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

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 
| **ý** | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------|
|       |                                                                                   |
|       | **for the quarterly period ended  March 31, 2003**                                     |

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

 

**CommissionFile Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

Incorporated inthe State of California

 

IRS EmployerIdentification Number **77-0421107**

 

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

 

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

 

Check whether theissuer: (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý             Noo

 

As of April 30,2003, the Corporation had 1,493,822 shares of common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

Item 1. FINANCIALSTATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEET

 
|                                                                                                            |   | **MARCH 31  2003** |   | **DECEMBER  31  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|------------|
| ASSETS:                                                                                                         |   |               |   |                   |       |
| Cash and Cash  Equivalents                                                                                      |   | 4,688,000          |   | 13,017,100             |       |
| Federal Funds  Sold                                                                                             |   | 10,755,000         |   | —                 |       |
| Trading Assets                                                                                                  |   | 66,000             |   | 82,200                 |       |
| Investment  Securities, available for sale (Note 1)                                                             |   | 5,456,200          |   | 6,039,800              |       |
| Other  Investments                                                                                              |   | 1,331,600          |   | 1,210,500              |       |
| Loans Held for  Sale                                                                                            |   | 1,629,000          |   | 982,500                |       |
| Gross Loans  (Note 2)                                                                                           |   | 63,398,300         |   | 60,041,300             |       |
| Allowance for  Possible Loan Losses (Note 3)                                                                    |   | (677,700           | )      | (636,900               | )          |
| Deferred  Origination Fees                                                                                      |   | (126,600           | )      | (130,000               | )          |
| Net Loans                                                                                                       |   | 62,594,000         |   | 59,274,400             |       |
| Bank Premises  and Equipment, Net                                                                               |   | 2,255,900          |   | 2,243,700              |       |
| Cash Surrender  Value of Life Insurance                                                                         |   | 2,187,800          |   | 2,160,400              |       |
| Interest  Receivable and Other Assets                                                                           |   | 1,394,700          |   | 1,268,700              |       |
| Total Assets                                                                                                    |   | 92,358,200         |   | 86,279,300             |       |
|                                                                                                            |   |               |   |                   |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                     |   |               |   |                   |       |
| Total Deposits  (Note 4)                                                                                        |   | 69,459,200         |   | 67,616,400             |       |
| Short-term  Borrowing                                                                                           |   | 0                  |   | 200,000                |       |
| Long-term  Borrowing                                                                                            |   | 0                  |   | 972,200                |       |
| Federal Home  Loan Bank Borrowed Funds                                                                          |   | 13,250,000         |   | 10,750,000             |       |
| Interest Payable  and Other Liabilities                                                                         |   | 888,100            |   | 1,101,800              |       |
| Total  Liabilities                                                                                              |   | 83,597,300         |   | 80,640,400             |       |
|                                                                                                            |   |               |   |                   |       |
| Junior  Subordinated Debt Securities                                                                            |   | 3,000,000          |   | —                 |       |
| Shareholders’  Equity:                                                                                     |   |               |   |                   |       |
| Common Stock -  No Par Value   Authorized: 2,500,000 in 2003 and 2002   Outstanding: 1,493,816 in 2003 and 2002 |   | 4,500,400          |   | 4,500,400              |       |
| Retained  Earnings                                                                                              |   | 1,267,000          |   | 1,120,900              |       |
| Accumulated  Other Comprehensive Income (Loss)                                                                  |   | (6,500             | )      | 17,600                 |       |
| Total  Shareholders’ Equity                                                                                |   | 5,760,900          |   | 5,638,900              |       |
| Total  Liabilities & Shareholders’ Equity                                                              |   | 92,358,200         |   | 86,279,300             |       |

 

2

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
|                                                          |   | **THREE-MONTH  PERIOD ENDING  MARCH 31** |   |
|---------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                          |   | **2003**                                 |   | **2002** | ** ** |
| INTEREST INCOME:                                              |   |                                     |   |   |   |
| Interest and  Fees on Loans                                   |   | 1,195,500                                |   | 1,060,400 |   |
| Interest on Time  Deposits with Financial Institutions        |   | 0                                        |   | 900 |   |
| Interest on  Investment Securities                            |   | 82,200                                   |   | 113,500 |   |
| Interest on  Federal Funds                                    |   | 19,700                                   |   | 26,600 |   |
| Total Interest  Income                                        |   | 1,297,400                                |   | 1,201,400 |   |
|                                                          |   |                                     |   |   |   |
| INTEREST EXPENSE:                                             |   |                                     |   |   |   |
| Interest on  Interest-Bearing Transaction Accounts            |   | 12,200                                   |   | 26,700 |   |
| Interest on  Savings Accounts                                 |   | 14,200                                   |   | 13,800 |   |
| Interest on Time  Deposits                                    |   | 294,400                                  |   | 405,000 |   |
| Interest on  Other Borrowed Funds                             |   | 143,300                                  |   | 81,500 |   |
| Total Interest  Expense                                       |   | 464,100                                  |   | 527,000 |   |
| Net Interest  Income                                          |   | 833,300                                  |   | 674,400 |   |
| PROVISION FOR  LOAN LOSSES                                    |   | 50,000                                   |   | 37,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |   | 783,300                                  |   | 637,400 |   |
| NONINTEREST  INCOME:                                          |   |                                     |   |   |   |
| Service Charges  on Deposit Accounts                          |   | 137,500                                  |   | 121,600 |   |
| SBA Loan Sales  & Servicing Income                        |   | 178,200                                  |   | 72,800 |   |
| Other Operating  Income                                       |   | 628,900                                  |   | 587,000 |   |
| Total  Noninterest Income                                     |   | 944,600                                  |   | 781,400 |   |
| NONINTEREST  EXPENSE:                                         |   |                                     |   |   |   |
| Salaries and  Employee Benefits                               |   | 611,400                                  |   | 531,200 |   |
| Occupancy and  Equipment Expense                              |   | 140,800                                  |   | 83,700 |   |
| Professional  Fees                                            |   | 21,900                                   |   | 18,700 |   |
| Data Processing                                               |   | 90,700                                   |   | 79,100 |   |
| FDIC & State  Assessments                                 |   | 7,500                                    |   | 7,100 |   |
| Other Operating  Expenses                                     |   | 630,300                                  |   | 599,200 |   |
| Income Tax  Expense                                           |   | 79,200                                   |   | 5,600 |   |
| Total  Non-interest Expense                                   |   | 1,581,800                                |   | 1,324,600 |   |
| NET INCOME  (LOSS)                                            |   | 146,100                                  |   | 94,200 |   |
| Earnings per  common share                                    |   |                                     |   |   |   |
| Primary                                                       |   | 0.098                                    |   | 0.064 |   |
| Diluted                                                       |   | 0.084                                    |   | 0.055 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

THREE MONTHS ENDEDMARCH 31, 2003 AND 2002

 
|                                                           |   | **2003**   |   | **2002**   |   |
|----------------------------------------------------------------|--------|------------|--------|------------|--------|
| NET INCOME                                                     |   | 146,100    |   | 94,200     |   |
| Adjustments to  net income:                                    |   |       |   |       |   |
| Depreciation and  amortization expense                         |   | 41,900     |   | 31,900     |   |
| Amortization/Accretion  on investments                         |   | (700       | )      | (1,000     | )      |
| Provision for  possible loan losses                            |   | 50,000     |   | 37,000     |   |
| Increase  (decrease) in accrued expenses                       |   | (201,000   | )      | (203,000   | )      |
| (Increase)  decrease in trading asset                          |   | (16,200    | )      | (6,300     | )      |
| (Increase)  decrease in other assets                           |   | (142,200   | )      | 31,800     |   |
| Increase  (decrease) in interest payable                       |   | (12,800    | )      | (59,200    | )      |
| (Increase)  decrease in interest receivable                    |   | (11,000    | )      | 12,300     |   |
| Total  adjustments to net income                               |   | (292,000   | )      | (156,500   | )      |
|                                                           |   |       |   |       |   |
| Net cash  provided (used) by operations                        |   | (145,900   | )      | (62,300    | )      |
|                                                           |   |       |   |       |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                          |   |       |   |       |   |
| Proceeds from  sale of investments                             |   | 0          |   | 5,987,600  |   |
| Principal  payments on investments                             |   | 562,900    |   | 2,400      |   |
| Purchase of  securities                                        |   | (104,100   | )      | (2,154,100 | )      |
| Net (increase)  decrease in loans                              |   | (3,357,000 | )      | (1,762,400 | )      |
| (Increase)  decrease in loans held for sale                    |   | (646,500   | )      | (684,000   | )      |
| Proceeds from  sale of equipment                               |   | 900        |   | 700        |   |
| Capital  expenditures                                          |   | (55,000    | )      | (27,200    | )      |
| Exercise of  Stock Options                                     |   | 0          |   | 27,500     |   |
| Stock Repurchase                                               |   | 0          |   | 0          |   |
|                                                           |   |       |   |       |   |
| Net cash  provided (used) in investing activities              |   | (3,598,800 | )      | 1,390,500  |   |
|                                                           |   |       |   |       |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                          |   |       |   |       |   |
| Net increase  (decrease) in deposit accounts                   |   | 1,842,800  |   | (1,098,100 | )      |
| Proceeds from  borrowings, net                                 |   | 2,500,000  |   | 0          |   |
| Repayments of  borrowings, net                                 |   | (1,172,200 | )      | 0          |   |
| Proceeds from  issuance of junior subordinated debt securities |   | 3,000,000  |   | 0          |   |
| Net cash  provided (used) by financing activities              |   | 6,170,600  |   | (1,098,100 | )      |
|                                                           |   |       |   |       |   |
| Net increase  (decrease) in cash & cash equivalents        |   | 2,425,900  |   | 230,100    |   |
| Cash & cash  equivalents - beginning of year               |   | 13,017,100 |   | 11,392,900 |   |
|                                                           |   |       |   |       |   |
| Cash & cash  equivalents - end of period                   |   | 15,443,000 |   | 11,623,000 |   |

 

See Note 6 for supplemental disclosures

 

4

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NOTES TO FINANCIAL STATEMENTS

 
|                                          |   | **MARCH 31  2003** |   | **DECEMBER  31  2002** | ** ** |
|-----------------------------------------------|--------|--------------------|--------|------------------------|------------|
|                                          |   |               |   |                   |       |
| (NOTE 1)  INVESTMENT SECURITIES:              |   |               |   |                   |       |
|                                          |   |               |   |                   |       |
| Available for  sale:                          |   |               |   |                   |       |
| Government  National Mortgage Association     |   | 4,000,300          |   | 4,553,300              |       |
| Corporate Debt  Securities                    |   | 1,455,900          |   | 1,486,500              |       |
|                                          |   | 5,456,200          |   | 6,039,800              |       |
|                                          |   |               |   |                   |       |
| (NOTE 2) GROSS  LOANS:                        |   |               |   |                   |       |
|                                          |   |               |   |                   |       |
| Commercial and  Industrial                    |   | 13,909,400         |   | 13,449,900             |       |
| Construction                                  |   | 3,849,900          |   | 4,066,300              |       |
| Real Estate -  Mortgage                       |   | 45,106,400         |   | 41,999,800             |       |
| Installment                                   |   | 470,600            |   | 461,900                |       |
| Government  Guaranteed Loans Purchased        |   | 62,000             |   | 63,400                 |       |
| Gross Loans                                   |   | 63,398,300         |   | 60,041,300             |       |
|                                          |   |               |   |                   |       |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES: |   |               |   |                   |       |
|                                          |   |               |   |                   |       |
| Balance at  Beginning of Period               |   | 636,900            |   | 566,300                |       |
| Recoveries                                    |   | 800                |   | 13,300                 |       |
| Provision for  Possible Loan Losses           |   | 50,000             |   | 117,000                |       |
| Loans Charged  Off                            |   | (10,000            | )      | (59,700                | )          |
| Balance at End  of Period                     |   | 677,700            |   | 636,900                |       |
|                                          |   |               |   |                   |       |
| (NOTE 4)  DEPOSITS:                           |   |               |   |                   |       |
|                                          |   |               |   |                   |       |
| Demand                                        |   | 14,007,900         |   | 15,023,700             |       |
| Interest-Bearing  Transaction                 |   | 12,747,800         |   | 12,653,400             |       |
| Savings                                       |   | 7,414,700          |   | 4,667,900              |       |
| Time Under  $100,000                          |   | 18,844,600         |   | 19,143,900             |       |
| Time Equal to or  Greater than $100,000       |   | 16,444,200         |   | 16,127,500             |       |
|                                          |   | 69,459,200         |   | 67,616,400             |       |

 

(Note 5) StockOption Plan:

 

Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148“Accounting for Stock-Based Compensation –Transition and Disclosure,”encourages all entities to adopt a fair value based method of accounting foremployee stock compensation plans, whereby compensation cost is measured at thegrant date based on the value of the award and is recognized over the serviceperiod, which is usually the vesting period. However, it also allows an entity to continue to measure compensationcost for those plans using the intrinsic value based method of accountingprescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” whereby compensation cost is the excess, ifany, of the quoted market price of the stock at the grant date (or othermeasurement date) over the amount an employee must pay to acquire

 

5

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the stock.  Stock options issuedunder the Corporation’s stock option plan have no intrinsic value at the grantdate, and under Opinion No. 25 no compensation cost is recognized for them.

 

The Corporation applies APB Opinion 25 andrelated Interpretations in accounting for the plan.  Accordingly, no compensation cost has been recognized.  Had compensation cost for the Corporation’sstock-based compensation plan been determined based on the fair value at thegrant date for awards under the plan consistent with the method prescribed bySFAS No. 123, the Corporation’s net income and basic earnings per share wouldhave been adjusted to the pro forma amounts indicated below:

 
| Net income:            |   |   |    |   |   |
|------------------------|--------|--------|---------|--------|--------|
| As reported            |   | $      | 146,100 |   | $      | 94,200 |   |
| Pro forma              |   | $      | 125,163 |   | $      | 56,900 |   |
|                   |   |   |    |   |   |
| Earnings per  share:   |   |   |    |   |   |
| Basic - as  reported   |   | $      | 0.098   |   | $      | 0.064 |   |
| Basic - pro  forma     |   | $      | 0.084   |   | $      | 0.039 |   |
|                   |   |   |    |   |   |
| Diluted - as  reported |   | $      | 0.084   |   | $      | 0.055 |   |
| Diluted - pro  forma   |   | $      | 0.072   |   | $      | 0.033 |   |

 

The fair value of these options was estimated at the grant date usingthe Black-Scholes option pricing model with the following weighted-averageassumptions for 2003 and 2002: risk-free interest rate of 4.83 percent;dividend yield of 0 percent; expected option life of 5.0 years; and volatilityof 30 percent.

 

(NOTE 6)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| **Payments during the period ending:** |   | **3/31/03** |   | **3/31/02** |   |
|----------------------------------------|--------|-------------|--------|-------------|--------|
| Interest                               |   | 461,400     |   | 591,000     |   |
| Income Taxes                           |   | 79,200      |   | 48,600      |   |

 

6

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

 

**OVERVIEW**

 

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

 

For the threemonths ended March 31, 2003 net income was $146,100, compared to $94,200 forthe same period in 2002.  For the threemonths ended March 31, 2003 interest income after provision for loan lossesincreased $145,900, non-interest income increased $163,200, while non-interestexpense increased $257,200.

 

7

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The followingtable sets forth certain selected financial ratios of the Corporation at andfor the three months ended, March 31, 2003 and 2002.

 
|                                               |   | **The three  months  Ended March 31, 2003**       |   | **The three  months  Ended March 31, 2002** |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------|--------|
|                                               |   | **(Dollars  in thousands except per share data)** |   |
| Summary of  Operating Results:                     |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Total interest  income                             |   | 1,297                                             |   | 1,201                                       |   |
| Total interest  expense                            |   | 464                                               |   | 527                                         |   |
| Net interest  income                               |   | 833                                               |   | 674                                         |   |
|                                               |   |                                              |   |                                        |   |
| Provision for  possible loan losses                |   | 50                                                |   | 37                                          |   |
| Net interest  income after provision for loan loss |   | 783                                               |   | 637                                         |   |
|                                               |   |                                              |   |                                        |   |
| Total other  income                                |   | 945                                               |   | 781                                         |   |
| Total other  expense                               |   | 1,503                                             |   | 1,319                                       |   |
|                                               |   |                                              |   |                                        |   |
| Income (loss)  before taxes                        |   | 225                                               |   | 100                                         |   |
| Provision for  income tax                          |   | 79                                                |   | 6                                           |   |
|                                               |   |                                              |   |                                        |   |
| Net income  (loss)                                 |   | 146                                               |   | 94                                          |   |
|                                               |   |                                              |   |                                        |   |
| Per Common Share  Data:                            |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Net income -  Primary(1)                           |   | 0.098                                             |   | 0.064                                       |   |
| Net income -  Diluted(2)                           |   | 0.084                                             |   | 0.055                                       |   |
| Book value, end  of period(3)                      |   | 3.86                                              |   | 3.85                                        |   |
| Avg shares  outstanding(4)                         |   | 1,330,973                                         |   | 1,337,087                                   |   |
|                                               |   |                                              |   |                                        |   |
| Balance Sheet  Data:                               |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Total loans, net  of unearned income(5)            |   | 64,223                                            |   | 54,969                                      |   |
| Total assets                                       |   | 92,358                                            |   | 78,460                                      |   |
| Total deposits                                     |   | 69,459                                            |   | 67,235                                      |   |
| Stockholders’  equity(6)                      |   | 5,761                                             |   | 5,173                                       |   |

 

8

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|                                                 |   | **The three  months  Ended March 31, 2003** |   | **The three  months  Ended March 31, 2002** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
| Selected Financial  Ratios(4):                       |   |                                        |   |                                        |   |
|                                                 |   |                                        |   |                                        |   |
| Return on  average assets(5)                         |   | 0.67                                        | %      | 0.48                                        | %      |
| Return on  average stockholders’ equity(5)      |   | 10.25                                       | %      | 7.36                                        | %      |
| Net interest  spread                                 |   | 4.03                                        | %      | 3.37                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Net interest  margin                                 |   | 4.41                                        | %      | 3.97                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Avg  shareholders’ equity to average assets     |   | 6.49                                        | %      | 6.49                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Risked-Based  capital ratios                         |   |                                        |   |                                        |   |
| Tier 1                                               |   | 9.64                                        | %      | 9.30                                        | %      |
| Total                                                |   | 12.70                                       | %      | 10.28                                       | %      |
| Total loans to  total deposits at end of period      |   | 92.46                                       | %      | 81.76                                       | %      |
|                                                 |   |                                        |   |                                        |   |
| Allowance to  total loans at end of period           |   | 1.04                                        | %      | 1.08                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Nonperforming  loans to total loans at end of period |   | 0.04                                        | %      | 0.21                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Net charge-offs  to average loans                    |   | 0.01                                        | %      | 0.01                                        | %      |

 

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(1)        Primary earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of common shares used for this computationwas 1,493,822 and 1,466,610 for March 31, 2003 and 2002, respectively.

 

(2)          Diluted earnings (loss)per share amounts were computed on the basis of the weighted average number ofshares of common stock and common stock equivalents outstanding during theyear.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,745,353 and 1,719,392 for March 31, 2003 and 2002,respectively.

 

(3)   Includes loans being held for sale.

 

(4)   Averagesare of daily balances.

 

(5)   March 31, 2003 calculated on an annualizedbasis.

 

9

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**NET INTEREST INCOME**

 

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

 

Net interest income for the three months ended March31, 2003 was $833,300 compared to $674,400 for the same period in 2002.  The increase of $158,900 resulted from totalinterest income increasing $96,000, while total interest expense decreased$62,900.  Average interest earningassets increased $6,905,000 (9.92%), while the average rate earned decreased 18basis points.  Average interest bearingliabilities increased $8,608,000 (14.72%), while the average rate paiddecreased 84 basis points.

 

The followingtable shows the components of the Bank’s net interest income, setting forth,for each the three months ended March 31, 2003 and 2002, (i) average assets,liabilities and investments, (ii) interest income earned on interest-earningassets and interest expense paid on interest-bearing liabilities, (iii) averageyields earned on interest-earning assets and average rates paid oninterest-bearing liabilities, (iv) the net interest spread (i.e., the averageyield earned on interest-earning assets less the average rate paid oninterest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets).  Yields arecomputed on a tax-equivalent basis, no tax-exempt investments were held in 2003or 2002.  Non-accrual loans andoverdrafts are included in average loan balances.  Average loans are presented net of unearned income.

 

10

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**INTEREST SPREAD ANALYSIS:**

 
|                                  |   | **Three  Months  Ended March 31,** |   | **Twelve  Months  Ended December 31,** |   |
|---------------------------------------|--------|------------------------------------|--------|----------------------------------------|--------|
|                                  |   | **2003**                           |   | **2002**                               |   | **2002** |   |
|                                  |   | **Avg  Bal**                       |   | **Int  Earn    Paid**             |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn    Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn    Paid** |   | **Avg  %  Rate** |   |
|                                  |   | **(Dollars  in thousands)**        |   |
| Interest Earning  Assets:             |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 0                                  |   | 0                                      |   | 0.00 |   | 100 |   | 1 |   | 3.45 |   | 88 |   | 3 |   | 3.30 |   |
| Invest  securities - Taxable          |   | 6,809                              |   | 74                                     |   | 4.34 |   | 7,224 |   | 104 |   | 5.77 |   | 7,490 |   | 387 |   | 5.17 |   |
| Invest  securities - Non-Taxable      |   | 0                                  |   | 0                                      |   | 0 |   | 0 |   | 0 |   | 0.00 |   | 0 |   | 0 |   | 0.00 |   |
| Federal funds  sold                   |   | 6,552                              |   | 20                                     |   | 1.20 |   | 6,788 |   | 27 |   | 1.57 |   | 7,063 |   | 115 |   | 1.63 |   |
| Total  investments                    |   | 13,361                             |   | 94                                     |   | 2.80 |   | 14,112 |   | 132 |   | 3.73 |   | 14,641 |   | 505 |   | 3.45 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 4,047                              |   | 88                                     |   | 8.67 |   | 1,591 |   | 67 |   | 16.92 |   | 2,870 |   | 272 |   | 9.46 |   |
| Real estate                           |   | 43,342                             |   | 827                                    |   | 7.64 |   | 37,115 |   | 714 |   | 7.70 |   | 37,729 |   | 2,846 |   | 7.54 |   |
| Installment                           |   | 474                                |   | 14                                     |   | 12.03 |   | 717 |   | 19 |   | 10.85 |   | 704 |   | 57 |   | 8.12 |   |
| Commercial                            |   | 15,271                             |   | 267                                    |   | 6.99 |   | 15,414 |   | 262 |   | 6.80 |   | 15,454 |   | 1,191 |   | 7.71 |   |
| Total loans                           |   | 63,134                             |   | 1,196                                  |   | 7.58 |   | 54,837 |   | 1,063 |   | 7.75 |   | 56,758 |   | 4,365 |   | 7.69 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest  earning assets        |   | 76,495                             |   | 1,290                                  |   | 6.74 |   | 68,949 |   | 1,194 |   | 6.93 |   | 71,399 |   | 4,870 |   | 6.82 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 10,364                             |   | 6                                      |   | 0.25 |   | 9,972 |   | 23 |   | 0.91 |   | 10,960 |   | 73 |   | 0.67 |   |
| Money market  savings                 |   | 2,241                              |   | 6                                      |   | 1.03 |   | 1,588 |   | 4 |   | 1.03 |   | 2,021 |   | 21 |   | 1.04 |   |
| Savings deposits                      |   | 5,538                              |   | 14                                     |   | 1.03 |   | 3,753 |   | 14 |   | 1.47 |   | 4,199 |   | 54 |   | 1.29 |   |
| Time deposits  >$100M              |   | 16,610                             |   | 135                                    |   | 3.26 |   | 16,776 |   | 165 |   | 3.92 |   | 16,059 |   | 610 |   | 3.80 |   |
| Time deposits  <$100M              |   | 18,988                             |   | 159                                    |   | 3.35 |   | 21,183 |   | 240 |   | 4.54 |   | 20,371 |   | 815 |   | 4.00 |   |
| Other Borrowing                       |   | 12,139                             |   | 126                                    |   | 4.17 |   | 4,000 |   | 65 |   | 6.46 |   | 5,402 |   | 306 |   | 5.67 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest  bearing liabilities   |   | 65,879                             |   | 447                                    |   | 2.72 |   | 57,271 |   | 510 |   | 3.56 |   | 59,012 |   | 1880.2 |   | 3.19 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                  |   |                               |   | 843                                    |   |   |   |   |   | 684 |   |   |   |   |   | 2,990 |   |   |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                  |   |                               |   |                                   |   | 4.03 |   |   |   |   |   | 3.37 |   |   |   |   |   | 3.64 |   |
|                                  |   |                               |   |                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest earning assets |   |                               |   |                                   |   | 4.41 |   |   |   |   |   | 3.97 |   |   |   |   |   | 4.19 |   |

 

11

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|                                 |   | **Three  Months  Ended March 31,  2003 vs 2002** |   | **Twelve  Months  Ended December 31,  20021 vs 2001** |   |
|--------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                 |   | **Increase  (Decrease)  Due to changes**         |   | **Increase  (Decrease)  Due to changes**              |   |
|                                 |   | **Avg  Volume**                                  |   | **Avg  Rate**                                         |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                                 |   | **(Dollars  in thousands)**                      |   |
| Interest Earning  Assets:            |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks |   | (1                                               | )      | 0                                                     |   | (1 | ) | (6 | ) | (3 | ) | (9 | ) |
| Invest  securities - Taxable         |   | (6                                               | )      | (24                                                   | )      | (30 | ) | 3 |   | (85 | ) | (82 | ) |
| Invest  securities - Non-Taxable     |   | 0                                                |   | 0                                                     |   | 0 |   | (25 | ) | 0 |   | (25 | ) |
| Federal funds  sold                  |   | (1                                               | )      | (6                                                    | )      | (7 | ) | (114 | ) | (134 | ) | (249 | ) |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Total  investments                   |   | (8                                               | )      | (30                                                   | )      | (38 | ) | (143 | ) | (222 | ) | (365 | ) |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Construction                         |   | 104                                              |   | (83                                                   | )      | 20 |   | 68 |   | (24 | ) | 44 |   |
| Real estate                          |   | 120                                              |   | (7                                                    | )      | 113 |   | 581 |   | (540 | ) | 41 |   |
| Installment                          |   | (7                                               | )      | 1                                                     |   | (6 | ) | (7 | ) | (25 | ) | (32 | ) |
| Commercial                           |   | (2                                               | )      | 7                                                     |   | 5 |   | 114 |   | (377 | ) | (264 | ) |
| Total loans                          |   | 215                                              |   | (82                                                   | )      | 133 |   | 755 |   | (966 | ) | (211 | ) |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets       |   | 207                                              |   | (112                                                  | )      | 95 |   | 612 |   | (1,188 | ) | (576 | ) |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:          |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                  |   | 1                                                |   | (17                                                   | )      | (16 | ) | 15 |   | (35 | ) | (20 | ) |
| Money market  savings                |   | 2                                                |   | 0                                                     |   | 2 |   | 11 |   | (13 | ) | (1 | ) |
| Savings deposits                     |   | 6                                                |   | (6                                                    | )      | (0 | ) | 6 |   | (22 | ) | (16 | ) |
| Time deposits  >$100M             |   | (2                                               | )      | (28                                                   | )      | (29 | ) | 46 |   | (269 | ) | (223 | ) |
| Time deposits  <$100M             |   | (25                                              | )      | (56                                                   | )      | (82 | ) | 6 |   | (317 | ) | (311 | ) |
| Other Borrowing                      |   | 131                                              |   | (70                                                   | )      | 62 |   | 62 |   | (48 | ) | 14 |   |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Total interest  bearing deposits     |   | 113                                              |   | (176                                                  | )      | (63 | ) | 146 |   | (703 | ) | (557 | ) |
|                                 |   |                                             |   |                                                  |   |   |   |   |   |   |   |   |   |
| Net change in  net interest          |   | 94                                               |   | 65                                                    |   | 158 |   | 466 |   | (485 | ) | (19 | ) |

 

12

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**Provision and Allowance for LoanLosses**

 

The provision forloan losses is an expense charged against operating income and added to theallowance for loan losses.  Theallowance for loan losses represents amounts set aside for the specific purposeof absorbing losses that may occur in the Bank’s loan portfolio.

 

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

 

| **Loan Category**                        |   | **Reserve%** |   |
|------------------------------------------|--------|--------------|--------|
|                                     |   |         |   |
| Classified  Loans:                       |   |         |   |
| Loans classified  loss                   |   | 100.00       | %      |
| Loans classified  doubtful               |   | 50.00        | %      |
| Loans classified  substandard            |   |         |   |
| Real Estate  Secured                     |   | 5.00         | %      |
| Non Real Estate  Secured                 |   | 20.00        | %      |
|                                     |   |         |   |
| Unclassified  Loans:                     |   |         |   |
| Real Estate -  Loan to value 80% or less |   | 0.10         | %      |
| Real Estate -  Loan to value over 80%    |   | 0.70         | %      |
| Real Estate -  Construction              |   | 0.15         | %      |
| Loans to  Individuals                    |   | 3.00         | %      |
| Commercial                               |   | 2.00         | %      |
| SBA Loans -  Unguaranteed portion        |   | 2.00         | %      |
| Unfunded Loan  Commitments               |   | .25          | %      |
| Concentration  Risk Factor - Real Estate |   | .10          | %      |
| Economic Risk  Factor                    |   | .25          | %      |
| SBA Loans -  Guaranteed portion          |   | 0.00         | %      |
| Cash Secured  Loans                      |   | 0.00         | %      |

 

Although no assurance canbe given that actual losses will not exceed the amount provided for in theallowance, Management believes that the allowance is adequate to provide forall estimated credit losses in light of all known relevant factors. At March31, 2003 and 2002 the Bank’s allowance stood at 1.04 percent and 1.08 percentof gross loans, respectively.  Aprovision of $50,000 was made to the allowance during the three months endedMarch 31, 2003, compared with a provision of $37,000 due the same period in2002.  Loans charged off during thethree months ended March 31, 2003, totaled $10,000, compared to $13,500 in thesame period of 2002.  Recoveries for thesame periods were $700 and $10,600, respectively.

 

13

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The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.71 percent at March 31, 2003 compared with0.21 percent for the same period in 2002.

 

Based upon statisticsreleased by Federal and state banking authorities regarding banks of similarsize or otherwise located in California, Management believes that the Bank ’sratios of delinquent and non performing loans to total loans are far better thanaverage.  Prudent collection efforts,and tighter lending controls, are responsible for the Bank’s strong performanceon these measures of credit quality. However, no assurance can be given that the Bank’s loan portfolio willcontinue to measure well against its peers on these ratios and qualitymeasures, or that losses will not otherwise occur in the future.

 

**Non-Interest Income**

 

Total non-interest incomefor the three months ended March 31, 2003 was $944,600 compared with $781,400for the same period in 2002.  Theincrease of  $163,200 was the result ofservice charges on deposit accounts increasing $15,900, income from SBA loansales and servicing increasing $105,400 and income from other service charges,commissions and fees increasing $41,900.

 

The sale, of SmallBusiness Administration (SBA) guaranteed loans, is a significant contributor tothe Bank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums, which vary with market conditions.  SBA loans are guaranteed by the full faithof the United States Government from 75 to 80 percent of the principalamount.  The guaranteed portion hasrisks comparable for an investor to a U. S. Government security and can usuallybe sold in the secondary financial market, either at a premium or at a yieldwhich allows the Bank to maintain a significant spread for itself.

 

There can be noassurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA recently beganrequiring lenders to share a portion of premiums in excess of 10% earned on thesale of the guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannot predictthe significance of the impact these changes will have on SBA income.

 

**Non-Interest Expense**

 

Salary andbenefits expense for the three months ended March 31, 2003 increased $80,200compared with the same period in 2002. The increase was due the addition of two full time equivalent positions,to merit pay increases and bonus accruals increasing $24,600.

 

Total occupancyand equipment expense for the three months ended March 31, 2003 was $140,800compared to $83,700 for the same period in 2002.  The increase of

 

14

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$57,100 was due toincreases of $31,300 in premises rent, $9,900 in depreciation expense and$12,000 maintenance expense.

 

Professional feesfor the three months ended March 31, 2003 increased $3,200 compared to the sameperiod in 2002.  The increase was due toaccounting/audit fees increasing $1,700 and legal fees increasing $1,500.

 

Data processingexpense for the three months ended March 31, 2003 was $90,700 compared to$79,100 for the same period in 2002. The increase of $11,600 was due to cost associated with development ofan Internet website and license fees for a management reporting system.

 

Other expenses for thethree months ended March 31, 2003 totaled $717,000 compared with $611,900 forthe same period in 2002.  Significantchanges occurred in the following categories with increases in advertising$7,900, ATM expense $3,100, collection expense $9,200, director fees $2,800,merchant expense $7,200, telephone $2,300, miscellaneous expense $5,600,postage $3,400, stationary and supplies $4,200, telephone expense $2,000,income tax expense $73,600 and decreases in entertainment and meals $3,700,loan expense $4,400, operational losses $3,100 and messenger and freight$3,000.

 

**LOANS**

 

Loans represented 82.53%of average earning assets, and 71.88% of average total assets for the threemonths ended March 31, 2003 compared with 78.80% and 69.50%, respectivelyduring 2002. For the three months ended March 31, 2003, average loans increased15.13% from $54,837,000 for the same period in 2002 to $63,134,000.  Average construction loans increased$2,456,000 (154.42%) real estate loans increased $6,227,000 (16.78%); whileaverage installment loans decreased $243,000 (33.93%) commercial loans decreased$143,000 (0.93%).

 

The Bank’s commercialand industrial loans are generally made for the purpose of providing workingcapital, financing the purchase of equipment or inventory, and other businesspurposes. Such loans generally have maturities ranging from one year to severalyears.  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) normally providefor monthly installments of principal and interest.  The Bank from time to time utilizes accounts receivable andinventory as security for loans.

 

The Bank is arecognized leader for Small Business Administration lending in Monterey County,and holds SBA’s coveted Preferred Lender Status.  Generally, SBA loans are guaranteed, by the SBA, for 75 to 80percent of their principal amount, which can be retained in portfolio or soldto investors.  Such loans are made atfloating interest rates, but generally for longer terms (up to 25 years) thanare available on a conventional basis to small businesses.  Theunguaranteed portion of the loans, although generally supported by collateral,is considered to be more risky than conventional commercial loans because theymay be based upon credit standards the Bank would not otherwise apply, such aslower cash flow coverage, or longer repayment terms.

 

15

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

 

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

 

Consumer loans are made for the purpose of financingthe purchase of various types of consumer goods, home improvement loans, autoloans and other personal loans. Consumer installment loans generally provide for monthly payments ofprincipal and interest, at a fixed rate. Most of the Bank’s consumer installment loans are generally secured bythe personal property being purchased. The Bank generally makes consumer loans to those customers with a priorbanking relationship with the Bank.

 

**Non-performing and Non-accrual Loans**

 

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

 

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

 

16

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|                                                          |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------|--------|------------------------------------|--------|
|                                                          |   | **2003**                           |   | **2002** |   |
|                                                          |   | **(Dollars  in thousands)**        |   |
| Accruing,past due 90 days or more:                            |   |                               |   |   |   |
|                                                          |   |                               |   |   |   |
| Real Estate                                                   |   | 0                                  |   | 0 |   |
| Commercial                                                    |   | 0                                  |   | 0 |   |
| Installment                                                   |   | 0                                  |   | 0 |   |
| Other                                                         |   | 0                                  |   | 0 |   |
| Total accruing                                                |   | 0                                  |   | 0 |   |
|                                                          |   |                               |   |   |   |
| Nonaccrual Loans:                                             |   |                               |   |   |   |
|                                                          |   |                               |   |   |   |
| Commercial                                                    |   | 28                                 |   | 118 |   |
| Installment                                                   |   | 0                                  |   | 0 |   |
| Other                                                         |   | 0                                  |   | 0 |   |
| Total nonaccrual                                              |   | 28                                 |   | 118 |   |
|                                                          |   |                               |   |   |   |
| Total  nonperforming                                          |   | 28                                 |   | 118 |   |
|                                                          |   |                               |   |   |   |
| Total loans end  of period                                    |   | 64,901                             |   | 55,569 |   |
|                                                          |   |                               |   |   |   |
| Ratio of  nonperforming loans to total loans at end of period |   | 0.04                               | %      | 0.21 | % |

 

These ratios have beenmaintained as a result of conservative underwriting criteria, frequent reviewof new and delinquent loans and a firm collection policy (with the assistanceof outside legal counsel).  The Bankdoes not have any foreign loans or loans for highly leveraged transactions.

 

17

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## **Summary of Loan LossExperience**

 
|                                                                           |   | **Three  Months Ended  March 31,  2003** |   | **Three  Months Ended  March 31,  2002** |   |
|--------------------------------------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**              |   |
| Average loans outstanding                                                      |   | 63,134                                   |   | 54,837                                   |   |
|                                                                           |   |                                     |   |                                     |   |
| Allowance,  beginning of period                                                |   | 637                                      |   | 566                                      |   |
|                                                                           |   |                                     |   |                                     |   |
| Loans charged  off during period:                                              |   |                                     |   |                                     |   |
| Commercial                                                                     |   | 10                                       |   | 13                                       |   |
| Installment                                                                    |   | 0                                        |   | 0                                        |   |
| Real Estate                                                                    |   | 0                                        |   | 0                                        |   |
| Other                                                                          |   | 0                                        |   | 0                                        |   |
| Total charge offs                                                              |   | 10                                       |   | 13                                       |   |
|                                                                           |   |                                     |   |                                     |   |
| Recoveries  during period:                                                     |   |                                     |   |                                     |   |
| Commercial                                                                     |   | 1                                        |   | 10                                       |   |
| Installment                                                                    |   | 0                                        |   | 0                                        |   |
| Other                                                                          |   | 0                                        |   | 0                                        |   |
| Total recoveries                                                               |   | 1                                        |   | 10                                       |   |
|                                                                           |   |                                     |   |                                     |   |
| Net Loans  charged off during the period                                       |   | 9                                        |   | 3                                        |   |
|                                                                           |   |                                     |   |                                     |   |
| Additions to  allowance for possible loan losses                               |   | 50                                       |   | 37                                       |   |
|                                                                           |   |                                     |   |                                     |   |
| Allowance, end  of period                                                      |   | 678                                      |   | 600                                      |   |
|                                                                           |   |                                     |   |                                     |   |
| Ratio of net  loans charged off to average Loans outstanding during the period |   | 0.014                                    | %      | 0.006                                    | %      |
|                                                                           |   |                                     |   |                                     |   |
| Ratio of  allowance to total loans at end of period                            |   | 1.04                                     | %      | 1.08                                     | %      |

 

**Funding Sources**

 

Average deposits for thethree months ended March 31, 2003 were $53,740,000 an increase of 0.88%compared with the same period in 2002. Average certificates of deposit represented 53.00% of average depositsfor the three months ended March 31, 2003. Average interest bearing checking, money market and savings accounts asa group was 27.01% of average deposits. Average demand deposits represented 19.99% of average deposits.

 

18

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On March 27, 2003, theCompany’s wholly owned special-purpose trust subsidiary, Northern CaliforniaBancorp, Inc. Trust I (the “Trust”) issued $3 million in cumulative TrustPreferred Securities.  The securitiesbear a floating rate of interest of 3.25% over the three month LIBOR rate,payable quarterly.  Concurrent with theissuance of the Trust Preferred Securities, the Trust used the proceeds fromthe Trust Preferred Securities offering to purchase a like amount of JuniorSubordinated Debentures of the Company. The Subordinated Debentures are the sole assets of the Trust and areeliminated, along with the related income statement effects, in theconsolidated financial statements.  TheCompany will pay interest on the Junior Subordinated Debentures to the Trust,which represents the sole revenue and sole source of dividend distributions tothe holders of the Trust Preferred Securities. The Company has the right, assuming no default has occurred, to deferpayments of interest on the Junior Subordinated Debentures at any time for aperiod not to exceed 20 consecutive quarters. The Trust Preferred Securities will mature on April 7, 2033, but can beredeemed under certain circumstances at a premium prior to April 7, 2008, andcan be redeemed, in whole or in part, on any January 7, April 7, July 7 orOctober 7 on or after April 7, 2008 at par. The Company fully and unconditionally guarantees the obligations of theTrust, on a subordinated basis.

 

The Company received$2.91 million from the Trust upon issuance of the Junior SubordinatedDebentures, of which $1 million was contributed by the Company to the Bank toincrease its capital, $1.14 million was used to retire existing Company debtand the remainder held as working capital. Under applicable regulatory guidelines, a portion of the Trust PreferredSecurities will qualify as Tier I Capital, and the remainder as Tier IICapital.

 

Issuance costs of$115,800 related to the Trust Preferred Securities have been deferred and willbe amortized over the 30-year life of the securities.

 

The Bank has lines ofcredit from the Federal Home Loan Bank of San Francisco and Pacific CoastBankers’ Bank with maximum borrowing limits on March 31, 2003 of $14,966,100and $2,500,000, respectively.  TheFederal Home Loan Bank line of credit is secured by certain of the Bank’s realestate secured loans and investment securities at March 31, 2003 the totalprincipal balances of pledged loans was $19,152,700 and total pledgedsecurities were $3,833,500.  The followingtable provides information on the Federal Home Loan Bank advances out standingat March 31, 2003.

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

 

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The Bank has a letter ofcredit in the amount of $105,000, expiring April 17, 2006, issued by FederalHome Loan Bank of San Francisco, which is used to secure local agencydeposits.  The beneficiary of the letterof credit is the Administrator of Local Agency Security, Department ofFinancial Institutions.

 

The Pacific CoastBankers’ Bank line of credit is unsecured. The Bank did not utilize any overnight borrowings in 2003, 2002 or 2001.

 

**Capital Resources**

 

The Company maintains capital to comply with legalrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to paydividends.  At March 31, 2003,stockholders’ equity was $5,760,800 versus $5,638,900 at December 31,2002.  The Company paid a ten (10%)percent stock dividend in 2002, 2001 and 2000. The Bank paid a cash dividend $50,000 during the three months endedMarch 31, 2003 and cash dividends totaling $75,000 and $100,000 to theCorporation in 2002 and 2001.

 

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

 

Under current rules, all banks are required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets. The Bank had a Tier 1 risk-based capital ratio of 10.04%and a total risk-based capital ratio of 10.97% at March 31, 2003, well abovethe minimum regulatory requirements. The Company had a Tier 1 risk-based capital ratio of 9.64% and a totalrisk-based capital ratio of 12.70% at March 31, 2003.

 

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Company had a leveragecapital ratio of 7.63% at March 31, 2003 while the Bank’s leverage capitalratio was 7.94%.

 

Under regulatory guidelines, the $3 million in TrustPreferred Securities issued in March of 2003 will qualify as Tier 1 capital upto 25% of Tier 1 capital.  Anyadditional Trust Preferred Securities will qualify as Tier 2 capital.

 

**Liquidity**

 

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future cash needs.  For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course ofthe Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the

 

20

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acquisition ofdeposit balances and short-term borrowings. In addition, the Bank has lines of credit from the Federal Home LoanBank of San Francisco of approximately $14,966,100****and a $2,500,000 federal funds line of credit with thePacific Coast Bankers’ Bank to meet temporary liquidity requirements.

 

As a matter of policy, the Bank seeks to maintain alevel of liquid assets, including marketable investment securities, equal to aleast 10 percent of total assets (“primary liquidity”), while maintainingsources of secondary liquidity (borrowing lines from other institutions) equalto at least an additional 10 percent of assets.  Within these ratios, the Bank generally has excess fundsavailable to sell as federal funds on a daily basis, and is able to fund itsown liquidity needs without the need of short-term borrowing.  The Bank’s primary liquidity at March 31,2003 was 21.68 percent.

 

The Corporation’s sources of revenues and liquidityare the dividends, tax equalization payments or management fees from the Bank,gains on securities held in a trading account. The ability of the Bank to pay such items to the Corporation is subjectto limitations under state and Federal law. To help provide financial strength, Northern California Bancorp Inc.’strust subsidiary, Northern California Bancorp, Inc. Trust I, completed a $3million offering in Trust Preferred Securities during March 2003, the proceedsof which were used to purchase Junior Subordinated Debentures of theCompany.  Of the $2.91 million netproceeds, $1 million was contributed by the Company to the Bank to increase itscapital, $1.14 million was used to retire existing Company debt and theremainder held in a deposit account with the Bank as working capital.

 

**Interest Rate Risk**

 

Management of interest rate sensitivity(asset/liability management) involves matching and repricing rates ofinterest-earning assets with interest-bearing liabilities in a manner designedto optimize net interest income within the constraints imposed by regulatoryauthorities, liquidity determinations and capital considerations.  The Bank instituted formal asset/liabilitypolicies at the end of 1989.

 

The purpose forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liability management ismanaging the risk/return relationships between interest rate risk, liquidity,market risk and capital adequacy.  TheBank gives priority to liquidity concerns followed by capital adequacy, theninterest rate risk and market risk in the investment portfolio.  The policy of the Bank will be to controlthe exposure of the Bank’s earnings to changing interest rates by generallymaintaining a position within a narrow range around an “earnings neutralposition.” An earnings neutral position is defined as the mix of assets andliabilities that generate a net interest margin that is not affected byinterest rate changes.  However,Management does not believe that the Bank can maintain a totally earningsneutral 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 in market rates of interest will generallyimpact

 

21

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on the Bank’s netinterest income and net interest margin for long or short periods of time.

 

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  At March 31, 2003the affect of a 2% increase in the federal funds sold rate, expressed, as apercentage of equity, was a positive 7.94%. At March 31, 2003 the fed funds target rate was 1.25%; therefore, themodel assumed a 1% decrease in the fed funds rate resulting in negative affecton capital of 8.2%.

 

The Corporation’s sources of revenues and liquidityare the dividends, tax equalization payments or management fees from the Bank,gains on securities held in a trading account and the line of credit from thePacific Coast Bankers’ Bank.  Theability of the Bank to pay such items to the Corporation is subject tolimitations under state and Federal law.

 

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**Investment Securities**

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at March 31, 2003:

 
|                                      |   | **INVESTMENT  PORTFOLIO MIX  March 31, 2003** |   |
|-------------------------------------------|--------|-----------------------------------------------|--------|
|                                      |   | **Book  Value**                               |   | **Market  Value** |   |
| Securities  Available for Sale            |   |                                          |   |   |   |
| Government  National Mortgage Association |   | 3,992,600                                     |   | 4,000,200 |   |
| Corporate Debt  Securities                |   | 1,507,800                                     |   | 1,456,000 |   |
| Total                                     |   | 5,500,400                                     |   | 5,456,200 |   |

 

The following tablesummarizes the maturity of the Bank’s investment securities at March 31, 2003:

 
|                               |   | **INVESTMENT  PORTFOLIO MATURITIES  (Dollars in thousands)  Available for Sale** |   |
|------------------------------------|--------|----------------------------------------------------------------------------------|--------|
|                               |   | **Amortized  Cost**                                                              |   | **Fair  Value** | ** ** |
| Due between one  and five years    |   | 757,800                                                                          |   | 727,300 |   |
| Due between five  and ten years    |   | 750,000                                                                          |   | 728,700 |   |
| Due between ten  and fifteen years |   | —                                                                           |   | — |   |
| Due in over  fifteen years         |   | 3,992,600                                                                        |   | 4,000,200 |   |
|                               |   | 5,500,400                                                                        |   | 5,456,200 |   |

 

**Item 3.  Controls and Procedures**

 

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

 

(b) Changes inInternal Controls:  In the quarter endedMarch 31, 2003, the Company did not make any significant changes in, nor takeany corrective actions regarding, its internal controls or other factor thatcould significantly affect these controls.

 

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**PARTII-OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

None

 

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

 

None

 

**Item 5.  Other Information.**

 

None

 

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

 

A.                                   EXHIBITS

 

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

 

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

 

B.                                     REPORTSon FORM 8-K

 

None

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |        | NORTHERN CALIFORNIA BANCORP, INC. |                          |
|--------|-------------|-----------------------------------|-------------------------------|
|   |        |                              |                          |
| Date:  | May 9, 2003 |                              | By:                           | /s/ Charles T. Chrietzberg, Jr. |   |   |
|   |        |                              | Charles T. Chrietzberg, Jr.   |   |
|   |        |                              | Chief Executive Officer       |   |
|   |        |                              | and President                 |   |
|   |        |                              |                          |
|   |        |                              |                          |
| Date:  | May 9, 2003 |                              | By:                           | /s/ Bruce N. Warner |   |   |
|   |        |                              | Bruce N. Warner               |   |
|   |        |                              | Chief Financial Officer and   |   |
|   |        |                              | Principal Accounting  Officer |   |
|        |             |                                   |                               |  |  |  |  |

 

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CERTIFICATIONS

 

I, Charles T. Chrietzberg, Jr. certify that:

 

1.         I have read this annualreport on Form 10-QSB of Northern California Bancorp, Inc.;

 

2.         Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.         Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4.         The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filling date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.         The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee or registrant’s board ofdirectors (or persons performing the equivalent functions):

 

2.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

3.               any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.         The registrant’s othercertifying officer and I have indicated in this annual report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 9, 2003 | /s/ Charles T. Chrietzberg, Jr. |   |   |
|-------------------|---------------------------------|--------|--------|
|              | Charles T. Chrietzberg, Jr.     |   |
|              | Chairman of the Board &     |   |
|              | Chief Executive Officer         |   |

 

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CERTIFICATIONS

 

I, Bruce N. Warner certify that:

 

1.         I have read this annualreport on Form 10-QSB of Northern California Bancorp, Inc.;

 

2.         Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.         Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4.         The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

d)             designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

e)              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filling date of this annual report (the“Evaluation Date”); and

 

f)                presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.         The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee or registrant’s board ofdirectors (or persons performing the equivalent functions):

 

4.               all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

5.               any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.         The registrant’s othercertifying officer and I have indicated in this annual report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 9, 2003 | /s/ Bruce N. Warner           |   |   |
|-------------------|-------------------------------|--------|--------|
|              | Bruce N. Warner               |   |
|              | Chief Financial Officer & |   |
|              | Principal Accounting Officer  |   |

 

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