**Table ofContents**

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

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **x** | **Quarterly report under Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------|--------------------------------------------------------------------------------------------------|

 

**for the quarterly period ended September 30,2009**

 

| **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 Business Issuer in its Charter)

 

**Incorporated in the State of California**

**IRS Employer Identification Number 77-0421107**

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

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

 

Check whether theissuer: (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is an accelerated filer, a non-acceleratedfiler, or a smaller reporting company (as defined in Rule 12b-2 of theAct).

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller reporting company x |

 

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

 

As of November 12,2009, the Corporation had 1,783,230 shares of common stock outstanding.

 

 

 

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Table of Contents

 

TABLE OF CONTENTS

 
| **Facing Page**       |   | 1                                                                                           |
|-----------------------|--------|---------------------------------------------------------------------------------------------|
| **Table of Contents** |   | 2                                                                                           |
| **PART I**       |   | Financial Information                                                                       |   | 3-6 |
| Item 1                |   | Financial Statements                                                                        |   |   |
|                  |   | Consolidated  Balance Sheets                                                                |   | 3 |
|                  |   | Consolidated  Statements of Operations                                                      |   | 4 |
|                  |   | Consolidated****Statements****of  Changes in Shareholders’ Equity                      |   | 5 |
|                  |   | Consolidated  Statements of Cash Flows                                                      |   | 6 |
|                  |   | Summary of  Accounting Policies                                                             |   | 7-15 |
| Item 2                |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 15-36 |
| Item 4T               |   | Controls and Procedures                                                                     |   | 37 |
|                  |   |                                                                                        |   |   |
| **PART II**      |   | Other Information                                                                           |   |   |
| Item 1                |   | Legal Proceedings                                                                           |   | 38 |
| Item 2                |   | Unregistered Sales of Equity  Securities and Use of Proceeds                                |   | 38 |
| Item 3                |   | Defaults Upon Senior  Securities                                                            |   | 38 |
| Item 4                |   | Submission of Matters to a  Vote of Security Holders                                        |   | 38 |
| Item 5                |   | Other Information                                                                           |   | 39 |
| Item 6                |   | Exhibits                                                                                    |   | 39 |
| Signatures            |   | 39                                                                                          |
| Certifications        |   | 40-43                                                                                       |

 

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**PART I-FINANCIALINFORMATION**

 

### Item1. FINANCIAL STATEMENTS

###  

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands except share  data)**                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                          | ** ** | **(Unaudited)**        | ** ** | **(Audited)**         | ** ** |
| ASSETS:                                                                             |       |                   |       |                  |       |
| Cash  and Due From Banks                                                            |       | $                      | 5,730      |                  | $          | 16,348 |   |
| Trading  Assets                                                                     |       | 276                    |       | 361                   |       |
| Time  Deposits with other Financial Institutions                                    |       | 30,916                 |       | 3,500                 |       |
| Investment  Securities, available for sale (AFS) (Note 5)                           |       | 43,853                 |       | 93,353                |       |
| Other  Investments (Note 6)                                                         |       | 4,068                  |       | 3,852                 |       |
| Loans  Held for Sale, at lower of cost or market                                    |       | 1,244                  |       | 1,650                 |       |
| Loans,  net of allowance for loan losses of $2,982 in 2009; $2,413 in 2008 (Note 7) |       | 166,043                |       | 165,530               |       |
| Bank  Premises and Equipment, Net                                                   |       | 4,810                  |       | 4,988                 |       |
| Cash  Surrender Value of Life Insurance                                             |       | 4,064                  |       | 3,969                 |       |
| Other  Real Estate Owned                                                            |       | 13,923                 |       | 7,364                 |       |
| Interest  Receivable and Other Assets                                               |       | 6,001                  |       | 5,286                 |       |
| Total  Assets                                                                       |       | $                      | 280,928    |                  | $          | 306,201 |   |
|                                                                                |       |                   |       |                  |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:                                         |       |                   |       |                  |       |
|                                                                                |       |                   |       |                  |       |
| Non  interest-bearing demand                                                        |       | $                      | 42,539     |                  | $          | 25,812 |   |
| Interest-bearing  demand                                                            |       | 15,313                 |       | 14,240                |       |
| Savings                                                                             |       | 6,011                  |       | 6,159                 |       |
| Time  less than $100,000                                                            |       | 95,006                 |       | 88,188                |       |
| Time  in denominations of $100,000 or more                                          |       | 59,023                 |       | 55,331                |       |
| Total  Deposits                                                                     |       | 217,892                |       | 189,730               |       |
|                                                                                |       |                   |       |                  |       |
| Short-term  borrowed funds                                                          |       | 3,000                  |       | 18,000                |       |
| Federal  Home Loan Bank Borrowed Funds                                              |       | 29,000                 |       | 66,500                |       |
| Junior  Subordinated Debt Securities                                                |       | 8,248                  |       | 8,248                 |       |
| Payable  for Investment Securities Purchased                                        |       | —                 |       | 3,050                 |       |
| Interest  Payable and Other Liabilities                                             |       | 5,964                  |       | 6,321                 |       |
| Total  Liabilities                                                                  |       | 264,104                |       | 291,849               |       |
|                                                                                |       |                   |       |                  |       |
| Shareholders’  Equity:                                                         |       |                   |       |                  |       |
| Common  Stock - No Par Value                                                        |       |                   |       |                  |       |
| Authorized  10,000,000 in 2009 and 2,500,000 in 2008                                |       |                   |       |                  |       |
| Outstanding:1,783,230  in 2009 and 1,803,908 in 2008                                |       | 5,088                  |       | 5,173                 |       |
| Retained  Earnings                                                                  |       | 11,304                 |       | 9,481                 |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 8)                             |       | 432                    |       | (302                  | )          |
| Total  Shareholders’ Equity                                                    |       | 16,824                 |       | 14,352                |       |
| Total  Liabilities & Shareholders’ Equity                             |       | $                      | 280,928    |                  | $          | 306,201 |   |

 

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH PERIOD  ENDED** | ** ** | **NINE-MONTH PERIOD  ENDED** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **September 30,**        | ** ** | **September 30,**       | ** ** |
| **(in thousands except for share  data)**                               | ** ** | **2009**                      | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
| INTEREST  INCOME:                                                       |       |                          |       |                         |       |   |   |   |   |
| Loans                                                                   |       | $                             | 2,550      |                         | $          | 2,863 |   | $ | 8,239 |   | $ | 9,574 |   |
| Time  deposits with other financial institutions                        |       | 4                             |       | 4                            |       | 14 |   | 16 |   |
| Investment  securities                                                  |       | 1,037                         |       | 1,018                        |       | 3,795 |   | 2,740 |   |
| Federal  funds sold                                                     |       | —                        |       | 58                           |       | 1 |   | 209 |   |
| Total  Interest Income                                                  |       | 3,591                         |       | 3,943                        |       | 12,049 |   | 12,539 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| INTEREST  EXPENSE:                                                      |       |                          |       |                         |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 5                             |       | 13                           |       | 17 |   | 37 |   |
| Savings  and time deposit accounts                                      |       | 862                           |       | 833                          |       | 2,698 |   | 2,506 |   |
| Time  deposits in denominations of $100,000 or more                     |       | 532                           |       | 647                          |       | 1,600 |   | 2,129 |   |
| Notes  payable and other                                                |       | 988                           |       | 906                          |       | 2,968 |   | 2,633 |   |
| Total  Interest Expense                                                 |       | 2,387                         |       | 2,399                        |       | 7,283 |   | 7,305 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| Net  Interest Income                                                    |       | 1,204                         |       | 1,544                        |       | 4,766 |   | 5,234 |   |
| Provision  for loan losses                                              |       | 1,272                         |       | 250                          |       | 1,918 |   | 250 |   |
| Net  interest income (loss), after provision for loan losses            |       | (68                           | )          | 1,294                        |       | 2,848 |   | 4,984 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| NON-INTEREST  INCOME:                                                   |       |                          |       |                         |       |   |   |   |   |
| Service  charges on deposit accounts                                    |       | 148                           |       | 168                          |       | 493 |   | 572 |   |
| Income  from sales and servicing of Small Business Administration Loans |       | 219                           |       | 69                           |       | 316 |   | 285 |   |
| Gain  on sales of securities                                            |       | 2,018                         |       | —                       |       | 3,153 |   | 449 |   |
| Other  income                                                           |       | 1,687                         |       | 896                          |       | 4,413 |   | 2,844 |   |
| Total  non-interest income                                              |       | 4,072                         |       | 1,133                        |       | 8,375 |   | 4,150 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| NON-INTEREST  EXPENSE:                                                  |       |                          |       |                         |       |   |   |   |   |
| Salaries  and Employee Benefits                                         |       | 828                           |       | 881                          |       | 2,398 |   | 2,885 |   |
| Occupancy  and Equipment Expense                                        |       | 254                           |       | 243                          |       | 769 |   | 715 |   |
| Foreclosed  assets, net                                                 |       | 163                           |       | 76                           |       | 792 |   | 608 |   |
| Professional  Fees                                                      |       | 172                           |       | 50                           |       | 699 |   | 167 |   |
| Data  Processing                                                        |       | 67                            |       | 86                           |       | 247 |   | 277 |   |
| Other  general and administrative                                       |       | 1,479                         |       | 980                          |       | 4,025 |   | 2,671 |   |
| Total  non-interest expense                                             |       | 2,963                         |       | 2,316                        |       | 8,930 |   | 7,323 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| Income  before tax provision (benefit)                                  |       | 1,041                         |       | 111                          |       | 2,293 |   | 1,811 |   |
| Income  tax provision (benefit)                                         |       | 297                           |       | (43                          | )          | 470 |   | 801 |   |
| Net  income                                                             |       | $                             | 744        |                         | $          | 154 |   | $ | 1,823 |   | $ | 1,010 |   |
|                                                                    |       |                          |       |                         |       |   |   |   |   |
| Earnings  per common share                                              |       |                          |       |                         |       |   |   |   |   |
| Basic                                                                   |       | $                             | 0.417      |                         | $          | 0.085 |   | $ | 1.016 |   | $ | 0.552 |   |
| Diluted                                                                 |       | $                             | 0.416      |                         | $          | 0.085 |   | $ | 1.014 |   | $ | 0.543 |   |

 

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NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

** **
| ** **                                                                                                                | ** ** | ** **     | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**          | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|--------------|------------|--------------------------|------------|------------|------------|
| ** **                                                                                                                | ** ** | ** **     | ** ** | ** ** | ** ** | ** **   | ** ** | **Other  Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                | ** ** | **Number  of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **Income**               | ** ** | ** ** | ** ** |
| **(in thousands except share  data)**                                                                                     | ** ** | **Shares**     | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**               | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2007                                                                                        |       | 1,845,918      |       | $          | 5,502      |         | $          | 8,831                    |       | $          | 101        |   | $ | 14,434 |   |
|                                                                                                                      |       |           |       |       |       |         |       |                     |       |       |       |
| Cumulative  effect - application of new accounting standard EITF 06-4 and EITF 06-10                                      |       | —         |       | —     |       | (362         | )          | —                   |       | (362       | )          |
|                                                                                                                      |       |           |       |       |       |         |       |                     |       |       |       |
| Comprehensive  income:                                                                                                    |       |           |       |       |       |         |       |                     |       |       |       |
| Net  income for the year                                                                                                  |       | —         |       | —     |       | 1,462        |       | —                   |       | 1,462      |       |
| Change  in net unrealized gain on AFS securities and other assets, net of tax  reclassification adjustment and tax effect |       | —         |       | —     |       | —       |       | (403                     | )          | (403       | )          |
| Total  comprehensive income                                                                                               |       |           |       |       |       |         |       |                     |       | 1,059      |       |
| Stock  repurchase                                                                                                         |       | (46,010        | )          | (341       | )          | —       |       | —                   |       | (341       | )          |
| $ 0.25  per share dividend                                                                                           |       | —         |       | —     |       | (450         | )          | —                   |       | (450       | )          |
| Exercise  of stock options, including tax benefit                                                                         |       | 4,000          |       | 12         |       | —       |       | —                   |       | 12         |       |
|                                                                                                                      |       |           |       |       |       |         |       |                     |       |       |       |
| Balance  at December 31, 2008 (Audited)                                                                              |       | 1,803,908      |       | 5,173      |       | 9,481        |       | (302                     | )          | $          | 14,352     |   |
|                                                                                                                      |       |           |       |       |       |         |       |                     |       |       |       |
| Comprehensive  income:                                                                                                    |       |           |       |       |       |         |       |                     |       |       |       |
| Net  income for the year                                                                                                  |       | —         |       | —     |       | 1,823        |       | —                   |       | 1,823      |       |
| Change  in net unrealized loss on AFS securities and other assets, net of tax  reclassification adjustment and tax effect |       | —         |       | —     |       | —       |       | 734                      |       | 734        |       |
| Total  comprehensive income                                                                                               |       |           |       |       |       |         |       |                     |       | 2,558      |       |
| Stock  repurchase                                                                                                         |       | (20,678        | )          | (85        | )          | —       |       | —                   |       | (85        | )          |
|                                                                                                                      |       |           |       |       |       |         |       |                     |       |       |       |
| Balance  at September 30, 2009 (Unaudited)                                                                           |       | 1,783,230      |       | $          | 5,088      |         | $          | 11,304                   |       | $          | 432        |   | $ | 16,824 |   |

 

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008

 
| ** **                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           |       |     |       |     |       |
| Net  income                                                                        |       | $        | 1,823      |     | $          | 1,010 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation  and amortization expense                                             |       | 255      |       | 228      |       |
| Realized  gain on sales of available for sale securities, net                      |       | (3,153   | )          | (449     | )          |
| Amortization  of deferred loan fees, net                                           |       | 75       |       | 243      |       |
| Amortization  (accretion) of discounts and premiums on investment securities, net  |       | (272     | )          | (161     | )          |
| Provision  for loan losses                                                         |       | 1,918    |       | 250      |       |
| Provision  for foreclosed asset losses                                             |       | 522      |       | —   |       |
| Loss  on sale of other real estate owned                                           |       | 67       |       | —   |       |
| Increase  in cash surrender value of life insurance                                |       | (95      | )          | (92      | )          |
| Deferred  income tax (benefit) provision                                           |       | (322     | )          | 30       |       |
| (Increase)  decrease in assets:                                                    |       |     |       |     |       |
| Trading  assets                                                                    |       | 85       |       | 633      |       |
| Loans  held for sale                                                               |       | 406      |       | 639      |       |
| Interest  receivable                                                               |       | 1,174    |       | 10       |       |
| Other  assets                                                                      |       | (1,546   | )          | 1,317    |       |
| Increase  (decrease) in liabilities                                                |       |     |       |     |       |
| Interest  payable                                                                  |       | (541     | )          | (476     | )          |
| Other  liabilities                                                                 |       | 463      |       | 1,571    |       |
| Net  cash provided by operating activities                                         |       | 859      |       | 4,753    |       |
|                                                                               |       |     |       |     |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           |       |     |       |     |       |
| Net  change in time deposits with other financial institutions                     |       | (27,416  | )          | (6,500   | )          |
| Activity  in available for sale securities                                         |       |     |       |     |       |
| Sales                                                                              |       | 129,868  |       | 33,763   |       |
| Maturities,  prepayments, and calls                                                |       | (5,219   | )          | 3,000    |       |
| Purchases                                                                          |       | (74,281  | )          | (73,801  | )          |
| Net  increase in loans                                                             |       | (11,313  | )          | (11,270  | )          |
| Loan  sales                                                                        |       | —   |       | 12,781   |       |
| Proceeds  from sale of other real estate owned                                     |       | 2,491    |       | —   |       |
| Investment  in other real estate owned                                             |       | (1,111   | )          | —   |       |
| Additions  to bank premises and equipment                                          |       | (73      | )          | (407     | )          |
| Net cash  provided (used) by investing activities                                  |       | 12,946   |       | (42,434  | )          |
|                                                                               |       |     |       |     |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           |       |     |       |     |       |
| Net  increase in deposits                                                          |       | 28,162   |       | 14,779   |       |
| Proceeds  from borrowings                                                          |       | 5,000    |       | 11,340   |       |
| Repayments  on borrowing, net                                                      |       | (57,500  | )          | —   |       |
| Proceeds  from exercise of stock options                                           |       | —   |       | 12       |       |
| Repurchase  of common stock                                                        |       | (85      | )          | (341     | )          |
| Net  cash provided (used) by financing activities                                  |       | (24,423  | )          | 25,790   |       |
|                                                                               |       |     |       |     |       |
| Net  decrease in cash and cash equivalents                                         |       | (10,618  | )          | (11,891  | )          |
|                                                                               |       |     |       |     |       |
| **CASH AND CASH EQUIVALENTS, BEGINNING**                                           |       | 16,348   |       | 20,153   |       |
|                                                                               |       |     |       |     |       |
| **CASH AND CASH EQUIVALENTS, ENDING**                                              |       | $        | 5,730      |     | $          | 8,262 |   |

 

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**SUMMARY OF ACCOUNTING POLICIES**

 

(NOTE 1) NATURE OFBUSINESS AND ****BASIS OFPRESENTATION****

 

*Nature of Business*

 

Northern CaliforniaBancorp, Inc. (the “Corporation”) was incorporated on August 29,1995, as a for-profit corporation under the California Corporate laws for the principalpurpose of engaging in banking and non-banking activities as allowed for a bankholding company.  The Corporation’ssources of revenues at this time are dividends on investments, gains onsecurities transactions and potential dividends, management fees and taxequalization payments, if any, from the Bank.

 

The Corporation owns 100%of Monterey County Bank (the “Bank”) which operates five full service branchesin Monterey County, California. The Corporation owns 100% of the common stockof two unconsolidated special purpose business trusts, “Northern CaliforniaBancorp, Inc. Trust I” and “Northern California Bancorp, Inc. TrustII”.

 

*Basisof Presentation*

 

Theinterim condensed consolidated financial statements of Northern CaliforniaBancorp, Inc. and Monterey County Bank are unaudited and reflect alladjustments (consisting only of normal recurring adjustments), which are, inthe opinion of management, necessary for a fair presentation, in all materialrespects, of the consolidated financial position and operating results of theCorporation for the interim periods.  The results of operations for thenine months ended September 30, 2009 are not necessarily indicative of theresults to be expected for the entire fiscal year ending December 31,2009.  The year-end consolidated balance sheet data at December 31,2008 was derived from the audited financial statements.  All material intercompany balances andtransactions have been eliminated in consolidation.

 

Thisfinancial information should be read in conjunction with the audited financialstatements and notes thereto included in the Corporation’s Form 10-K forthe fiscal year ended December 31, 2008.

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

InAugust 2009, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) No. 2009-05, *“Fair Value Measurements and Disclosures (Topic 820) — MeasuringLiabilities at Fair Value”*.  This ASU provides amendmentsfor fair value measurements of liabilities.  It provides clarificationthat in circumstances in which a quoted price in an active market for theidentical liability is not available, a reporting entity is required to measurefair value using one or more techniques.  ASU 2009-05 also clarifiesthat when estimating a fair value of a liability, a reporting entity is notrequired to include a separate input or adjustment to other inputs relating tothe existence of a restriction that prevents the transfer of theliability.  ASU 2009-05 is effective for the periods beginning on October 1,2009.   We are assessing the impactof ASU 2009-05 on our financial condition, results of operations, anddisclosures.

 

InJune 2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168),*“Topic 105 - Generally Accepted AccountingPrinciples - FASB Accounting Standards Codification and the*

 

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*Hierarchy of Generally Accepted Accounting Principles*.”* *The Codification is the singlesource of authoritative nongovernmental U.S. generally accepted accountingprinciples (GAAP).  The Codification does not change current GAAP,but is intended to simplify user access to all authoritative GAAP by providingall the authoritative literature related to a particular topic in oneplace.  All existing accounting standard documents are superseded andall other accounting literature not included in the Codification is considerednonauthoritative.  The Codification is effective for interim orannual reporting periods ending after September 15, 2009.  Wehave made the appropriate changes to GAAP references in our financialstatements.

 

InJune 2009, the FASB issued Statement No. 167, *“Amendments to FASB Interpretation No. 46(R)”*(SFAS167).  SFAS 167 amends the consolidation guidance applicable tovariable interest entities.  The amendments to the consolidationguidance affect all entities currently within the scope of FIN 46(R), as wellas qualifying special-purpose entities (QSPEs) that are currently excluded fromthe scope of FIN 46(R).  SFAS 167 is effective as of the beginning ofthe first annual reporting period that begins after November 15,2009.  We do not believe that the adoption of SFAS 167 has an impacton our consolidated financial statements.

 

InJune 2009, the FASB issued Statement No. 166, *“Accounting for Transfers of Financial Assets, anamendment of FASB Statement No. 140”*(SFAS No. 166).  SFAS166 amends the derecognition accounting and disclosure guidance relating toSFAS 140.  SFAS 166 eliminates the exemption from consolidation forQSPEs. It also requires a transferor to evaluate all existing QSPEs todetermine whether they must be consolidated in accordance with SFAS166.  SFAS 166 is effective as of the beginning of the first annualreporting period that begins after November 15, 2009.  We areassessing the impact of SFAS 166 on our financial condition, results ofoperations, and disclosures.

 

InMay 2009, the FASB issued Accounting Standards Codification (ASC) 855(formerly Statement No. 165), *“SubsequentEvents”*.  ASC 855 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or available to be issued.  ASC855 is effective for interim or annual periods ending after June 15,2009.  We have adopted the provisions of ASC 855 and it did not havea significant impact on the consolidated financial statements.

 

InApril 2009, the FASB issued ASC 825 (formerly FASB Staff Position (FSP)107-1 and APB 28-1), *“Interim Disclosuresabout Fair Value of Financial Instruments.”  *ASC 825requires a public entity to provide disclosures about fair value of financialinstruments in interim financial information.  ASC 825 is effectivefor interim and annual financial periods ending after June 15,2009.  As a result of adopting the provisions of ASC 825 on June 30,2009, we are now disclosing information about the fair value of our financialinstruments on a quarterly basis.

 

InApril 2009, the FASB issued ASC 320 (formerly Staff Position FAS 115-2,FAS 124-2 and EITF 99-20-2), *“Recognitionand Presentation of Other-Than-Temporary-Impairment.”  *ASC320 (i) changes existing guidance for determining whether an impairment ofdebt securities is other than temporary and (ii) replaces the existingrequirement that the entity’s management assert it has both the intent andability to hold an impaired security until recovery with a requirement thatmanagement assert: (a) it does not have the intent to sell the security;and (b) it is more likely than not it will not have to sell the securitybefore recovery of its cost basis.  Under ASC 320, declines in thefair value of held-to-maturity and available-for-sale securities below theircost that are deemed to be other than temporary are reflected in earnings asrealized losses to the extent the impairment is related to creditlosses.  The amount of impairment related to other 

 

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factorsis recognized in other comprehensive income.  ASC 320 is effectivefor interim and annual periods ending after June 15, 2009.  Weadopted the provisions of ASC 320 on April 1, 2009.  Theadoption of ASC 320 in the second quarter of 2009 did not have a materialimpact on our consolidated financial statements.

 

InApril 2009, the FASB issued ASC 820 (formerly FSP FAS 157-4), *“Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly.”  *ASC 820affirms the objective of fair value when a market is not active, clarifies andincludes additional factors for determining whether there has been asignificant decrease in market activity, eliminates the presumption that alltransactions are distressed unless proven otherwise, and requires an entity todisclose a change in valuation technique.  ASC 820 is effective forinterim and annual periods ending after June 15, 2009.  Weadopted the provisions of ASC 820 on April 1, 2009.  Theprovisions of ASC 820 did not have a material impact on our financial conditionand results of operations.

 

(NOTE3) STOCK BASED COMPENSATION

 

The Corporation’s compensation cost relating to share-based paymenttransactions is recognized in the financial statements based upon the fairvalue of the equity or liability instruments issued. Based on the stock-basedcompensation awards outstanding for the nine months ended September 30,2009 and 2008, there was no stock-based compensation to expense.

 

Underthe Corporation’s 1998 Stock Option Plan, the Corporation may grant incentivestock options and non-qualified stock options to directors, officers, and employeesof the Corporation and its subsidiary, so long as the Corporation owns amajority of the equity interest of such subsidiary.  Incentive stock options are granted at fairvalue of the common stock on the date of grant. However, an incentive stock option granted to an individual owning 10%or more of the Corporation’s stock after such grant must have an exercise priceof at least 110%****of such fair market value and anexercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85%of the fair market value of the common stock on the date of grant.  The Board of Directors is authorized todetermine when options become exercisable within a period not exceeding 10years from the date of grant.  Under thePlan, 64,661 shares of common stock had been reserved for the granting of theseoptions.  At September 30, 2009,26,161 options were outstanding.  During2009, no options were granted or exercised by officers, employees, and boardmembers; while 36,000 options expired. As of September 30, 2009, all options have been vested and allrelated compensation expense had been formerly expensed.

 

No further options may begranted under the 1998 Stock Option Plan.  The planprovided that options could be granted for a period of ten years from the datethe plan was adopted by the Board.  TheBoard adopted the plan on April 16, 1998. The plan remains in effect until all options granted under the Plan havebeen satisfied or expired.

 

**Under the Corporation’s 2007 Stock Option Plan, theCorporation may grant incentive**stockoptionsand non-qualified stock options to directors, officers, and employees of theCorporationandits subsidiary, so long as the Corporation owns a majority of the equityinterest of suchsubsidiary.  Incentive stock options are granted at fairvalue of the common stock on the date ofgrant.  However, anincentive stock option granted to an individual owning 10% or more of theCorporation’s stock after such grant must have an exercise price of at least110% of such fair market value and an exercise period of not more than fiveyears.  The Board of Directors is 

** **

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** **

**authorized to determine when options become exercisablewithin a period not exceeding 10 years from the date of grant.  Under the Plan, 300,000 shares of commonstock have been reserved for the granting of these options.  At September 30, 2009, no options havebeen granted under the 2007 stock option plan. Thus,** no pre-tax stock-based compensation expense was requiredfor the nine months ended September 30, 2009 and 2008.

** **

(NOTE 4) EARNINGS PER SHARE

 

**Basic earnings per share represent income available tocommon stockholders divided by the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per share reflect additional common shares that would have beenoutstanding, if potential dilutive common shares had been issued, as well asany adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued bythe Bank relate to outstanding stock options and warrants and are determinedusing the treasury stock method.**

** **

**The weighted-average number of shares used in computingbasic and diluted earnings per share is as follows:**

 
| ** **                                                         | ** ** | **Earnings per share Calculation**               | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the three months ended September 30** | ** ** |
| ** **                                                         | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                                       | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| **(in thousands except per**                                       | ** ** | **Net**                                          | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| **share data)**                                                    | ** ** | **Income**                                       | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic  earnings per share                                          |       | $                                                | 744        |   | 1,783,230 |   | $ | .417 |   | $ | 154 |   | 1,810,618 |   | $ | 0.085 |   |
|                                                               |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Effect  of dilutive shares assumed exercise of outstanding options |       | —                                           |       | 5,504 |   | (0.001 | ) | — |   | 9,611 |   | — |   |
| Diluted  earnings per share                                        |       | $                                                | 744        |   | 1,788,734 |   | $ | .416 |   | $ | 154 |   | 1,820,229 |   | $ | 0.085 |   |

** **
| ** **                                                         | ** ** | **Earnings per share Calculation**              | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the nine months ended September 30** | ** ** |
| ** **                                                         | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| ** **                                                         | ** ** | ** **                                      | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| **(in thousands except per**                                       | ** ** | **Net**                                         | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| **share data)**                                                    | ** ** | **Income**                                      | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic  earnings per share                                          |       | $                                               | 1,823      |   | 1,793,910 |   | $ | 1.016 |   | $ | 1,010 |   | 1,830,699 |   | $ | 0.552 |   |
|                                                               |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Effect  of dilutive shares assumed exercise of outstanding options |       | —                                          |       | 3,244 |   | (0.002 | ) | — |   | 30,411 |   | (0.009 | ) |
| Diluted  earnings per share                                        |       | $                                               | 1,823      |   | 1,797,154 |   | $ | 1.014 |   | $ | 1,010 |   | 1,861,110 |   | $ | 0.543 |   |

 

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(NOTE 5) INVESTMENT SECURITIES

 

Thefollowing table presents investment securities, available for sale at September 30,2009 and December 31, 2008:

 
| ** **                  | ** ** | **September 30,** | ** **   | **December 31,** | ** ** |
|-----------------------------|------------|------------------------|--------------|-----------------------|------------|
| **(dollars in thousands)**  | ** ** | **2009**               | ** **   | **2008**              | ** ** |
| Available  for sale:        |       |                   |         |                  |       |
| Corporate  Debt Securities  |       | $                      | —       |                  | $          |  5,866 |   |
| State/Local  Agency         |       | 37,148                 |         | 40,551                |       |
| Mortgage  Backed Securities |       | 1,650                  |         | 3,892                 |       |
| U.S.  government Agencies   |       | 5,055                  |         | 43,044                |       |
|                        |       | $                      |  43,853 |                  | $          |  93,353 |   |

 

(NOTE 6) OTHER INVESTMENTS

 

Thefollowing table presents the other investment securities at September 30,2009 and December 31, 2008:

 
| ** **                                       | ** ** | **September 30,** | ** **   | **December  31,** | ** ** |
|--------------------------------------------------|------------|------------------------|--------------|------------------------|------------|
| **(dollars in thousands)**                       | ** ** | **2009**               | ** **   | **2008**               | ** ** |
| AT  Services LLC                                 |       | $                      |  — |                   | $          |  20 |   |
| Federal  Home Loan Bank stock, restricted        |       | 3,333                  |         | 3,097                  |       |
| Independent  Bankers Financial Corporation       |       | 51                     |         | 51                     |       |
| Visa,  Inc Class “B” Stock        |       | 426                    |         | 426                    |       |
| Metrocities  Mortgage, LLC                       |       | 10                     |         | 10                     |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93                     |         | 93                     |       |
| Northern  California Bancorp, Inc. Trust II |       | 155                    |         | 155                    |       |
|                                             |       | $                      |  4,068  |                   | $          |  3,852 |   |

 

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(NOTE 7) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

 

Thefollowing table presents information on loans and the allowance for possibleloan losses at September 30, 2009 and December 31, 2008:

 
| ** **                             | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| **(dollars in thousands)**             | ** ** | **2009**               | ** **    | **2008**              | ** ** |
| Commercial  and Industrial             |       | $                      |  34,211  |                  | $          |  28,237 |   |
| Construction                           |       | 11,063                 |          | 16,040                |       |
| Real  Estate - Mortgage                |       | 121,252                |          | 122,951               |       |
| Installment                            |       | 2,717                  |          | 966                   |       |
| Government  Guaranteed Loans Purchased |       | 18                     |          | 24                    |       |
|                                   |       | 169,261                |          | 168,218               |       |
| Allowance  for loan losses             |       | (2,982                 | )             | (2,413                | )          |
| Deferred  origination fees, net        |       | (236                   | )             | (275                  | )          |
| Net  Loans                             |       | $                      |  166,043 |                  | $          |  165,530 |   |
|                                   |       |                   |          |                  |       |
| Balance  at Beginning of Period        |       | $                      |  2,413   |                  | $          |  2,028 |   |
| Recoveries                             |       | 2                      |          | 3                     |       |
| Provision  for Possible Loan Losses    |       | 1,918                  |          | 1,132                 |       |
| Loans  Charged Off                     |       | (1,351                 | )             | (750                  | )          |
| Balance  at End of Period              |       | $                      |  2,982   |                  | $          |  2,413 |   |

 

(NOTE 8) COMPREHENSIVE INCOME (LOSS):

 

The components of other comprehensive income (loss) and related taxeffects for the nine month period ended September 30, 2009 and the yearended December 31, 2008 are as follows:

 
| ** **                                                         | ** ** | **September 30,** | ** **   | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|--------------|-----------------------|------------|
| **(dollars in thousands)**                                         | ** ** | **2009**               | ** **   | **2008**              | ** ** |
| Unrealized holding losses on AFS securities and  other assets, net |       | $                      |  (1,819 | )                     | $          |  (284 | ) |
| Reclassification for (gains) losses realized in  income            |       | 3,153                  |         | (449                  | )          |
| Net unrealized gains (losses)                                      |       | 1,334                  |         | (733                  | )          |
| Tax effect                                                         |       | (600                   | )            | 330                   |       |
|                                                               |       |                   |         |                  |       |
| Other comprehensive income (loss) net of tax                       |       | $                      |  734    |                  | $          |  (403 | ) |

 

The components of accumulated othercomprehensive income (loss) and related tax effects are as follows:

 
| ** **                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Unrealized holding gains (losses) on available for  sale securities    |       | $                      |  731  |                  | $          |  (577 | ) |
| Unrealized holding gains on available for sale  asset strip receivable |       | 54                     |       | 27                    |       |
| Tax effect                                                             |       | (353                   | )          | 248                   |       |
| Accumulated other comprehensive income (loss)                          |       | $                      |  432  |                  | $          |  (302 | ) |

 

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(NOTE 9) SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:

 
| ** **                                       | ** ** | **September 30** | ** **  |
|--------------------------------------------------|------------|-----------------------|-------------|
| ** **                                       | ** ** | **2009**              | ** **  | **2008** | ** ** |
| Payments  during the period ending:              |       |                  |        |   |   |
| Interest                                         |       | $                     |  8,000 |   | $ |  7,400 |   |
| Income Taxes                                     |       | $                     |  458   |   | $ |  1,120 |   |
|                                             |       |                  |        |   |   |
| Noncash Investing and Financing Activities:      |       |                  |        |   |   |
| Transfer of loans to other real estate owned     |       | $                     |  8,850 |   | $ |  6,349 |   |
| Other real estate owned acquired by way of trade |       | $                     |  4,662 |   | $ | — |   |

 

(NOTE 10) FAIR VALUE MEASUREMENTS:

 

Authoritative guidance establishes a hierarchy for measuring fair valueunder generally accepted accounting principles (GAAP) in the United States ofAmerica and applies to all financial assets and liabilities that are beingmeasured and reported at fair value on a recurring and non-recurring basis.Fair value is measured in levels, which are described in more detail below, andis determined based on the observability and reliability of the assumptionsused to determine fair value.

 

**Level 1:** Valuation for assets andliabilities traded in active exchange markets. Valuations are obtained fromreadily available pricing sources for market transactions involving identicalassets or liabilities.

 

**Level 2:** Valuation for assets andliabilities traded in less active dealer or broker markets. Valuations areobtained from third party pricing services for identical or comparable assetsor liabilities.

 

**Level 3:** Valuation for assets andliabilities that are derived from other valuation methodologies, includingoption pricing models, discounted cash flow models, and similar techniques, andnot based on market exchange, dealer, or broker traded transactions. Thesevaluations incorporate certain assumptions and projections in determining thefair value assigned to such assets or liabilities.

 

The Corporation measures and reports available-for-sale securities andmortgage servicing rights at fair value on a recurring basis. The followingtable shows the balances of these assets based on the designated levels.

 

 
| ** **                                 | ** ** | **At September 30, 2009** | ** **   |
|--------------------------------------------|------------|--------------------------------|--------------|
| **(dollars in thousands)**                 | ** ** | **Total**                      | ** **   | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Investment securities — AFS and other |       | $                              |  47,921 |   | $ |  — |   | $ |  47,921 |   | $ |  — |   |
|                                            |            |                                |              |  |  |  |  |  |  |  |  |  |  |

 

The Corporation may also be required, from time to time, to measurecertain other non-financial assets at fair value on a non-recurring basis inaccordance with GAAP. During the nine months ended September 30, 2009, theCorporation measured collateral dependent impaired loans and Other Real EstateOwned (OREO) at fair value. The assets are measured at fair value on anon-recurring basis and the following table provides the assets’ designatedlevels, as well as the fair value losses recognized during the nine monthsended September 30, 2009.

 

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| **(dollars in  thousands)** | ** ** | **Total** | ** **   | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** **   | **Losses for the   nine months  ended  September 30,  2009** | ** ** |
|-----------------------------|------------|-----------|--------------|---------------|------------|---------------|------------|---------------|--------------|-------------------------------------------------------------------|------------|
| Impaired loans              |       | $         |  7,543  |          | $          |  —  |       | $             |  — |                                                              | $          |  7,543 |   | $ |  475 |   |
| OREO                        |       | 13,923    |         | —        |       | —        |       | 13,923        |         | 633                                                               |       |
|                        |       | $         |  21,466 |          | $          |  —  |       | $             |  — |                                                              | $          |  21,466 |   | $ |  1,108 |   |

 

Currentauthoritative guidance requires interim reporting period disclosure about thefair value of financial instruments, including assets, liabilities andoff-balance sheet items for which it is practicable to estimate fair value. Thefair value estimates are made based upon relevant market information, ifavailable, and upon the characteristics of the financial instrumentsthemselves. Because no market exists for a significant portion of theCorporation’s financial instruments, fair value estimates are based uponjudgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments and otherfactors. The estimated fair value of the Corporation’s financial instruments asof September 30, 2009 is shown below.

 
| ** **                                      | ** ** | **September 30, 2009** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **Carrying**                | ** ** | **Fair** | ** ** |
| **(dollars in thousands)**                      | ** ** | **Amount**                  | ** ** | **Value** | ** ** |
| Financial Assets:                               |       |                        |       |   |   |
| Cash and cash equivalents                       |       | $                           | 5,730      |   | $ | 5,730 |   |
| Time deposits with other financial institutions |       | 30,916                      |       | 30,916 |   |
| Trading assets                                  |       | 276                         |       | 276 |   |
| Investment securities , available for sale      |       | 43,853                      |       | 43,853 |   |
| Other investments                               |       | 4,068                       |       | 4,068 |   |
| Loans, held for sale                            |       | 1,244                       |       | 1,244 |   |
| Loans, net                                      |       | 166,043                     |       | 186,857 |   |
| Other real estate owned                         |       | 13,923                      |       | 13,923 |   |
| Accrued interest receivable                     |       | 954                         |       | 954 |   |
|                                            |       |                        |       |   |   |
| Financial Liabilities:                          |       |                        |       |   |   |
| Deposits                                        |       | 217,892                     |       | 219,029 |   |
| Long-term debt                                  |       | 37,248                      |       | 38,749 |   |
| Short-term debt                                 |       | 3,000                       |       | 3,000 |   |
| Accrued interest payable                        |       | 1,293                       |       | 1,293 |   |
|                                                 |            |                             |            |  |  |  |  |

 

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(NOTE 11) OFF-BALANCESHEET COMMITMENTS:

 

The Bank is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit.  Suchcommitments involve, to varying degrees, elements of credit and interest raterisk in excess of the amount recognized in the consolidated balance sheets.

 

The Bank’s exposure tocredit loss is represented by the contractual amount of these commitments.  The Bank uses the same credit policies inmaking commitments as it does for on-balance-sheet instruments.

 

**At September 30, 2009 and December 31, 2008, suchcommitments to extend credit were $15,518,000 and $13,941,000, respectively, ofundisbursed lines of credit, undisbursed loans in process, and commitmentletters.**

** **

**The Bank has two letters of credit issued by FederalHome Loan Bank of San Francisco. One letter of credit in the amount of$330,000, expiring April 17, 2011, is used to secure local agencydeposits.  The beneficiary of the letterof credit is the Administrator of Local Agency Security, Department ofFinancial Institutions.  The other letterof credit in the amount of $1,300,000, expiring February 17, 2019, hasMasterCard International Inc. as the beneficiary.**

** **

**ITEM2:**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

**StatementsRegarding Forward-Looking Information**

** **

**Except for historicalinformation contained herein, the matters discussed or incorporated byreference in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”), that involve substantial risks and uncertainties.  When used in thisreport, or in the documents incorporated by reference herein, the words “anticipate,”“believe,” “estimate,” “may,” “intend,” “expect,” and similar expressionsidentify certain of such forward-looking statements.  Actual results ofthe Corporation and Monterey County Bank could differ materially from suchforward-looking statements contained herein.  Factors that could causefuture results to vary from current expectations include, but are not limitedto, the following: changes in economic conditions (both generally and morespecifically in the markets in which the Bank operates); changes in interestrates, deposit flows, loan demand, real estate values and competition; changesin accounting principles, policies or guidelines and in government legislationand regulation (which change from time to time and over which the Bank has nocontrol); other factors affecting the Bank’s operations, markets, products andservices; and other risks detailed in this Form 10-Q and in the Bank’sother reports filed with the Federal Deposit Insurance Corporation (FDIC) andpursuant to the rules and regulations of the Securities and ExchangeCommission.  Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof.  The Corporation undertakes no obligation to publicly revisethese forward-looking statements to reflect events or circumstances that ariseafter the date thereof.**

** **

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**CRITICALACCOUNTING POLICIES**

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make a number of judgments,estimates and assumptions that affect the reported amount of assets,liabilities, income and expenses in the Corporation’s financial statements andaccompanying notes.  Management believesthat the judgments, estimates and assumptions used in preparation of theCorporation’s financial statements are appropriate given the factualcircumstances as of September 30, 2009.

 

Various elements of the Corporation’s accounting policies, by theirnature, are inherently subject to estimation techniques, valuation assumptionsand other subjective assessments. Critical accounting policies are those that involve the most complex andsubjective decisions and assessments and have the greatest potential impact onthe Corporation’s results of operation. In particular, management has identified one accounting policy that, dueto judgments, estimates and assumptions inherent in this policy, and thesensitivity of the Corporation’s financial statements to those judgments,estimates and assumptions, is critical to an understanding of the Corporation’sfinancial statements.  This policyrelates to the methodology that determines the Corporation’s allowance for loanlosses.  Management has discussed thedevelopment and selection of this critical accounting policy with theCorporation’s Audit Committee of the Board of Directors.  Although Management believes the level of theallowance at September 30, 2009 is adequate to absorb losses inherent inthe loan portfolio, a decline in the regional economy may result in increasinglosses that cannot reasonably be predicted at this time.  For further information regarding theallowance for loan losses see “Provision and Allowance for Loan Losses”included elsewhere herein.

 

**OVERVIEWof the Results of Operations and Financial Condition**

 

**Results of OperationsSummary**

** **

**Third quarter 2009 compared to third quarter 2008**

** **

Netincome for the quarter ended September 30, 2009 was $744,000 compared with$154,000 for the quarter ended September 30, 2008. Basic earnings pershare for the third quarter of 2009 were $0.416, compared to $0.084 for thethird quarter of 2008. The Corporation’s annualized return on average equitywas 17.34% and annualized return on average assets was 1.03% for the quarterended September 30, 2009, compared to a return on average equity of 4.80%and a return on assets of 0.23% for same quarter in 2008. The primary reasonsfor the change in net income during the third quarter of 2009 are as follows:

 

The net interestspread decreased from 2.21% to 1.73%, due primarily to a decline of 50 basispoints in the yield on interest-earning assets while the rate paid on interestbearing liabilities declined 2 basis points. As a result, net interest income decreased $340,000 or 22.02% during thethree months ended September 30, 2009. Total interest earned on loans decreased $313,000 and interest onfederal funds sold decreased $58,000 during the third quarter of 2009 comparedwith the same period in 2008.

 

The provision forloan losses was $1,272,000 during the third quarter of 2009 compared to$250,000 during the third quarter of 2008. The increase was due to continued economic pressures, particularly inthe real estate industry in the Corporation’s market area.

 

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Total non-interestincome was $4,072,000 during the third quarter of 2009 compared to $1,133,000during the third quarter of 2008.  Theincrease of $2,939,000 was due primarily to increases of $2,018,000 in gains onsales of securities, $469,000 in merchant discount fees, $126,000 in creditcard program fees and $150,000 in gains from sales of the guaranteed portion ofSmall Business Administration Loans during the third quarter of 2009.

 

Total non-interestexpense was $2,963,000 during the third quarter of 2009 compared to $2,316,000during the third quarter of 2008.  Theincrease of $647,000 was due primarily to increases of $499,000 in othergeneral and administrative expense, $122,000 in professional fees, $87,000 inexpenses related to foreclosed assets, and a decrease of $53,000 in salariesand employee benefits.

 

**Ninemonths ended September 30, 2009 compared to the same period in 2008**

 

For the ninemonths ended September 30, 2009 net income was $1,823,000, compared to$1,010,000 for the nine months ended September 30, 2008, an increase of80.50%.  Basic earnings per share forthe nine months ended September 30, 2009 were $1.016, compared to $0.552for the nine months ended September 30, 2008. The Corporation’s annualizedreturn on average equity was 15.15% and annualized return on average assets was0.80% for the nine months ended September 30, 2009, compared to a returnon average equity of 9.63% and a return on assets of 0.51% for same period in2008. The primary reasons for the change in net income during the nine monthsended September 30, 2009 are as follows:

 

Net interestincome for the nine months ended September 30, 2009 declined$468,000.  Net interest spread increasedfrom 2.44% to 2.54%, due primarily to rate paid on interest-bearing liabilitiesdeclining 53 basis points, partially offset by a decline of 42 basis points inthe yield on interest-earning assets. Total interest earned on loans decreased $1,335,000 and interest onfederal funds sold decreased $208,000 while interest earned on investmentsecurities increased $1,055,000 during the third quarter of 2009 compared withthe same period in 2008.

 

The provision forloan losses was $1,918,000 during the nine months ended September 30, 2009compared to $250,000 during the same period in 2008. The increase was due to continued economic pressures, particularly inthe real estate industry in the Corporation’s market area.

 

Total non-interestincome was $8,375,000 during the nine months ended September 30, 2009compared to $4,150,000 during the same period in 2008. The increase of $4,225,000 was due primarily to increases of $2,703,000in gains on sales of securities, $1,413,000 in merchant discount fees, $102,000increase in income from credit card/stored value card programs, a mark tomarket gain of $5,000 on trading assets compared to a loss of $721,000 in 2008,partially offset by income of $694,000 related to the Visa, Inc. initialpublic stock offering booked in 2008.

 

Total non-interestexpense was $8,930,000 during the nine months ended September 30, 2009compared to $7,323,000 during the same period in 2008. The increase of $1,607,000 was due primarily to other general andadministrative expenses increasing $1,354,000, professional fees increasing$532,000, expenses related to foreclosed assets increasing $184,000, andsalaries and employee benefits decreasing $487,000.

 

17

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The followingtable sets forth certain selected financial data and ratios of the Corporationfor the three months and nine months ended September 30, 2009 and 2008.

 
| ** **                                                  | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands except share data)**                        |       | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** |   |
| Summary of Operating Results:                               |       |                                      |       |                                     |       |   |   |   |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Total interest income                                       |       | $                                         | 3,591      |                                     | $          | 3,943 |   | $ | 12,049 |   | $ | 12,539 |   |
| Total interest expense                                      |       | 2,387                                     |       | 2,399                                    |       | 7,283 |   | 7,305 |   |
| Net interest income                                         |       | 1,204                                     |       | 1,544                                    |       | 4,766 |   | 5,234 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Provision for loan losses                                   |       | 1,272                                     |       | 250                                      |       | 1,918 |   | 250 |   |
| Net interest income (loss) after provision for loan  losses |       | (68                                       | )          | 1,294                                    |       | 2,848 |   | 4,984 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Total non-interest income                                   |       | 4,072                                     |       | 1,133                                    |       | 8,375 |   | 4,150 |   |
| Total non-interest expenses                                 |       | 2,963                                     |       | 2,316                                    |       | 8,930 |   | 7,323 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Income before tax provision (benefit)                       |       | 1,041                                     |       | 111                                      |       | 2,293 |   | 1,811 |   |
| Income tax provision (benefit)                              |       | 297                                       |       | (43                                      | )          | 470 |   | 801 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Net income                                                  |       | $                                         | 744        |                                     | $          | 154 |   | $ | 1,823 |   | $ | 1,010 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Per Common Share Data:                                      |       |                                      |       |                                     |       |   |   |   |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Net income - Basic (1)                                      |       | $                                         | 0.417      |                                     | $          | 0.085 |   | $ | 1.016 |   | $ | 0.552 |   |
| Net income - Diluted (2)                                    |       | 0.416                                     |       | 0.085                                    |       | 1.014 |   | 0.543 |   |
| Book value, end of period                                   |       | 9.44                                      |       | 6.67                                     |       | 9.44 |   | 6.67 |   |
| Average shares outstanding (3)                              |       | 1,783,230                                 |       | 1,810,618                                |       | 1,793,910 |   | 1,830,699 |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Balance Sheet Data:                                         |       |                                      |       |                                     |       |   |   |   |   |
|                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Total loans, net of unearned income (4)                     |       | $                                         | 167,287    |                                     | $          | 159,756 |   | $ | 167,287 |   | $ | 159,756 |   |
| Total assets                                                |       | 280,929                                   |       | 276,606                                  |       | 280,929 |   | 276,606 |   |
| Total deposits                                              |       | 217,892                                   |       | 182,111                                  |       | 217,892 |   | 182,111 |   |
| Stockholders’ equity                                   |       | 16,824                                    |       | 12,117                                   |       | 16,824 |   | 12,117 |   |

 

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| ** **                                                     | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                                  | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selected Financial Ratios:                                     |       |                                      |       |                                    |       |   |   |   |   |
|                                                           |       |                                      |       |                                    |       |   |   |   |   |
| Return on average assets (5) (6)                          |       | 1.03                                      | %          | 0.23                                    | %          | 0.80 | % | 0.51 | % |
| Return on average stockholders’ equity (5) (6)       |       | 17.34                                     | %          | 4.80                                    | %          | 15.15 | % | 9.62 | % |
| Net interest spread                                            |       | 1.73                                      | %          | 2.21                                    | %          | 2.54 | % | 2.44 | % |
| Net yield on interest earning assets (5)                       |       | 2.28                                      | %          | 2.63                                    | %          | 2.79 | % | 2.95 | % |
| Avg shareholders’ equity to average assets (5)            |       | 5.93                                      | %          | 4.70                                    | %          | 5.29 | % | 5.25 | % |
| Risked-Based capital ratios                                    |       |                                      |       |                                    |       |   |   |   |   |
| Tier 1                                                         |       | 10.47                                     | %          | 8.84                                    | %          | 10.47 | % | 8.84 | % |
| Total                                                          |       | 13.39                                     | %          | 13.89                                   | %          | 13.39 | % | 13.89 | % |
| Total loans to total deposits at end of period (4)             |       | 76.78                                     | %          | 87.72                                   | %          | 76.78 | % | 87.72 | % |
| Allowance for loan losses to total loans at end of  period (4) |       | 1.75                                      | %          | 1.40                                    | %          | 1.75 | % | 1.40 | % |
| Nonperforming loans to total loans at end of period  (4)       |       | 5.66                                      | %          | 3.23                                    | %          | 5.66 | % | 3.23 | % |
| Net charge-offs to average loans (4)                           |       | 0.70                                      | %          | 0.00                                    | %          | 0.79 | % | 0.00 | % |

 

----

(1)       Basic earnings per share amounts were computed on thebasis of the weighted average number of shares of common stock outstandingduring the year.  The weighted averagenumber of common shares used for this computation was 1,783,230 and 1,810,618for the three months ended September 30, 2009 and 2008, respectively.  The weighted average number of common sharesused for this computation was 1,793,910 and 1,830,699 for the nine months endedSeptember 30, 2009 and 2008, respectively.

 

(2)       Diluted earnings per share amounts were computed onthe basis of the weighted average number of shares of common stock and commonstock equivalents outstanding during the year. Common stock equivalents include director/employee stock options. Theweighted average number of shares used for this computation was 1,788,734 and1,820,229 for the three months ended September 30, 2009 and 2008,respectively.  The weighted averagenumber of shares used for this computation was 1,797,154 and 1,861,110 for thenine months ended September 30, 2009 and 2008, respectively.

 

(3)   Weighted average common shares.

 

(4)   Includes loans being held for sale.

 

(5)   Averages are of daily balances.

 

(6)   Calculated on an annualized basis.

 

**NETINTEREST INCOME**

 

Netinterest income, the difference between (a) interest and fees earned oninterest-earning assets and (b) interest paid on interest-bearingliabilities, is the most significant component of the Bank’s earnings.  Changes in net interest income from period toperiod result from increases or decreases in the average balances ofinterest-earning assets and interest-earning liabilities, the availability ofparticular sources of funds and changes in prevailing interest rates.

 

Net interest income forthe third quarter of 2009 was $1,204,000 compared to $1,544,000 for the thirdquarter of 2008, which was a decrease of $340,000 primarily resulting from

 

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decreases of $313,000 in interest onloans and $58,000 in interest on federal funds; partially offset by an increaseof $19,000 in interest on investment securities and a $12,000 decrease in totalinterest expense.  Net interest incomefor the nine months ended September 30, 2009 was $4,766,000 compared to$5,234,000 for the same period in 2008, which was a decrease of $468,000primarily resulting from decreases of $1,335,000 in interest on loans and$208,000 in interest on federal funds sold; partially offset by an $1,055,000increase in interest on investment securities and a decrease in total interestexpense of $22,000.

 

**DISTRIBUTION,RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:**

 

The following tables showthe consolidated average balances of earning assets, and interest-bearingliabilities; the amount of interest income and interest expense; the averageyield or rate for each category of average interest-earning assets and averageinterest-bearing liabilities; and the net interest income and the net interestspread for the periods indicated.  Yields are computed on a tax-equivalentbasis, resulting in adjustments to interest earned on municipal bonds of$279,000 and $109,000 for the three months ended and $787,000 and $244,000 forthe nine months ended September 30, 2009 and 2008, respectively.  Non-accrual loans and overdrafts are includedin average loan balances.  Average loansare presented net of unearned income.

 

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| ** **                                                  | ** ** | **Three Months Ended September 30,  2009** | ** ** | **Three Months Ended September 30,  2008** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                     | ** ** | ** **                                      | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                                  | ** ** | **Balance**                                     | ** ** | **Interest**                                    | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
|                                                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                               | 172,696    |                                            | $          | 2,550 |   | 5.91 | % | $ | 162,905 |   | $ | 2,863 |   | 7.03 | % |
| Time  deposits - in other banks                             |       | 12,929                                          |       | 4                                               |       | 0.12 | % | 603 |   | 3 |   | 1.99 | % |
| Investment  securities - taxable                            |       | 26,617                                          |       | 417                                             |       | 6.27 | % | 57,201 |   | 770 |   | 5.38 | % |
| Investment  securities - nontaxable                         |       | 48,099                                          |       | 899                                             |       | 7.48 | % | 18,939 |   | 359 |   | 7.58 | % |
| Federal  funds sold                                         |       | —                                          |       | —                                          |       | 0.00 | % | 11,640 |   | 58 |   | 1.99 | % |
| Total  interest-earning assets                              |       | 260,341                                         |       | 3,870                                           |       | 5.95 | % | 251,288 |   | 4,053 |   | 6.45 | % |
|                                                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Allowance  for credit losses                                |       | (2,977                                          | )          |                                            |       |   |   | (2,032 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                    |       | 6,166                                           |       |                                            |       |   |   | 6,713 |   |   |   |   |   |
| Premises  and equipment                                     |       | 4,843                                           |       |                                            |       |   |   | 5,086 |   |   |   |   |   |
| Accrued  interest receivable                                |       | 1,648                                           |       |                                            |       |   |   | 1,666 |   |   |   |   |   |
| Other  assets                                               |       | 19,559                                          |       |                                            |       |   |   | 10,217 |   |   |   |   |   |
| Total  average assets                                       |       | $                                               | 289,580    |                                            |       |   |   |   | $ | 272,938 |   |   |   |   |   |
|                                                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:                 |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                               | 14,575     |                                            | $          | 4 |   | 0.11 | % | $ | 15,802 |   | $ | 10 |   | 0.25 | % |
| Money  market savings                                       |       | 1,292                                           |       | 1                                               |       | 0.31 | % | 1,785 |   | 3 |   | 0.67 | % |
| Savings  deposits                                           |       | 5,844                                           |       | 7                                               |       | 0.48 | % | 6,728 |   | 17 |   | 1.01 | % |
| Time  deposits >$100M                                    |       | 60,403                                          |       | 532                                             |       | 3.53 | % | 58,815 |   | 647 |   | 4.40 | % |
| Time  deposits <$100M                                    |       | 96,629                                          |       | 855                                             |       | 3.54 | % | 72,329 |   | 816 |   | 4.51 | % |
| Other  borrowings                                           |       | 47,541                                          |       | 988                                             |       | 8.31 | % | 70,738 |   | 907 |   | 5.13 | % |
| Total  interest-bearing liabilities                         |       | 226,284                                         |       | 2,387                                           |       | 4.22 | % | 226,197 |   | 2,400 |   | 4.24 | % |
|                                                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 36,976                                          |       |                                            |       |   |   | 26,024 |   |   |   |   |   |
| Accrued  interest payable                                   |       | 1,376                                           |       |                                            |       |   |   | 1,851 |   |   |   |   |   |
| Other  liabilities                                          |       | 7,781                                           |       |                                            |       |   |   | 6,026 |   |   |   |   |   |
| Total  liabilities                                          |       | 272,417                                         |       |                                            |       |   |   | 260,098 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 17,163                                          |       |                                            |       |   |   | 12,840 |   |   |   |   |   |
| Total  average liabilities and shareholders equity          |       | $                                               | 289,580    |                                            |       |   |   |   | $ | 272,938 |   |   |   |   |   |
| Net  interest income                                        |       |                                            |       | $                                               | 1,483      |   |   |   |   |   | $ | 1,653 |   |   |   |
| Interest  income as a percentage of average earning assets  |       |                                            |       |                                            |       | 5.95 | % |   |   |   |   | 6.45 | % |
| Interest  expense as a percentage of average earning assets |       |                                            |       |                                            |       | 3.67 | % |   |   |   |   | 3.82 | % |
| Net  yield on earning assets                                |       |                                            |       |                                            |       | 2.28 | % |   |   |   |   | 2.63 | % |
| Net  interest spread                                        |       |                                            |       |                                            |       | 1.73 | % |   |   |   |   | 2.21 | % |

 

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| ** **                                                  | ** ** | **Nine months ended September 30, 2009** | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                   | ** ** | ** **                                    | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                                  | ** ** | **Balance**                                   | ** ** | **Interest**                                  | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                          |       | ** **                                    |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                             | 171,349    |                                          | $          | 8,239 |   | 6.41 | % | $ | 167,304 |   | $ | 9,574 |   | 7.63 | % |
| Time  deposits - in other banks                             |       | 2,802                                         |       | 15                                            |       | 0.71 | % | 693 |   | 16 |   | 3.08 | % |
| Investment  securities - taxable                            |       | 46,748                                        |       | 2,039                                         |       | 5.82 | % | 53,962 |   | 2,192 |   | 5.42 | % |
| Investment  securities - nontaxable                         |       | 44,242                                        |       | 2,543                                         |       | 7.66 | % | 14,682 |   | 794 |   | 7.21 | % |
| Federal  funds sold                                         |       | —                                        |       | —                                        |       | — |   | 11,200 |   | 209 |   | 2.49 | % |
| Total  interest-earning assets                              |       | 265,141                                       |       | 12,836                                        |       | 6.45 | % | 247,841 |   | 12,785 |   | 6.88 | % |
|                                                        |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Allowance  for credit losses                                |       | (2,653                                        | )          |                                          |       |   |   | (2,053 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash  and due from banks                                    |       | 15,449                                        |       |                                          |       |   |   | 6,479 |   |   |   |   |   |
| Premises  and equipment                                     |       | 4,898                                         |       |                                          |       |   |   | 4,989 |   |   |   |   |   |
| Accrued  interest receivable                                |       | 1,722                                         |       |                                          |       |   |   | 1,494 |   |   |   |   |   |
| Other  assets                                               |       | 18,450                                        |       |                                          |       |   |   | 6,995 |   |   |   |   |   |
| Total  average assets                                       |       | $                                             | 303,007    |                                          |       |   |   |   | $ | 265,745 |   |   |   |   |   |
|                                                        |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Liabilities  and shareholders’ equity:                 |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                             | 14,821     |                                          | $          | 14 |   | 0.13 | % | $ | 14,475 |   | $ | 27 |   | 0.25 | % |
| Money  market savings                                       |       | 1,407                                         |       | 3                                             |       | 0.28 | % | 1,768 |   | 10 |   | 0.75 | % |
| Savings  deposits                                           |       | 5,697                                         |       | 21                                            |       | 0.49 | % | 6,180 |   | 49 |   | 1.06 | % |
| Time  deposits >$100M                                    |       | 57,207                                        |       | 1,600                                         |       | 3.73 | % | 60,175 |   | 2,129 |   | 4.72 | % |
| Time  deposits <$100M                                    |       | 96,908                                        |       | 2,677                                         |       | 3.68 | % | 70,180 |   | 2,458 |   | 4.67 | % |
| Other  borrowings                                           |       | 72,140                                        |       | 2,968                                         |       | 5.49 | % | 66,474 |   | 2,634 |   | 5.28 | % |
| Total  interest-bearing liabilities                         |       | 248,180                                       |       | 7,283                                         |       | 3.91 | % | 219,252 |   | 7,307 |   | 4.44 | % |
|                                                        |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 34,188                                        |       |                                          |       |   |   | 25,787 |   |   |   |   |   |
| Accrued  interest payable                                   |       | 1,542                                         |       |                                          |       |   |   | 1,989 |   |   |   |   |   |
| Other  liabilities                                          |       | 3,058                                         |       |                                          |       |   |   | 4,727 |   |   |   |   |   |
| Total  liabilities                                          |       | 286,968                                       |       |                                          |       |   |   | 251,755 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 16,039                                        |       |                                          |       |   |   | 13,990 |   |   |   |   |   |
| Total  average liabilities and shareholders equity          |       | $                                             | 303,007    |                                          |       |   |   |   | $ | 265,745 |   |   |   |   |   |
| Net  interest income                                        |       |                                          |       | $                                             | 5,553      |   |   |   |   |   | $ | 5,478 |   |   |   |
| Interest  income as a percentage of average earning assets  |       |                                          |       |                                          |       | 6.45 | % |   |   |   |   | 6.88 | % |
| Interest  expense as a percentage of average earning assets |       |                                          |       |                                          |       | 3.66 | % |   |   |   |   | 3.93 | % |
| Net  yield on interest earning assets                       |       |                                          |       |                                          |       | 2.79 | % |   |   |   |   | 2.95 | % |
| Net  interest spread                                        |       |                                          |       |                                          |       | 2.54 | % |   |   |   |   | 2.44 | % |

 

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**Rate andVolume Analysis:**

 

The following tables show the increase or decrease in interest income,interest expense and net interest income, resulting from changes in rates andvolumes, for the three months and nine months ended September 30, 2009compared with the same period in 2008.

 
| ** **                                   | ** ** | **Increase (decrease) in the three months ended**                 | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **September 30, 2009 compared with September 30, 2008** | ** ** |
| **(dollars in thousands)**                   | ** ** | **Volume**                                                        | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:     |       |                                                              |       |   |   |   |   |
| Loans                                        |       | $                                                                 | 172        |   | $ | (485 | ) | $ | (313 | ) |
| Time  deposits - in other banks              |       | 61                                                                |       | (60 | ) | 1 |   |
| Investment  securities - taxable             |       | (412                                                              | )          | 59 |   | (353 | ) |
| Investment  securities - nontaxable          |       | 553                                                               |       | (13 | ) | 540 |   |
| Federal  funds sold                          |       | (58                                                               | )          | — |   | (58 | ) |
|                                         |       | 316                                                               |       | (499 | ) | (183 | ) |
|                                         |       |                                                              |       |   |   |   |   |
| Increase  (decrease) in interest expense:    |       |                                                              |       |   |   |   |   |
| Interest-bearing  demand                     |       | (1                                                                | )          | (5 | ) | (6 | ) |
| Money  market savings                        |       | (1                                                                | )          | (1 | ) | (2 | ) |
| Savings  deposits                            |       | (2                                                                | )          | (8 | ) | (10 | ) |
| Time  deposits >$100M                     |       | 17                                                                |       | (132 | ) | (115 | ) |
| Time  deposits <$100M                     |       | 274                                                               |       | (236 | ) | 38 |   |
| Other  borrowings                            |       | (297                                                              | )          | 379 |   | 82 |   |
|                                         |       | (10                                                               | )          | (3 | ) | (13 | ) |
| Increase  (decrease) in net interest income: |       | $                                                                 | 326        |   | $ | (496 | ) | $ | (170 | ) |

 
| ** **                                   | ** ** | **Increase (decrease) in the nine months ended**                  | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **September 30, 2009 compared with September 30, 2008** | ** ** |
| **(dollars in thousands)**                   | ** ** | **Volume**                                                        | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:     |       |                                                              |       |   |   |   |   |
| Loans                                        |       | $                                                                 | 232        |   | $ | (1,567 | ) | $ | (1,335 | ) |
| Time  deposits - in other banks              |       | 49                                                                |       | (50 | ) | (1 | ) |
| Investment  securities - taxable             |       | (293                                                              | )          | 140 |   | (153 | ) |
| Investment  securities - nontaxable          |       | 1,598                                                             |       | 151 |   | 1,749 |   |
| Federal  funds sold                          |       | (209                                                              | )          | — |   | (209 | ) |
|                                         |       | 1,377                                                             |       | (1,326 | ) | 51 |   |
|                                         |       |                                                              |       |   |   |   |   |
| Increase  (decrease) in interest expense:    |       |                                                              |       |   |   |   |   |
| Interest-bearing  demand                     |       | 1                                                                 |       | (14 | ) | (13 | ) |
| Money  market savings                        |       | (2                                                                | )          | (5 | ) | (7 | ) |
| Savings  deposits                            |       | (4                                                                | )          | (24 | ) | (28 | ) |
| Time  deposits >$100M                     |       | (105                                                              | )          | (424 | ) | (529 | ) |
| Time  deposits <$100M                     |       | 936                                                               |       | (717 | ) | 219 |   |
| Other  borrowings                            |       | 224                                                               |       | 110 |   | 334 |   |
|                                         |       | 1,050                                                             |       | (1,074 | ) | (24 | ) |
| Increase  (decrease) in net interest income: |       | $                                                                 | 327        |   | $ | (252 | ) | $ | 75 |   |

 

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**Provisionand Allowance for Loan and Lease Losses**

 

TheCorporation maintains a detailed, systematic analysis and procedural disciplineto determine the amount of the allowance for loan and lease losses (“ALLL”).  TheALLL is based on estimates and is intended to be adequate to provide forprobable losses inherent in the loan portfolio.  This processinvolves deriving probable loss estimates that are based on individual loanloss estimation, historical loss rates and management’s judgment.

 

TheCorporation employs several methodologies for estimating probablelosses.  Methodologies are determined based on a number of factors,including type of asset, risk rating, concentrations, and collateral value.

 

TheCorporation calculates the required ALLL on at least a quarterly basis andmakes adjusting entries quarterly. The review of the adequacy of theallowance takes into consideration such factors as concentrations of credit,changes in the growth, size and composition of the loan portfolio, overall andindividual portfolio quality, review of specific problem loans, collateral,guarantees and economic conditions that may affect the borrowers’ ability topay and/or the value of the underlying collateral.  Additionalfactors considered include: geographic location of borrowers, changes in theCompany’s product-specific credit policy and lending staffexperience.  These estimates depend on subjective factors and,therefore, contain inherent uncertainties.

 

TheCorporation’s ALLL is maintained at a level believed adequate by management toabsorb known and inherent probable losses on existing loans.  Aprovision for loan losses is charged to expense.  The allowance ischarged for losses when management believes that full recovery on the loan isunlikely.  Generally, the Company charges off any loan classified asa “loss”; portions of loans which are deemed to be uncollectible; overdraftswhich have been outstanding for more than 90 days; and, all other unsecuredloans past due 120 or more days.  Subsequent recoveries, if any, arecredited to the ALLL.

 

Although noassurance can be given that actual losses will not exceed the amount providedfor in the allowance, Management believes that the allowance is adequate toprovide for all estimated credit losses in light of all known relevant factors.At September 30, 2009 and 2008 the Bank’s allowance stood at 1.75 percent and 1.40percent of total loans, respectively.

 

Provisions made tothe ALLL during the nine months ended September 30, 2009 were $1,918,000compared to $250,000 for the same period in 2008.  Loans charged off during the nine monthsended September 30, 2009 totaled $1,351,000 compared to no charge offs forthe same period in 2008.  Recoveriestotaled $2,000 during the nine months ended September 30, 2009 and 2008.

 

During the ninemonths ended September 30, 2009, $8,850,000 of loans secured by realestate were foreclosed and transferred to other real estate owned and $1,111,000was funded for the completion of a construction project in other real estateowned.  During the nine months ended September 30,2009, other real estate owned assets amounting to $7,500,000 were sold at aloss of $67,000.

 

TheBank’s non-performing (delinquent 90 days or more and on non-accrual) net loansas a percentage of total loans were 5.66 percent and 3.23 percent as of the endof September 30,

 

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2009and 2008, respectively.  The significantincrease in non-accrual loans is primarily attributable to the continuedeconomic slowdown and the softening of the real estate market in which theCorporation operates.

 

**Non-InterestIncome**

 

Total non-interestincome for the third quarter 2009 was $4,072,000 compared with $1,133,000 for the sameperiod in 2008.  The increase of$2,939,000 was due primarily to an increases of $2,018,000 in gains on sales ofsecurities, $469,000 in merchant discount fees, $150,000 in income from salesand servicing of Small Business Administration loans, $126,000 in creditcard/stored value card program fees and a mark to market gain of $46,000 ontrading assets compared to a loss of $136,000 in 2008 during the third quarterof 2009.

 

Total non-interestincome was $8,375,000 during the nine months ended September 30, 2009compared to $4,150,000 during the first half of 2008.  The increase of $4,225,000 was due primarilyto increases of $2,703,000 in gains on sales of securities, $1,413,000 inmerchant discount fees, $102,000 in credit card/stored value card program feesand a mark to market gain of $5,000 on trading assets compared to a loss of$721,000 in 2008, partially offset by income of $694,000 related to the Visa, Inc.initial public stock offering booked in 2008.

 

**Non-InterestExpense**

 

Salary andbenefits expense for the third quarter of 2009 decreased $53,000 compared with the sameperiod in 2008.  Salary and benefitsexpense for the nine months ended September 30, 2009 decreased $487,000compared with the same period in 2008. The decreases were due to elimination of bonus accruals and theelimination of three positions during the fourth quarter of 2008.

 

Total occupancyand equipment expense for the third quarter of 2009 was $254,000 compared to $243,000 forthe same period in 2008.  The increasewas primarily due to increases of $6,000 in rental expense and an $8,000increase in depreciation expense, partially offset by a $3,000 decrease inutilities expense.  Total occupancy andequipment expense for the nine months ended September 30, 2009 was $769,000 compared to $715,000 forthe same period in 2008.  The increasewas primarily due to increases of $33,000 in rental expense and a $26,000increase in depreciation expense.

 

Professional feesfor the third quarter of 2009 were $172,000 compared to $50,000 for the sameperiod in 2008.  Professional fees forthe nine months ended September 30, 2009 were $699,000 compared to $167,000 for the sameperiod in 2008.  The increases wereprimarily due to increases in accounting/audit expense, legal fees associatedwith lawsuits related to various loans and loan collection expense.

 

Data processingexpense for the third quarter of 2009 was $67,000 compared to $86,000 for thesame period in 2008.  Data processingexpense for the nine months ended September 30, 2009 was $247,000 compared to $277,000 forthe same period in 2008, which was a decrease of $30,000 primarily due tocontinued efforts to control expenses.

 

Other general andadministrative expenses for the third quarter of 2009 totaled $1,479,000 compared with$980,000 for the same period in 2008, which is an increase of $499,000.  Significant changes occurred in the followingcategories; increases occurred in

 

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merchant credit cardprocessing expense of $291,000, FDIC regular and special assessment insurancepremiums of $217,000, credit card/stored value card program expense of $83,000,loan expense of $40,000 and other operational charge offs $22,000, whiledecreases occurred inATM expense of $92,000, stationery/supplies of $27,000 and businessdevelopment expense of $17,000.

 

Other general andadministrative expenses for the nine months ended September 30, 2009totaled $4,025,000 compared with $2,671,000 for the same period in 2008, whichis an increase of $1,354,000. Significant changes occurred in the following categories; increasesoccurred in merchantcredit card processing expense of $941,000, FDIC insurance premiums of $314,000(includes a special assessment of $134,000), credit card/stored valuecard program expense of $110,000, loan expense of $85,000 and in 2008 a creditof $110,000 resulted from the reversal of an accrued loss reserve for Visa, Inc.lawsuit settlement;while decreases occurred in ATM expense of $72,000, stationery/supplies of$48,000, businessdevelopment expense of $45,000, postage of $24,000.

 

OREO expenses andprovision for possible losses on OREO for the third quarter and nine monthsended September 30, 2009 totaled $163,000 and $792,000, respectivelycompared to $76,000 and $608,000 during the same periods in 2008.

 

**Provisionfor Income Taxes**

 

Thetax provision was $470,000 for the nine months ended September 30, 2009compared to tax provision of $801,000 for the same period in 2008, representing20.50% and 44.23% of pre-tax income for those periods.  The decrease in the effective tax rate for2009 is a direct result of the Bank’s investing in tax-exempt securities,increased taxable deductions for provisions to the allowance for loan and leaselosses and recognition of a tax benefit for losses on trading assets.

 

Theamount of the tax provision is determined by applying the Corporation’s statutoryincome tax rates to pre-tax book income, adjusted for permanent differencesbetween pre-tax book income and actual taxable income. Such permanentdifferences include but are not limited to tax-exempt interest income;increases in the cash surrender value of bank-owned life insurance, certainother expenses that are not allowed as tax deductions, and tax credits.

 

Deferredtax assets and liabilities are measured using the enacted tax rates expected toapply to taxable income in the periods in which the deferred tax asset orliability is expected to be realized or settled.  The Bank maintains a valuation allowance withrespect to deferred tax assets due to the uncertainty surrounding therealization of certain net deferred tax assets.

 

**LOANS**

 

Average loansrepresented 64.63% of average earning assets and 56.55% of average total assetsfor the nine months ended September 30, 2009 compared with 67.50% and 62.96%,respectively during 2008. For the nine months ended September 30, 2009, average loans increased 0.67% to$171,349,000 from $167,304,000 for the same period in 2008.  Average real estate loans increased$6,855,000 (6.00%), average commercial loans increased $5,122,000 (17.03%), andaverage installment loans increased $806,000 (90.41%), while averageconstruction loans decreased $8,738,000 (39.47%).

 

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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 of one year orlonger.  Short-term business loans aregenerally intended to finance current transactions and typically provide formonthly interest payments with principal being payable at maturity or at 90-dayintervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

 

The Bank is arecognized leader for Small Business Administration (SBA) lending in MontereyCounty, and holds SBA’s coveted Preferred Lender Status.  Generally, SBA loans are guaranteed, by theSBA, for 75 to 90 percent of their principal amount, which can be retained inthe loan portfolio or sold to investors. Such loans are made at floating interest rates, generally with longerterms (up to 25 years) than are available on a conventional loan basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventionalcommercial loans because they may be based upon credit standards the Bank wouldnot otherwise apply, such as lower cash flow coverage, or longer repaymentterms.

 

The Bank’s realestate loan portfolio consists of both real estate construction loans and realestate mortgage loans.  The Bank hasinitiated a program to generate more commercial and industrial real estateloans, which generally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. Real estate construction loans are made for a much shorter term, andoften at higher interest rates, than conventional single-family residentialreal estate loans.  The cost ofadministering such loans is often higher than for other real estate loans, asprincipal is drawn on 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 madefor the purpose of financing the purchase of various types of consumer goods,home improvement loans, auto loans and other personal loans.  Consumer installment loans generally providefor monthly payments of principal and interest, at a fixed rate.  Most of the Bank’s consumer installment loansare generally secured by the personal property being purchased.  The Bank generally makes consumer loans tothose customers with a prior banking relationship with the Bank.

 

**Non-performingand Non-accrual Loans**

 

The Bank’s presentpolicy is to cease accruing interest on loans which are past due as toprincipal or interest 90 days or more, except for loans which are well securedor when collection of interest and principal is deemed likely.  When a loan is placed on non-accrual,previously accrued and unpaid interest is generally reversed out of incomeunless adequate collateral from which to collect the principal and interest onthe loan is available and in the process of collection.

 

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In relation to SBAloans sold, the Bank generally repurchases from the secondary market theguaranteed portion of SBA guaranteed loans when those loans are placed onnon-accrual status.  After theforeclosure and collection process is complete, the SBA reimburses the Bank forthis principal balance.  Therefore,although these balances do not earn interest during this period, they generallydo not result in a loss of principal to the Bank.  The information provided in the followingtable is net of the $1,437,000 guaranteed by the Small Business Administration.

 

At September 30,2009 the Corporation had one loan with an outstanding principal balance of$899,000 which hard been restructured. The loan is performing in accordance with the restructured loan terms.

 

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”):

 
|                                                         |   | **As of**                   |   | **As of**             |   |
|--------------------------------------------------------------|--------|-----------------------------|--------|-----------------------|--------|
|                                                         |   | **September 30****,**  |   | **December 31,** |   |
|                                                         |   | **2009**                    |   | **2008**              |   | **2008** |   |
|                                                         |   | **(Dollars  in thousands)** |   |                  |   |
| Accruing,  past due 90 days or more:                         |   |                        |   |                  |   |   |   |
|                                                         |   |                        |   |                  |   |   |   |
| Real  Estate                                                 |   | $                           | 2,112  |                  | $      | — |   | $ | — |   |
| Commercial                                                   |   | —                      |   | —                |   | — |   |
| Installment                                                  |   | —                      |   | —                |   | — |   |
| Other                                                        |   | —                      |   | —                |   | — |   |
| Total  accruing                                              |   | 2,112                       |   | —                |   | — |   |
|                                                         |   |                        |   |                  |   |   |   |
| Nonaccrual  Loans:                                           |   |                        |   |                  |   |   |   |
| Real  Estate                                                 |   | 5,961                       |   | 3,929                 |   | 6,876 |   |
| Commercial                                                   |   | 1,582                       |   | 1,165                 |   | 215 |   |
| Installment                                                  |   | —                      |   | 155                   |   | — |   |
| Other                                                        |   | —                      |   | —                |   | — |   |
| Total  nonaccrual                                            |   | 7,543                       |   | 5,249                 |   | 7,091 |   |
|                                                         |   |                        |   |                  |   |   |   |
| Total  nonperforming loans                                   |   | 9,655                       |   | 5,249                 |   | 7,091 |   |
| Other  Real Estate Owned net                                 |   | 13,923                      |   | 6,349                 |   | 7,364 |   |
| Total  nonperforming assets                                  |   | $                           | 23,578 |                  | $      | 11,598 |   | $ | 14,455 |   |
|                                                         |   |                        |   |                  |   |   |   |
| Total  loans end of period                                   |   | 170,505                     |   | 162,323               |   | 169,868 |   |
|                                                         |   |                        |   |                  |   |   |   |
| Ratio  of nonperforming loansto total loans at end of period |   | 5.66                        | %      | 3.23                  | %      | 4.18 | % |
|                                                         |   |                        |   |                  |   |   |   |
| Ratio  of nonperforming assets to total assets               |   | 8.39                        | %      | 4.19                  | %      | 4.72 | % |

 

 

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Summaryof Loan Loss Experience

 
| ** **                                                                    | ** ** | ** **                   | ** ** | ** **            | ** ** | **As of the** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                                                                    | ** ** | **As of the period**         | ** ** | **Year ended**        | ** ** |
| ** **                                                                    | ** ** | **Ended September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                    | ** ** | **2009**                     | ** ** | **2008**              | ** ** | **2008**      | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**   | ** ** |
|                                                                          |       |                         |       |                  |       |          |       |   |   |   |
| Average loans outstanding                                                     |       | $                            | 171,349    |                  | $          | 167,304       |       | $ | 166,960 |   |
|                                                                          |       |                         |       |                  |       |          |       |
| Total loans outstanding at end of the period                                  |       | $                            | 170,505    |                  | $          | 162,323       |       | $ | 169,868 |   |
|                                                                          |       |                         |       |                  |       |          |       |
| Allowance, beginning of period                                                |       | $                            | 2,413      |                  | $          | 2,028         |       | $ | 2,028 |   |
|                                                                          |       |                         |       |                  |       |          |       |
| Loans charged off during period:                                              |       |                         |       |                  |       |          |       |
| Commercial                                                                    |       | 13                           |       | —                |       | 187           |       |
| Installment                                                                   |       | 30                           |       | —                |       | —        |       |
| Real Estate                                                                   |       | 1,308                        |       | —                |       | 563           |       |
| Other                                                                         |       | —                       |       | —                |       | —        |       |
| Total charge offs                                                             |       | 1,351                        |       | —                |       | 750           |       |
|                                                                          |       |                         |       |                  |       |          |       |
| Recoveries during period:                                                     |       |                         |       |                  |       |          |       |
| Commercial                                                                    |       | 2                            |       | 2                     |       | 3             |       |
| Installment                                                                   |       | —                       |       | —                |       | —        |       |
| Real Estate                                                                   |       | —                       |       | —                |       | —        |       |
| Other                                                                         |       | —                       |       | —                |       | —        |       |
| Total recoveries                                                              |       | 2                            |       | 2                     |       | 3             |       |
|                                                                          |       |                         |       |                  |       |          |       |
| Net loans charged off during the period                                       |       | 1,349                        |       | (2                    | )          | 747           |       |
|                                                                          |       |                         |       |                  |       |          |       |
| Additions to allowance for possible loan losses                               |       | 1,918                        |       | 250                   |       | 1,132         |       |
| Allowance, end of period                                                      |       | $                            | 2,982      |                  | $          | 2,280         |       | $ | 2,413 |   |
|                                                                          |       |                         |       |                  |       |          |       |
| Ratio of net loans charged off to averageloans outstanding during  the period |       | 0.79                         | %          | 0.00                  | %          | 0.45          | %          |
|                                                                          |       |                         |       |                  |       |          |       |
| Ratio of allowance to total loans at end of period                            |       | 1.75                         | %          | 1.40                  | %          | 1.42          | %          |
|                                                                          |       |                         |       |                  |       |          |       |
| Ratio of nonperforming loans to allowancefor loan losses at end of  period    |       | 323.78                       | %          | 230.20                | %          | 293.82        | %          |

 

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The following tableprovides a breakdown of the allowance for loan and lease losses by categoriesas of the dates indicated:

 
|                                      |   | **As of  the Period ended September 30,** |    | **As of  the Year ended**                     |   |
|-------------------------------------------|--------|------------------------------------------------|---------|-----------------------------------------------|--------|
|                                      |   | **2009**                                       |    | **2008**                                      |   | **December 31,  2008** |   |
|                                      |   | **Amount**                                     |    | **% of  Loans in  Category  to Total  Loans** |   | **Amount** |   | **% of  Loans in  Category  to Total  Loans** |   | **Amount** |   | **% of  Loans in  Category  to Total  Loans** |   |
|                                      |   | **(Dollars  in thousands)**                    |    |
| Balance at End  of Period Applicable to:  |   |                                           |    |                                          |   |   |   |   |   |   |   |   |   |
| Construction                              |   | $                                              | 112     |                                          | 6.5    | % | $ | 96 |   | 10.6 | % | $ | 163 |   | 9.4 | % |
| Commercial                                |   | 645                                            |    | 20.8                                          | %      | 619 |   | 19.1 | % | 634 |   | 17.6 | % |
| Installment                               |   | 218                                            |    | 1.6                                           | %      | 29 |   | 0.5 | % | 31 |   | 0.6 | % |
| Real Estate                               |   | 1,996                                          |    | 71.1                                          | %      | 1,516 |   | 69.8 | % | 1,569 |   | 72.4 | % |
| Unallocated                               |   | 11                                             |    |                                          |   | 20 |   |   |   | 16 |   |   |   |
| Total allowance for loan and lease losses |   | $                                              | 2,982   |                                          | 100.0  | % | $ | 2,280 |   | 100.0 | % | $ | 2,413 |   | 100.0 | % |
|                                      |   |                                           |    |                                          |   |   |   |   |   |   |   |   |   |
| Total loans end of period                 |   | $                                              | 170,505 |                                          |   |   | $ | 162,323 |   |   |   | $ | 169,868 |   |   |   |

 

**Non-performingAssets**

 

The followingtable presents information with respect to nonperforming assets, as of thedates indicated. The non-accrual loans are net of the guaranteed portion of SBAloans and the OREO was acquired through foreclosure.  The OREO was recorded at fair value lessselling costs on the date of acquisition.

 
| ** **                               | ** ** | ** **                   | ** ** | ** **            | ** ** | **As of the** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                               | ** ** | **As of the period**         | ** ** | **Year ended**        | ** ** |
| ** **                               | ** ** | **Ended September 30,** | ** ** | **December 31,** | ** ** |
| ** **                               | ** ** | **2009**                     | ** ** | **2008**              | ** ** | **2008**      | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**   | ** ** |
| Nonperforming loans                      |       | $                            | 9,655      |                  | $          | 5,249         |       | $ | 7,091 |   |
| Other real estate owned, net (1)         |       | 13,923                       |       | 6,349                 |       | 7,364         |       |
| Total nonperforming assets               |       | $                            | 23,578     |                  | $          | 11,598        |       | $ | 14,455 |   |
|                                     |       |                         |       |                  |       |          |       |
| Nonperforming loans to total gross loans |       | 5.66                         | %          | 3.23                  | %          | 4.18          | %          |
| Nonperforming assets to total assets     |       | 8.39                         | %          | 4.19                  | %          | 4.72          | %          |

 

----

(1) net of reserve for foreclosed assets losses of $522,000 as ofSeptember 30, 2009 and $0 as of September 30, 2008 and December 31,2008.

 

**Deposits**

 

Average interestbearing and non-interest-bearing deposits for the nine months ended September 30,2009 were$210,228,000 an increase of 17.73% compared with the same period in 2008.  Average certificates of deposit represented73.31% of average deposits for the nine months ended September 30,2009 compared with73.00% for the same period in 2008. Average interest bearing checking, money market and savings accounts asa group were 10.43% of average deposits for the nine months ended September 30,2009 compared with12.56% for the same period in 2008. Average non-interest bearing deposits represented 16.26% of averagedeposits for the nine months ended September 30, 2009 compared with 14.44% for the same periodin 2008.

 

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** **

The following table setsforth the scheduled maturities of the Corporation’s time deposits indenominations of $100,000 or greater at September 30, 2009:

 

Maturities of TimeDeposits of$100,000 or More

(Dollars inThousands)

 
| Three months or less                  |   | $      | 18,275 |   |
|---------------------------------------|--------|--------|--------|--------|
| Over three months through six months  |   | 8,549  |   |
| Over six months through twelve months |   | 16,680 |   |
| Over twelve months                    |   | 15,519 |   |
| Total                                 |   | $      | 59,023 |   |

** **

**Borrowings**

** **

**The Corporation has a line of credit with Marshall &Ilsley Bank in the amount of $3,000,000, at a floating interest rate based onthe one-month LIBOR Rate plus 3.75% with a floor rate of 6.50% and a maturitydate of November 15, 2009. At September 30, 2009, the line of creditwas fully advanced.**

** **

**The Bank has lines of credit from the Federal Reserve Bankof San Francisco and the Federal Home Loan Bank (FHLB) of San Francisco withremaining available borrowing capacity on September 30, 2009 of$22,227,000 and $127,000, respectively. The Federal Reserve Bank discountwindow line is secured by a portion of the Bank’s investment securities at September 30,2009. At September 30, 2009, the total book value of securities pledged tothe Federal Reserve Bank was $24,695,000 with no outstanding loan balance. TheFederal Home Loan Bank line of credit has a maximum borrowing capacity of 20%of the Bank’s total assets, adjusted quarterly. The Federal Home Loan Bank lineof credit is secured by a portion of the Bank’s real estate secured loans andsecurities at September 30, 2009. The total principal balance at September 30,2009 of pledged loans and securities at the Federal Home Loan Bank was$41,629,000 and $6,706,000, respectively.**

** **

**The following table providesinformation on ten FHLB advances outstanding at September 30, 2009.**

 
| **Amount** | ** ** | **Rate** | ** ** | **Funding  Date** | ** ** | **Maturity  Date** | ** ** |
|------------|------------|----------|------------|-------------------|------------|--------------------|------------|
| $          | 5,000,000  |     | 4.96       | %                 | 11/14/05   |               | 11/15/10   |   |
| 1,750,000  |       | 4.74     | %          | 1/26/06           |       | 1/26/11            |       |
| 2,250,000  |       | 4.75     | %          | 1/26/06           |       | 1/26/11            |       |
| 3,500,000  |       | 5.51     | %          | 7/17/06           |       | 7/18/11            |       |
| 1,500,000  |       | 5.52     | %          | 7/17/06           |       | 7/18/11            |       |
| 1,000,000  |       | 5.22     | %          | 8/25/06           |       | 8/25/11            |       |
| 5,000,000  |       | 5.21     | %          | 7/30/07           |       | 7/30/12            |       |
| 3,000,000  |       | 4.85     | %          | 10/1/07           |       | 10/1/12            |       |
| 5,000,000  |       | 5.01     | %          | 9/18/07           |       | 9/18/14            |       |
| 1,000,000  |       | 7.72     | %          | 6/1/00            |       | 6/3/30             |       |
| $          | 29,000,000 |     |       |              |       |               |       |   |

** **

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** **

**The Bank has two letters of credit issued by FederalHome Loan Bank of San Francisco. One letter of credit in the amount of$330,000, expiring April 17, 2011, is used to secure local agencydeposits. The beneficiary of the letter of credit is the Administrator of LocalAgency Security, Department of Financial Institutions. The other letter ofcredit in the amount of $1,300,000, expiring February 17, 2019 hasMasterCard International Inc. as the beneficiary.**

** **

**CapitalResources**

 

The Corporation maintains capital tocomply with regulatory requirements, to provide a margin of safety for itsdepositors and stockholders, and to provide for future growth and the abilityto pay dividends. At September 30,2009, shareholders’ equity was $16,824,000versus $14,352,000 at December 31, 2008. The Corporation paid no cashdividends to shareholders for the nine months ended September 30, 2009and $450,000 for the year ended December 31, 2008. The Bank paid cashdividends to the Corporation of $500,000 for the nine months ended September 30, 2009and no dividends for the year ended December 31, 2008.

 

The FDIC andFederal Reserve Board have adopted capital adequacy guidelines for use in theirexamination and regulation of banks and bank holding companies. If the capitalof a bank or bank holding company falls below the minimum levels established bythese guidelines, it may be denied approval to acquire or establish additionalbanks or non-bank businesses, or the FDIC or Federal Reserve Board may takeother administrative actions. The guidelines employ two measures of capital: (1) risk-basedcapital and (2) leverage capital.

 

In general, therisk-based capital guidelines provide detailed definitions of which obligationswill be treated as capital, and assign different weights to various assets andoff-balance sheet items, depending upon the perceived degree of credit riskassociated with each asset. Each asset is assigned to one of four risk-weightedcategories. For example, 0 percent for cash and unconditionally guaranteedgovernment securities; 20 percent for deposits with other banks and fed funds;50 percent for state bonds and certain residential real estate loans; and 100percent for commercial loans and other assets. Capital is categorized as eitherTier 1 capital, consisting of common stock and retained earnings (or deficit),or Tier 2 capital, which includes limited-life preferred stock and allowancefor loan losses (subject to certain limitations). The guidelines also defineand set minimum capital requirements to maintain Tier 1 capital of at least4.0% and total capital of 8.0% of risk-adjusted assets. The Bank had a Tier 1capital to total risk-adjusted assets capital ratio of 13.39% and 12.17% at September 30,2009 and 2008, respectively. The Bank’s Tier 1 capital exceeds the minimumregulatory requirement by $18,271,000. The Bank had a Total Risk-Based capitalto risk-adjusted assets ratio of 14.64% and 13.39% at September 30, 2009and 2008, respectively. The Bank’s Total Risk-Based capital exceeds the minimumregulatory requirement by $12,918,000.

 

The Tier 1 leveragecapital ratio guidelines require a minimum leverage capital ratio of 4.0% ofTier 1 capital to total assets less goodwill. The Bank had a leverage capitalratio of 9.04% and 8.75% at September 30, 2009 and 2008, respectively. TheBank’s Tier 1 leverage capital exceeds the minimum regulatory requirement by$14,533,000. The Bank accomplished its plan, initiated earlier in the year, toincrease the leverage capital ratio to a minimum of 9% through earnings and byreducing its asset size.

 

Under regulatoryguidelines, the $8 million in Trust Preferred Securities outstanding qualify asTier 1 capital up to 25% of Tier 1 capital. Any additional Trust PreferredSecurities will qualify as Tier 2 capital.

 

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The Corporation’s Boardof Directors approved a stock repurchase program pursuant to which theCorporation, from time to time and at management’s discretion, may repurchaseup to $500,000 of the Corporation’s outstanding shares. The Corporationrepurchased 20,678 shares of common stock at an average cost of $4.20 per sharein open market transactions during the nine months ending September 30,2009. The Corporation repurchased 46,010 shares of common stock at an averagecost of $7.51 per share in open market transactions during 2008.

 

In October 2008, the Board and the holders of more than a majorityof our issued and outstanding common stock approved by written consent, anamendment to the Corporation’s articles of incorporation (the “Amendment”).The Amendment authorizes the Corporation to issue up to 10,000,000 shares ofpreferred stock, which may be issued from time to time in one or more series asdetermined by the Board. The Board is authorized to designate all rights,preferences, privileges and restrictions attendant to each series as well asthe number of shares authorized for issuance in each series of the preferredstock, which matters shall be expressed in resolutions adopted by the Board andfiled with the Secretary of State of the state of California. Additionally, theAmendment authorizes the Corporation to issue an additional 7,500,000 shares ofcommon stock for a total of 10,000,000 shares of common stock authorized forissuance after the Amendment. The Amendment became effective January 23,2009. There were no shares issued as of September 30, 2009.

 

## **Other Regulatory Matters**

 

TheFederal Deposit Insurance Corporation requested the Bank consent to aregulatory order resulting from its 2008 Consumer Compliance Examination, whichwas completed in 2009. The Bank does not agree with some of the provisions ofthe draft order and is seeking expert opinions regarding the matters at issue. Asa result of the Bank’s refusal to sign the order in accord with the FDIC’s timeframe, the FDIC has indicated to the Bank that it will proceed with theAdministrative Hearing process to issue the order. The FDIC is asserting thatthree credit and debit card programs operated by third-party vendors violatedcertain provision of Federal law, which the Bank disputes, and the FDIC isdemanding that the Bank make restitution to affected customers and be subjectedto a civil money penalty as a result of the alleged violations. The Bank alsobelieves that restitution and civil money penalty are inappropriate under thecircumstances. The FDIC is presently investigating the Bank’s involvement inthe subject card programs utilizing its subpoena powers pursuant to statutoryauthority. The financial and non-financial impact of this matter is not knownas of the balance sheet date and as of the issuance date of this report.

 

**Liquidity**

 

Liquidityrepresents the ability to provide sufficient cash flows or cash resources in amanner that enables an entity to meet its obligations in a timely fashion andadequately provide for anticipated future cash needs.

 

For the Bank,liquidity considerations involve the capacity to meet expected and potentialrequirements of depositors seeking access to balances and to provide for thecredit demands of borrowing customers. In the ordinary course of the Bank’sbusiness, funds are generated from the repayment of loans, maturities withinthe investment securities portfolio and the acquisition of deposit balances andshort-term borrowings. In addition, the Bank has a line of credit from the FederalHome Loan Bank of San Francisco of approximately $58,456,000, based on 20percent

 

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of the Bank’stotal assets as reported in the most recent quarterly Consolidated Reports ofCondition and Income for a bank with Domestic Offices Only. The line of creditis subject to pledging of acceptable collateral. At September 30, 2009,$127,000 in excess collateral was pledged. The Bank has a borrowing line withthe Federal Reserve Bank of San Francisco secured****aportion of the Bank’s securities, with available borrowing of $22**,**227,000 at September 30,2009.

 

As a matter of policy, the Bank seeks tomaintain a level of liquid assets, including marketable investment securities,equal to a least 15 percent of total assets (“total liquidity”). Additionallythe Bank maintains secondary sources of liquidity (borrowing lines from otherinstitutions) equal to at least an additional 10 percent of assets. Withinthese ratios, the Bank generally has excess funds available to sell as federalfunds on a daily basis, and is able to fund its own liquidity needs without theneed of short-term borrowing. The Bank’s total liquidity at September 30, 2009 and 2008was 35.26% and 33.23%, respectively, while its average loan to average depositratio for such years was 81.51% and 93.69%, respectively.

 

Brokered deposits aredeposit instruments, such as certificates of deposit, deposit notes, bankinvestment contracts and certain municipal investment contracts that are issuedthrough brokers and dealers who then offer and/or sell these depositinstruments to one or more investors. Additionally, deposits on which afinancial institution pays an interest rate significantly higher thanprevailing rates are considered to be brokered deposits. Federal law andregulation restricts banks from soliciting or accepting brokered deposits,unless the bank is well capitalized under Federal guidelines. The Bank had$6,300,000 in brokered deposits at September 30, 2009 compared with$2,656,000 in brokered deposits at September 30, 2008.

 

**Deferralof Interest Payments on Trust Preferred Securities**

 

The Corporation has exercised its rights in accordance with Section 2.11Extension of Interest Payment Period of the Indentures dated March 27,2003 for Northern California Bancorp, Inc. Trust I and November 3,2003 for Northern California Bancorp, Inc. Trust II to defer interestpayments for an undetermined period of time, not to exceed twenty (20)consecutive quarterly payments. The deferral of interest payments on NorthernCalifornia Bancorp, Inc. Trust I was effective with the October 7,2009 interest payment. The deferral of interest payments on Northern CaliforniaBancorp, Inc. Trust II was effective with the November 8, 2009interest payment.

 

**InterestRate 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 Bankinstituted formal asset/liability policies 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 expectsto generate earnings from increasing loan volume, appropriate loan pricing andexpense control and not from trying to accurately forecast interest rates. Anotherimportant function of asset/liability management is managing the risk/returnrelationships between interest rate risk, liquidity, market risk and capitaladequacy. The Bank gives priority to liquidity concerns followed by capital

 

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adequacy, theninterest rate risk and market risk in the investment portfolio. The policy ofthe 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 thatthe Bank can maintain a totally earnings neutral position. Further, the actualtiming of repricing of assets and liabilities does not always correspond to thetiming assumed by the Bank for analytical purposes. Therefore, changes inmarket rates of interest will generally impact the Bank’s net interest incomeand net interest margin for long or short periods of time.

 

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed funds rate.The model converts a fed funds rate change into rate changes for each majorclass of asset and liability, then simulates the bank’s net interest marginbased on the bank’s actual repricing over a one year period, assuming thatmaturities are reinvested in instruments identical to those maturing during theperiod. The followingtable shows the affect on net interest income of various rate shocks, expressedin basis points, at September 30, 2009. The table includes one projectionfor a decrease in rates, as the Federal Funds target rate is currently between0% and 0.25%.

 
| **Rate Shock Increase in  Basis Points** | ** ** | **Percent Increase in Net  Interest Income** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| -25                                      |       | -2.0%                                        |       |
| 100                                      |       | 11.2%                                        |       |
| 200                                      |       | 24.9%                                        |       |
| 300                                      |       | 39.1%                                        |       |

 

**InvestmentSecurities**

 

Thefollowing table sets forth the book and market value of the investmentsecurities, AFS at September 30, 2009:

 
| ** **                           | ** ** | **INVESTMENT PORTFOLIO MIX  SEPTEMBER 30, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Book Value**                                                  | ** ** | **Market Value** | ** ** |
|                                 |       |                                                                 |       |   | ** ** |
| State/Local  Agency Bonds            |       | $                                                                    | 36,473     |   | $ | 37,148 | ** ** |
| Mortgage  Backed Securities          |       | 1,649                                                                |       | 1,650 |   |
| U.S.  Government Agency Securities   |       | 5,000                                                                |       | 5,055 |   |
| Total                                |       | $                                                                    | 43,122     |   | $ | 43,853 |   |

 

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The following table sets forth the book and market value of the otherinvestments at September 30, 2009:

 
| ** **                                      | ** ** | **INVESTMENT PORTFOLIO MIX  SEPTEMBER 30, 2009** | ** **  |
|-------------------------------------------------|------------|----------------------------------------------------------------------|-------------|
| ** **                                      | ** ** | **Book Value**                                                  | ** **  | **Market Value** | ** ** |
| Metrocities Mortgage, LLC                       |       | $                                                                    | 10          |   | $ | 10 |   |
| Federal Home Loan Bank stock, restricted        |       | 3,332                                                                |        | 3,333 |   |
| Northern California Bancorp, Inc. Trust I  |       | 93                                                                   |        | 93 |   |
| Northern California Bancorp, Inc. Trust II |       | 155                                                                  |        | 155 |   |
| Independent Bankers Financial Corporation       |       | 51                                                                   |        | 51 |   |
| Visa, Inc. Stock                           |       | 426                                                                  |        | 426 |   |
|                                            |       | $                                                                    |  4,068 |   | $ | 4,068 |   |

 

In addition, the Corporation maintains a trading account, at fairvalue, consisting of marketable securities. At September 30, 2009 and December 31,2008 the account value was $276,000 and $361,000, respectively.

 

The contractualmaturities of investment securities as well as yields based on amortized costof those securities at September 30, 2009 are shown below. Actualmaturities may differ from contractual maturities because issuers have theright to call or prepay obligations with or without call or prepaymentpenalties.

 
| ** **                           | ** ** | **One year or less** | ** ** | **After one year to  five years** | ** ** | **After five years to  ten years** | ** ** | **After ten years** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------|------------|------------|------------|
| **(Dollars in thousands)** | ** ** | **Amount**                          | ** ** | **Yield**                                             | ** ** | **Amount**                                             | ** ** | **Yield**                     | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| Available-for-sale                   |       |                                |       |                                                  |       |                                                   |       |                          |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage  Backed Securities          |       | $                                   | —     |                                                  | 0.00       | %                                                      | $          | —                        |       | 0.00       | %          | $ | — |   | 0.00 | % | $ | 1,650 |   | 6.94 | % | $ | 1,650 |   | 6.94 | % |
| State/Local  Agency Securities       |       | —                              |       | 0.00                                                  | %          | —                                                 |       | 0.00                          | %          | 413        |       | 4.91 | % | 36,735 |   | 4.89 | % | 37,148 |   | 4.89 | % |
| U.S.  Government Agencies            |       | —                              |       | 0.00                                                  | %          | —                                                 |       | 0.00                          | %          | —     |       | 0.00 | % | 5,055 |   | 5.10 | % | 5,055 |   | 5.10 | % |
|                                 |       | $                                   | —     |                                                  | 0.00       | %                                                      | $          | —                        |       | 0.00       | %          | $ | 413 |   | 4.91 | % | $ | 43,440 |   | 5.00 | % | $ | 43,853 |   | 4.99 | % |

 

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**Item 4T. Controlsand Procedures**

** **

(a) The Corporation’sChief Executive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Bank’s disclosure controls and procedures as defined inExchange Act Rules 13a-15(e) promulgated under the Exchange Act as ofthe end of the period covered by this report (the “Evaluation Date”) haveconcluded that as of the Evaluation Date, the Corporation’s disclosure controlsand procedures were adequate and effective to ensure that material informationrelating to the Corporations would be made known to them by others within theBank, particularly during the period in which this report was being prepared. Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by us in thereports that we file under the Exchange Act is accumulated and communicated toour management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

(b) Changesin Internal Controls: In the quarter ended September 30, 2009,the Corporation did not make any significant changes in, nor take anycorrective actions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

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**PART II-OTHERINFORMATION**

 

**Item 1. LegalProceedings.**

 

The Corporation, the Bank and Charles T. Chrietzberg, Jr. were named as defendants in a lawsuit filed November 3, 2008 in the Monterey County Court-Civil Division by Golden State Bank. The lawsuit involves claims related to loan participations purchased by Golden State Bank from Monterey County Bank. The lawsuit seeks to compel arbitration of the issues, rescission of the participation agreements, payment of all principal and interest, damages, attorneys’ fees and costs.

 

The defendants have reviewed the lawsuit, categorically deny all of the allegations and will vigorously defend the suit. The parties have agreed to have this matter decided by binding arbitration. The plaintiff, Golden State Bank has dismissed Mr. Chrietzberg from the suit. The dismissal was without consideration from the Corporation, Bank or Mr. Chrietzberg.

 

The Bank was named as defendant in a lawsuit filed February 26, 2009 in Monterey County Court-Civil Division by Tighorn Financial Services, LLC (“Tighorn”). The lawsuit seeks to compel the Bank to continue its credit card sponsorship and the servicing of a credit card portfolio under a card sponsorship agreement with Tighorn. Pursuant to termination provisions contained in the parties’ agreement, the Bank gave Tighorn written notice of termination of the agreement in June 2008.

 

The Bank, Charles T. Chrietzberg, Jr. and Timothy M. Leveque were named as defendants in a lawsuit filed April 29, 2009 in the Monterey County Court-Civil Division by First Foundation Bank. The lawsuit involves claims related to two loan participations purchased by First Foundation Bank from Monterey County Bank. The lawsuit seeks to rescind the participation agreements, payment of all principal and interest, damages, attorneys’ fees and costs.

 

The Bank has reviewed the lawsuit, categorically denies all of the allegations, believes it gave proper notice, and will vigorously defend the suit.

 

The Bank, Charles T. Chrietzberg, Jr and Timothy M. Leveque were named as defendants in a lawsuit filed November 3, 2008 in the Monterey County Court-Civil Division by Bank of the Orient. The lawsuit involves claims related to loan participations purchased by Bank of the Orient from Monterey County Bank. The lawsuit seeks rescission of the participation agreements, payment of all principal and interest, damages, attorneys’ fees and costs.

 

The defendants have reviewed the lawsuit, categorically deny all of the allegations and will vigorously defend the suit. The parties have agreed to have this matter decided by binding arbitration.

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3. Defaultsupon Senior Securities**

 

None

** **

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** **

**Item 4. Submission ofMatters to a Vote of Security Holders.**

** **

None

 

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

####  

None

 

#### **Item 6. Exhibits**

####  

| A.     | EXHIBITS |
|--------|----------|
|   |     |
|   | 31.1     | Certification of the  Chief Executive Officer of Northern California Bancorp, Inc. pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |     |   |
|   | 31.2     | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |     |   |
|   | 32.1     | Certification of the Chief Executive Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|   |     |   |
|   | 32.2     | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                          | NORTHERN CALIFORNIA BANCORP,  INC. |
|-------------------------------|------------------------------------|
|                          |                               |   |
| Date: November 12,  2009 | By:                                | /s/ Charles T.  Chrietzberg, Jr. |
|                          | Charles T.  Chrietzberg, Jr.  |
|                          | Chairman of the  Board &  |
|                          | Chief Executive Officer            |
|                          |                               |
|                          |                               |
| Date: November 12,  2009 | By:                                | /s/ Bruce N. Warner |
|                          | Bruce N. Warner                    |
|                          | Chief  Financial Officer and       |
|                          | Principal  Accounting Officer      |

 

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