   | 2,141 |   | 7.72 |   | 56,758 |   | 4,365 |   | 7.69 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest  earning assets        |   | 80,776                             |   | 2,641                                     |   | 6.54 |   | 69,908 |   | 2,390 |   | 6.84 |   | 71,399 |   | 4,870 |   | 6.82 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 10,398                             |   | 13                                        |   | 0.25 |   | 10,277 |   | 47 |   | 0.91 |   | 10,960 |   | 73 |   | 0.67 |   |
| Money market  savings                 |   | 2,160                              |   | 11                                        |   | 1.04 |   | 1,781 |   | 9 |   | 1.02 |   | 2,021 |   | 21 |   | 1.04 |   |
| Savings deposits                      |   | 6,067                              |   | 31                                        |   | 1.03 |   | 3,863 |   | 28 |   | 1.48 |   | 4,199 |   | 54 |   | 1.29 |   |
| Time deposits  >$100M              |   | 16,496                             |   | 265                                       |   | 3.21 |   | 16,775 |   | 325 |   | 3.88 |   | 16,059 |   | 610 |   | 3.80 |   |
| Time deposits  <$100M              |   | 19,889                             |   | 314                                       |   | 3.15 |   | 20,914 |   | 446 |   | 4.27 |   | 20,371 |   | 815 |   | 4.00 |   |
| Other Borrowing                       |   | 15,419                             |   | 315                                       |   | 4.08 |   | 5,200 |   | 163 |   | 6.28 |   | 5,402 |   | 306 |   | 5.67 |   |
| Total interest  bearing liabilities   |   | 70,429                             |   | 948                                       |   | 2.69 |   | 58,809 |   | 1,019 |   | 3.47 |   | 59,012 |   | 1880.2 |   | 3.19 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                  |   |                               |   | 1,694                                     |   |   |   |   |   | 1,370 |   |   |   |   |   | 2,990 |   |   |   |
| Net interest  spread                  |   |                               |   |                                      |   | 3.85 |   |   |   |   |   | 3.37 |   |   |   |   |   | 3.64 |   |
| Net yield on  interest earning assets |   |                               |   |                                      |   | 4.19 |   |   |   |   |   | 3.92 |   |   |   |   |   | 4.19 |   |

 

10

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|                                 |   | **Six Months  Ended June 30,  2003 vs 2002** |   | **Twelve  Months  Ended December 31,  2002 vs 2001** |   |
|--------------------------------------|--------|----------------------------------------------|--------|------------------------------------------------------|--------|
|                                 |   | **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:             |   |                                         |   |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks |   | (2                                           | )      | 0                                                    |   | (2 | ) | (6 | ) | (3 | ) | (9 | ) |
| Invest  securities - Taxable         |   | 7                                            |   | (12                                                  | )      | (5 | ) | 3 |   | (85 | ) | (82 | ) |
| Federal funds  sold                  |   | 11                                           |   | (20                                                  | )      | (9 | ) | (114 | ) | (134 | ) | (249 | ) |
| Total  investments                   |   | 16                                           |   | (33                                                  | )      | (16 | ) | (118 | ) | (222 | ) | (340 | ) |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Construction                         |   | 124                                          |   | (70                                                  | )      | 54 |   | 68 |   | (24 | ) | 44 |   |
| Real estate                          |   | 315                                          |   | (59                                                  | )      | 256 |   | 581 |   | (540 | ) | 41 |   |
| Installment                          |   | (12                                          | )      | 1                                                    |   | (11 | ) | (7 | ) | (25 | ) | (32 | ) |
| Commercial                           |   | (12                                          | )      | (18                                                  | )      | (30 | ) | 114 |   | (377 | ) | (264 | ) |
| Total loans                          |   | 415                                          |   | (146                                                 | )      | 268 |   | 755 |   | (966 | ) | (211 | ) |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets       |   | 431                                          |   | (179                                                 | )      | 252 |   | 637 |   | (1,188 | ) | (551 | ) |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:       |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                  |   | 1                                            |   | (35                                                  | )      | (34 | ) | 15 |   | (35 | ) | (20 | ) |
| Money market  savings                |   | 2                                            |   | 0                                                    |   | 2 |   | 12 |   | (14 | ) | (1 | ) |
| Savings deposits                     |   | 16                                           |   | (13                                                  | )      | 3 |   | 6 |   | (22 | ) | (16 | ) |
| Time deposits  >$100M             |   | (5                                           | )      | (56                                                  | )      | (61 | ) | 46 |   | (269 | ) | (223 | ) |
| Time deposits  <$100M             |   | (22                                          | )      | (111                                                 | )      | (133 | ) | 6 |   | (317 | ) | (311 | ) |
| Other Borrowing                      |   | 321                                          |   | (169                                                 | )      | 152 |   | 62 |   | (48 | ) | 14 |   |
| Total interest  bearing liabilities  |   | 313                                          |   | (383                                                 | )      | (70 | ) | 147 |   | (704 | ) | (557 | ) |
|                                 |   |                                         |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net change in  net interest          |   | 118                                          |   | 204                                                  |   | 322 |   | 490 |   | (484 | ) | 6 |   |

 

11

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**Provision and Allowance for LoanLosses**

 

The provision for loan losses is an expense chargedagainst operating income and added to the allowance for loan losses.  The allowance for loan losses representsamounts, which have been set aside for the specific purpose of absorbinglosses, which may occur in the Bank’s loan portfolio.

 

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of theCalifornia Department of Financial Institutions and FDIC examinations,independent accountants’ observations, and the Bank’s internal review asadditional indicators to determine if the amount in the allowance for loanlosses is adequate 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                    |   | 2.00          | %      |
| 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 can be given that actual losseswill not exceed the amount provided for in the allowance, Management believesthat the allowance is adequate to provide for all estimated credit losses inlight of all known relevant factors. At June 30, 2003 and 2002 the Bank’sallowance stood at 1.02 and 1.09 percent, respectively.  A provision of $75,000 was made to theallowance during the six months ended June 30, 2003 compared with $52,000 inthe same period in 2002.  Charged offloans during the six months ended June 30, 2003 and 2002 totaled $18,400 and$14,800 respectively.  Recoveries forthe same periods were $800 and $12,500, respectively.

 

12

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The Bank’s non-performing (delinquent 90 days or moreand non-accrual) loans as a percentage of total loans were 0.03 percent at June30, 2003 compared with 0.19 percent at June 30, 2002.

 

Based upon statistics released by Federal and statebanking authorities regarding banks of similar size or otherwise located inCalifornia, Management believes that the Bank’s ratios of delinquent and nonperforming loans to total loans are far better than average.  Prudent collection efforts, and tighterlending controls, are responsible for the Bank’s strong performance on thesemeasures of credit quality.  However, noassurance can be given that the Bank’s loan portfolio will continue to measurewell against its peers on these ratios and quality measures, or that losseswill not otherwise occur in the future.

 

**Non-InterestIncome**

 

Total non-interest income for the six months endedJune 30, 2003 was $1,961,300, compared with $1,624,900 for the same period in2002.  The increase of $336,400 was theresult increases of a $17,500 in service charges on deposit accounts, $45,700in SBA loan sales and servicing and $273,200 in other operating income.  The increase in other operating incomeincluded increases of $77,900 in commercial banking origination fees, $61,700in merchant discount fees and a gain of $36,700 on investment securitiescompared with a loss of $131,300 in 2002.

 

The sale of Small Business Administration (SBA)guaranteed loans is a significant contributor to the Bank’s income.  SBA guaranteed loans yield up to 3 3/4% overthe New York prime rate, and the guaranteed portions can be sold at premiums,which vary with market conditions.  SBAloans are guaranteed by the full faith of the United States Government from 75to 80 percent of the principal amount. The guaranteed portion has risks comparable for an investor to a U. S.Government security and can usually be sold in the secondary financial market,either at a premium or at a yield, which allows the Bank to maintain asignificant spread for itself.

 

There can be no assurance that the gains on sale willcontinue at, or above, the levels realized in the past three years.  In addition, increasing competition amonglenders for qualified SBA borrowers makes it difficult for the Bank tocontinually expand its program in this area, and may limit the level of premiumthat can be earned with regard thereto. The level of premium income on longer-term loans has been significantlyreduced due to the volume of loans that have been paid off early.

 

**Non-InterestExpense**

 

Salary and benefits expense for the six months endedJune 30, 2003 increased $182,300 compared with the same period in 2002.  The increase was due to merit pay increasesand increased bonus accruals due to increased earnings.

 

Total occupancy and equipment expense for the sixmonths ended June 30, 2003 was $262,800 compared to $176,500 for the sameperiod in 2002.  The increase was due to

 

13

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leasing a branch office facility in Carmel by the Sea, additionaloffice space in Monterey and increases under existing lease agreements.

 

For the six months ended June 30, 2003 professionalfees were $48,700 compared with $40,400 the same period in 2002.  Accounting/audit fees increased $7,500 andlegal fees increased $800.

 

Data processing for the six months ended June 30, 2003increased $15,700 compared to the same period in 2002.  The increase was due to cost increasednumbers of accounts and transaction volumes and an annual cost of livingadjustment.

 

Other expenses for the six months endedJune 30, 2003 totaled $1,516,300 compared with $1,334,500 for the same periodin 2002.  Significant changes occurredin the following categories with increases in and income tax expense $110,700,merchant expense of $26,400, collection expense $22,700, stationary &supplies $12,500, advertising $9,400, miscellaneous expense $5,300, businessdevelopment/promotions $4,100, and telephone expense $8,300; with decreases ininsurance expense $11,700, other losses $7,300, miscellaneous $2,800, donationexpense $4,700, entertainment & meals $8,600, security $4,100.

 

**LOANS**

 

Loans represented 80.48% of average earning assets,and 71.21% of average total assets for the six months ended June 30, 2003,compared with 79.35% and 69.75%, respectively during 2002.  For the six months ended June 30, 2003average loans increased 16.92% from $55,474,000 for the same period in 2002 to$64,799,000.  Average real estate loansincreased $7,652,000 (20.61%), and construction loans increased $2,025,000(101.17%) while average installment loans decreased $279,000 (38.20%) andaverage commercial loans decreased $11,000 (0.07%).

 

The Bank’s commercial and industrial loans aregenerally made for the purpose of providing working capital, financing thepurchase of equipment or inventory, and other business purposes. Such loansgenerally have terms ranging from one year to several years.  Short-term business loans are generally intendedto finance current transactions and typically provide for monthly interestpayments with principal being payable at maturity or at 90-day intervals. Termloans (usually for a term of two to five years) normally provide for monthlyinstallments of principal and interest. The Bank from time to time utilizes accounts receivable and inventory assecurity for loans.

 

The Bank is a recognized leader for Small BusinessAdministration lending in Monterey County, and holds SBA’s coveted PreferredLender Status.  Generally, the SBAguarantees SBA loans for 75 to 80 percent of their principal amount, which canbe retained in portfolio or sold to investors. Such loans are made at floating interest rates, but generally for longerterms (up to 25 years) than are available on a conventional basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventionalcommercial loans because they

 

14

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may be based upon credit standards the Bank would not otherwise apply,such as lower cash flow coverage, or longer repayment terms.

 

The Bank’s real estate loan portfolio consists both ofreal estate construction loans and real estate mortgage loans.  The Bank has initiated a program to generatemore commercial and industrial real estate loans, which generally yield higherreturns than normal commercial loans.  TheBank has also developed a broker program for generating residential real estateloans.  The Bank does not make realestate development loans.  Real estate construction loans are made for amuch shorter term, and often at higher interest rates, than conventionalsingle-family residential real estate loans. The cost of administering such loans is often higher than for other realestate loans, as principal is drawn on periodically as construction progresses.

 

The Bank also makes real estate loans secured by afirst deed of trust on single- family residential properties and commercial andindustrial real estate.  Californiacommercial banks are permitted, depending on the type and maturity of the loan,to lend up to 90 percent of the fair market value of real property (or more ifthe loan is insured either by private mortgage insurers or governmentalagencies).  In certain instances, theappraised value may exceed the actual amount, which could be realized onforeclosure, or declines in market value subsequent to making the loan canimpair 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. Consumer installment loans generally provide for monthly payments ofprincipal and interest, at a fixed rate. Most of the Bank’s consumer installment loans are generally secured bythe personal property being purchased. The Bank generally makes consumer loans to those customers with a priorbanking relationship with the Bank.

 

15

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**Nonperformingand Nonaccrual Loans**

 

The Bank’s present policy is to cease accruinginterest on loans which are past due as to principal or interest 90 days ormore, except for loans which are well secured or when collection of interestand principal is deemed likely.  When aloan is placed on non-accrual, previously accrued and unpaid interest isgenerally reversed out of income unless adequate collateral from which tocollect the principal of, and interest on, the loan appears to be available.

 

The following table presents information with respectto loans which, as of the dates indicated, were past due 90 days or more orwere placed on non-accrual status (referred to collectively as “non-performingloans”):

 
|                                                           |   | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------|--------|---------------------------------|--------|
|                                                           |   | **2003**                        |   | **2002** |   |
|                                                           |   | **(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                                                     |   | 20                              |   | 109 |   |
| Installment                                                    |   | 0                               |   | 0 |   |
| Other                                                          |   | 0                               |   | 0 |   |
| Total  non-accrual                                             |   | 20                              |   | 109 |   |
|                                                           |   |                            |   |   |   |
| Total  non-performing                                          |   | 20                              |   | 109 |   |
|                                                           |   |                            |   |   |   |
| Total loans end  of period                                     |   | 68,192                          |   | 56,437 |   |
|                                                           |   |                            |   |   |   |
| Ratio of  non-performing loans to total loans at end of period |   | 0.03                            | %      | 0.19 | % |

 

These ratios have been maintained as a result of astrengthening of underwriting criteria, frequent review of new and delinquentloans and a firm collection policy (with the assistance of outside legalcounsel).  The Bank does not have anyforeign loans or loans for highly leveraged transactions.

 

16

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**Summaryof Loan Loss Experience**

 
|                                                                           |   | **Six Months  Ended  June 30, 2003** |   | **Six Months  Ended  June 30, 2002** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**          |   |
| Average loans  outstanding                                                     |   | 64,799                               |   | 55,474                               |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance,  beginning of period                                                |   | 637                                  |   | 566                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Loans charged  off during period:                                              |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 18                                   |   | 13                                   |   |
| Installment                                                                    |   | 0                                    |   | 0                                    |   |
| Real Estate                                                                    |   | 0                                    |   | 1                                    |   |
| Other                                                                          |   | 0                                    |   | 1                                    |   |
| Total charge  offs                                                             |   | 18                                   |   | 15                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Recoveries  during period:                                                     |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 1                                    |   | 13                                   |   |
| Installment                                                                    |   | 0                                    |   | 0                                    |   |
| Other                                                                          |   | 0                                    |   | 0                                    |   |
| Total recoveries                                                               |   | 1                                    |   | 13                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Net Loans  charged off during the period                                       |   | 17                                   |   | 2                                    |   |
|                                                                           |   |                                 |   |                                 |   |
| Additions to  allowance for possible loan losses                               |   | 75                                   |   | 52                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance, end  of period                                                      |   | 695                                  |   | 616                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of net  loans charged off to average Loans outstanding during the period |   | 0.03                                 | %      | 0.00                                 | %      |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of  allowance to total loans at end of period                            |   | 1.02                                 | %      | 1.09                                 | %      |

 

17

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**FundingSources**

 

Average deposits for the six months ended June 30,2003 were $69,277,000 an increase of 1.49% compared with the average balancefor 2002.  Average certificates ofdeposit represented 52.52% of average deposits for the six months ended June30, 2003.  Average interest bearingchecking, money market and savings accounts as a group was 26.89% of averagedeposits.  Average demand depositsrepresented 20.59% of average deposits.

 

On March 27, 2003, the Company’s wholly ownedspecial-purpose trust subsidiary, Northern California Bancorp, Inc.Trust I (the “Trust”) issued $3 million in cumulative Trust PreferredSecurities.  The securities bear afloating rate of interest of 3.25% over the three month LIBOR rate, payablequarterly.  Concurrent with the issuanceof the Trust Preferred Securities, the Trust used the proceeds from the TrustPreferred Securities offering to purchase a like amount of Junior SubordinatedDebentures of the Company.  TheSubordinated Debentures are the sole assets of the Trust and are eliminated,along with the related income statement effects, in the consolidated financialstatements.  The Company will payinterest on the Junior Subordinated Debentures to the Trust, which representsthe sole revenue and sole source of dividend distributions to the holders ofthe Trust Preferred Securities.  TheCompany has the right, assuming no default has occurred, to defer payments ofinterest on the Junior Subordinated Debentures at any time for a period not toexceed 20 consecutive quarters.  TheTrust Preferred Securities will mature on April 7, 2033, but can be redeemedunder certain circumstances at a premium prior to April 7, 2008, and can beredeemed, in whole or in part, on any January 7, April 7, July 7 or October 7on or after April 7, 2008 at par.  TheCompany fully and unconditionally guarantees the obligations of the Trust, on asubordinated basis.

 

The Company received $2.91 million from the Trust uponissuance of the Junior Subordinated Debentures, of which $1 million wascontributed by the Company to the Bank to increase its capital, $1.14 millionwas used to retire existing Company debt and the remainder held as workingcapital.  Under applicable regulatoryguidelines, a portion of the Trust Preferred Securities will qualify as Tier ICapital, and the remainder as Tier II Capital.

 

Issuance costs of $115,800 related to the TrustPreferred Securities have been deferred and will be amortized over the 30-yearlife of the securities.

 

During the six months ended June 30, 2003 interestexpense on Junior Subordinated Debentures totaled $36,300 and the amortizationof the issuance cost totaled $1,000.

 

The Bank has lines of credit from the Federal HomeLoan Bank of San Francisco and Pacific Coast Bankers’ Bank with maximumborrowing limits on June 30, 2003 of $15,019,400 and $2,500,000,respectively.  The Federal Home LoanBank line of credit is secured by real estate secured loans and investmentsecurities at June 30, 2003 the total principal balances of pledged loans was$21,127,600 and total pledged securities were $4,103,600.  The following table provides information onthe Federal Home Loan Bank advances out standing at June 30, 2003.

 

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** **

| **Advance  Amount** |   | **Rate** |   | **Funding  Date** |   | **Maturity  Date** |   |
|---------------------|--------|----------|--------|-------------------|--------|--------------------|--------|
| 1,000,000           |   | 6.81     | %      | 6/03/1997         |   | 6/03/2004          |   |
| 1,000,000           |   | 4.83     | %      | 10/06/1998        |   | 10/06/2003         |   |
| 1,000,000           |   | 7.72     | %      | 6/01/2000         |   | 6/03/2030          |   |
| 1,000,000           |   | 6.86     | %      | 8/10/2000         |   | 8/10/2005          |   |
| 2,750,000           |   | 3.44     | %      | 9/27/2002         |   | 9/27/2007          |   |
| 100,000             |   | 2.89     | %      | 10/29/2002        |   | 10/31/2005         |   |
| 3,900,000           |   | 2.83     | %      | 10/29/2002        |   | 10/31/2005         |   |
| 1,000,000           |   | 2.54     | %      | 2/04/2003         |   | 2/06/2006          |   |
| 1,500,000           |   | 3.34     | %      | 2/14/2003         |   | 2/14/2008          |   |
| 1,500,000           |   | 1.01     | %      | 6/20/2003         |   | 6/21/2004          |   |

 

The Bank has a $105,000 letter of credit issued by theFederal Home Loan Bank of San Francisco to secure the uninsured portion oflocal agency deposits maintained with the Bank.  The letter of credit matures April 17, 2006.

 

**CapitalResources**

 

The Bank maintains capital to comply with legalrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to paydividends.  At June 30, 2003,stockholders’ equity was $6,014,700 versus $5,638,900 at December 31, 2002. TheCompany paid a ten (10%) percent stock dividend in 2002, 2001 and 2000.  The Bank paid a cash dividend of $50,000during the six months ended June 30, 2003 and cash dividends totaling $75,000and $100,000 to the Corporation in 2002 and 2001.

 

The FDIC and Federal Reserve Board have adoptedcapital adequacy guidelines for use in their examination and regulation ofbanks and bank holding companies.  Ifthe capital of a bank or bank holding company falls below the minimum levelsestablished by these guidelines, it may be denied approval to acquire orestablish additional banks or non-bank businesses, or the FDIC or FederalReserve Board may take other administrative actions.  The guidelines employ two measures of capital:  (1) risk-based capital and (2) leveragecapital.

 

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 consolidatedbasis the Company had a Tier 1 risk-based capital ratio of 11.95% and a totalrisk-based capital ratio of 14.27% at June 30, 2003 well above the minimumregulatory 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 7.72% at June 30, 2003.

 

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**Liquidity**

 

Liquidity represents a bank’s ability to providesufficient cash flows or cash resources in a manner that enables it to meetobligations in a timely fashion and adequately provides for anticipated futurecash needs.  For the Bank, liquidityconsiderations involve the capacity to meet expected and potential requirementsof depositors seeking access to balances and to provide for the credit demandsof borrowing customers.  In the ordinarycourse of the Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. The Bank has a line of credit fromthe Federal Home Loan Bank of San Francisco of approximately $15,000,000 and a$2,500,000 unsecured Federal Funds Purchased line with the Pacific CoastBankers’ Bank to meet temporary liquidity requirements.

 

As a matter of policy, the Bank seeks to maintain alevel of liquid assets, including marketable investment securities, equal to aleast 15 percent of total assets (“primary liquidity”), while maintainingsources of secondary liquidity (borrowing lines from other institutions) equalto at least an additional 10 percent of assets.  In addition, it seeks to generally limit loans to not more than90 percent of total funding sources (total deposits plus Federal Home Loan Bankadvances).  Within these ratios, the Bank generally has excess fundsavailable to sell as federal funds on a daily basis, and is able to fund itsown liquidity needs without the need of short-term borrowing.  The Bank’s total liquidity at June 30, 2003was 24.85 percent; while its average loan to funding sources ratio for the sixmonths ended June 30, 2002 was 76.58 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 regulatoryauthorities, liquidity determinations and capital considerations.  The Bank instituted formal asset/liabilitypolicies at the end of 1989.

 

The purpose for asset/liability management is toprovide stable net interest income growth by protecting the Bank’s earningsfrom undue interest rate risk.  The Bankexpects to generate earnings from increasing loan volume, appropriate loanpricing and expense control and not from trying to accurately forecast interestrates.  Another important function ofasset/liability management is managing the risk/return relationships betweeninterest rate risk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidityconcerns followed by capital adequacy, then interest rate risk and market riskin the investment portfolio.  The policyof the Bank 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 analytical purposes.  Therefore, changes in market rates ofinterest will generally impact on the Bank’s net interest income and netinterest margin for long or short periods of time.

 

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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 June 30, 2003 theaffect of a 2% increase in the federal funds sold rate would result in a 6.14%increase in equity.  At June 30, 2003the fed funds target rate was 1.00%; therefore, the model assumed a 1% decreasein the fed funds rate resulting in negative affect on capital of 2.45%.

 

**InvestmentSecurities**

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at June 30, 2003:

 

INVESTMENT PORTFOLIO MIX

 
|                                      |   | **Book  Value**             |   | **Market  value** |   |
|-------------------------------------------|--------|-----------------------------|--------|-------------------|--------|
|                                      |   | **(Dollars  in thousands)** |   |
|                                      |   |                        |   |
| Securities  Available for Sale            |   |                        |   |              |   |
| U. S. Government  Agency Securities       |   | 1,003,800                   |   | 1,006,700         |   |
| Government  National Mortgage Association |   | 3,254,700                   |   | 3,230,200         |   |
| Corporate Debt  Securities                |   | 2,556,800                   |   | 2,569,500         |   |
| Total                                     |   | 6,815,300                   |   | 6,806,400         |   |

 

The following table summarizes the maturity of theBank’s investment securities at June 30, 2003:

 

INVESTMENT PORTFOLIOMATURITIES

(Dollars in thousands)

 
|                               |   | **Available  for Sale** |   |
|------------------------------------|--------|-------------------------|--------|
|                               |   | **Amortized  Cost**     |   | **Fair  Value** |   |
| Due between one  and five years    |   | 2,810,600               |   | 2,794,400 |   |
| Due between five  and ten years    |   | 750,000                 |   | 781,800 |   |
| Due between ten  and fifteen years |   | —                  |   | — |   |
| Due in over  fifteen years         |   | 3,254,700               |   | 3,230,200 |   |
|                               |   | 6,815,300               |   | 6,806,400 |   |

 

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**Item 3.  Controls and Procedures**

 

(a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosurecontrols and procedures (as Defined in Section 13(a) – 14(c) of the SecuritiesExchange Act of 1934 (the “Act”) was carried out under the supervision and withthe participation of the Company’s Chief Executive Officer, Chief FinancialOfficer and other members of the Company’s management within the 90-day periodpreceding the filing date of this quarterly report.  The Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures as currently ineffect are effective in ensuring that the information required to be disclosedby the Registrant in the reports it files or submits under the Act is(i) accumulated and communicated to the Company’s management (includingthe Chief Executive Officer and Chief Financial Officer) in a timely manner,and (ii) recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.

 

# **(b) Changes in Internal Controls:  In the quarter ended June 30, 2003, theCompany did not make any significant changes in, nor take any correctiveactions regarding, its internal controls or other factor that couldsignificantly affect these controls.**

 

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# **PART II-OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

None

 

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

 

The following proposals werepresented to shareholders at the Corporation’s annual shareholders’ meetingheld on May 29, 2003.

 

Proposal Number 1:               Election of Directors

** **
|                        |   | **Number of  Affirmative Votes** |   | **Number of  Votes Withheld** |   |
|-----------------------------|--------|----------------------------------|--------|-------------------------------|--------|
| Charles T. Chrietzberg, Jr. |   | 1,026,533                        |   | 9,354                         |   |
| Sandra G. Chrietzberg       |   | 1,027,024                        |   | 9,354                         |   |
| Peter J. Coniglio           |   | 1,027,828                        |   | 8,550                         |   |
| Carla S. Hudson             |   | 1,027,828                        |   | 8,550                         |   |
| John M. Lotz                |   | 1,025,041                        |   | 11,337                        |   |

 

Proposal Number 2:               Amend the Company’s 1998 Stock Option Plan toincrease the number of shares covered there under from 558,803 to 654,749.

 

| **Number of  Affirmative Votes** |   | **Number of  Votes Against** |   | **Number of  Abstentions** |   |
|----------------------------------|--------|------------------------------|--------|----------------------------|--------|
| 864,717                          |   | 29,394                       |   | 5,059                      |   |

 

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

 

A.         EXHIBITS

 

31.1               Certification ofthe 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 Officerof Northern California Bancorp, Inc. pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1               Certification of the Chief Executive Officerof Northern California Bancorp, Inc. pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

32.2               Certification of the Chief Financial Officerof Northern California Bancorp, Inc. pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

B.                              REPORTSon FORM 8-K

 

None

 

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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:  | August 11, 2003                   |   | By: | /s/ Charles T.  Chrietzberg, Jr. |   |
|   |                              | Charles T.  Chrietzberg, Jr. |
|   |                              | Chief Executive Officer  and President |
|   |                              |   |
|   |                              |   |
| Date:  | August 11, 2003                   |   | By: | /s/ Bruce N.  Warner |   |
|   |                              | Bruce N. Warner |
|   |                              | Chief Financial Officer  and  Principal Accounting Officer |

 

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