** **

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

**Washington,D.C.  20549**

** **

**FORM10-QSB**

** **

**x****   Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of 1934 forthe quarterly period ended September 30, 2007**

 

**o****   Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Nofee required) for the period from               to               **

 

**CommissionFile Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

**Incorporatedin the State of California**

**IRSEmployer Identification Number 77-0421107**

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

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

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).

 
|   | Large  accelerated filer o | Accelerated  filer o |   | Non-accelerated  filer x. |
|--------|---------------------------------|---------------------------|--------|--------------------------------|

 

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

 

As of November 5, 2007,the Corporation had 1,794,865 shares of common stock outstanding.

 

 

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TABLE OF CONTENTS

 
| **Facing Page**       | 1                                                                                           |
|-----------------------|---------------------------------------------------------------------------------------------|
| **Table of Contents** | 2                                                                                           |
| **PART  I**           | Financial Information                                                                       | 3-6 |
| Item 1                | Financial Statements                                                                        |   |
|                  | Consolidated Balance Sheets                                                                 | 3 |
|                  | Consolidated Statements of  Operations                                                      | 4 |
|                  | Consolidated****Statements****of  Changes in Shareholders’ Equity                      | 5 |
|                  | Consolidated Statements of  Cash Flows                                                      | 6 |
|                  | Summary of Accounting Policies                                                              | 7-11 |
| Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11-33 |
| Item 3                | Controls and  Procedures                                                                    | 33 |
|                  |                                                                                        |   |
| **PART II**           | Other Information                                                                           |   |
| Item 1                | Legal Proceedings                                                                           | 34 |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 34 |
| Item 3                | Defaults Upon  Senior Securities                                                            | 34 |
| Item 4                | Submission of  Matters to a Vote of Security Holders                                        | 34 |
| Item 5                | Other Information                                                                           | 34 |
| Item 6                | Exhibits and  Reports on Form 8-K                                                           | 34 |
| Signatures            | 35                                                                                          |
| Certifications        | 36-39                                                                                       |

 

 

2

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**PARTI-FINANCIAL INFORMATION**

 

### Item 1.                                     FINANCIALSTATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                | ** ** | **SEPTEMBER 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **(in thousands except share data)**                                                                  | ** ** | **2007**              | ** ** | **2006**             | ** ** |
| ** **                                                                                                                | ** ** | **(Unaudited)**       | ** ** | **(Audited)**        | ** ** |
| ASSETS:                                                                                                                   |       |                  |       |                 |       |
| Cash and Due  From Banks                                                                                                  |       | $                     | 5,504      |                 | $          | 4,979 |   |
| Federal Funds  Sold                                                                                                       |       | 5,820                 |       | 17,455               |       |
| Total Cash and  Cash Equivalents                                                                                          |       | 11,324                |       | 22,434               |       |
| Trading Assets                                                                                                            |       | 1,331                 |       | 1,762                |       |
| Time Deposits  with other Financial Institutions                                                                          |       | 1,000                 |       | 1,000                |       |
| Investment  Securities, available for sale (Note 5)                                                                       |       | 35,783                |       | 15,286               |       |
| Investment  Securities, held to maturity at cost (fair value approximates $8,052 in 2007;  $7,072 in 2006)  (Note 5) |       | 7,873                 |       | 7,012                |       |
| Other  Investments (Note 6)                                                                                               |       | 2,790                 |       | 1,967                |       |
| Loans Held for  Sale, at lower of cost or market                                                                          |       | 1,577                 |       | 1,182                |       |
| Loans, net of  allowance for loan losses of $1,575 in 2007; $1,409 in 2006 (Note 7)                                       |       | 154,845               |       | 128,868              |       |
| Bank Premises  and Equipment, Net                                                                                         |       | 4,900                 |       | 4,613                |       |
| Cash Surrender  Value of Life Insurance                                                                                   |       | 3,764                 |       | 3,671                |       |
| Interest  Receivable and Other Assets                                                                                     |       | 3,942                 |       | 2,775                |       |
| Total Assets                                                                                                              |       | $                     | 229,129    |                 | $          | 190,570 |   |
|                                                                                                                      |       |                  |       |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                               |       |                  |       |                 |       |
|                                                                                                                      |       |                  |       |                 |       |
| Non interest  bearing demand                                                                                              |       | $                     | 27,029     |                 | $          | 30,079 |   |
| Interest-bearing  demand                                                                                                  |       | 14,958                |       | 17,262               |       |
| Savings                                                                                                                   |       | 4,324                 |       | 5,326                |       |
| Time less than  $100,000                                                                                                  |       | 53,385                |       | 43,135               |       |
| Time in  denominations of $100,000 or more                                                                                |       | 51,873                |       | 35,826               |       |
| Total Deposits                                                                                                            |       | 151,569               |       | 131,628              |       |
|                                                                                                                      |       |                  |       |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                                    |       | 49,500                |       | 34,750               |       |
| Junior  Subordinated Debt Securities                                                                                      |       | 8,248                 |       | 8,248                |       |
| Interest Payable  and Other Liabilities                                                                                   |       | 5,548                 |       | 3,542                |       |
| Total  Liabilities                                                                                                        |       | 214,865               |       | 178,168              |       |
|                                                                                                                      |       |                  |       |                 |       |
| Shareholders’  Equity:                                                                                               |       |                  |       |                 |       |
| Common Stock - No  Par Value, authorized 2,500,000                                                                        |       |                  |       |                 |       |
| Outstanding:1,794,865  in 2007 and 1,721,715 in 2006                                                                      |       | 5,339                 |       | 5,060                |       |
| Retained  Earnings                                                                                                        |       | 8,848                 |       | 7,363                |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 8)                                                                   |       | 77                    |       | (21                  | )          |
| Total  Shareholders’ Equity                                                                                          |       | 14,264                |       | 12,402               |       |
| Total  Liabilities & Shareholders’ Equity                                                                        |       | $                     | 229,129    |                 | $          | 190,570 |   |

 

3

----

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH PERIOD  ENDING** | ** ** | **NINE-MONTH PERIOD  ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                              | ** ** | **SEPTEMBER 30**               | ** ** | **SEPTEMBER 30**              | ** ** |
| **(in thousands except share data)**                | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                                        |       |                                |       |                               |       |   |   |   |   |
| Loans                                                                   |       | $                                   | 3,640      |                               | $          | 3,128 |   | $ | 10,373 |   | $ | 8,527 |   |
| Time deposits  with other financial institutions                        |       | 13                                  |       | 14                                 |       | 41 |   | 36 |   |
| Investment  securities                                                  |       | 598                                 |       | 289                                |       | 1,433 |   | 744 |   |
| Federal funds  sold                                                     |       | 132                                 |       | 220                                |       | 367 |   | 582 |   |
| Total Interest  Income                                                  |       | 4,383                               |       | 3,651                              |       | 12,214 |   | 9,889 |   |
| INTEREST  EXPENSE:                                                      |       |                                |       |                               |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 12                                  |       | 15                                 |       | 38 |   | 54 |   |
| Savings and time  deposit accounts                                      |       | 709                                 |       | 369                                |       | 1,894 |   | 1,023 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 673                                 |       | 400                                |       | 1,670 |   | 1,040 |   |
| Notes payable  and other                                                |       | 779                                 |       | 585                                |       | 2,032 |   | 1,588 |   |
| Total Interest  Expense                                                 |       | 2,173                               |       | 1,369                              |       | 5,634 |   | 3,705 |   |
| Net Interest  Income                                                    |       | 2,210                               |       | 2,282                              |       | 6,580 |   | 6,184 |   |
| Provision for  loan losses                                              |       | 140                                 |       | 50                                 |       | 415 |   | 145 |   |
| Net interest  income, after provision for loan losses                   |       | 2,070                               |       | 2,232                              |       | 6,165 |   | 6,039 |   |
| NON-INTEREST  INCOME:                                                   |       |                                |       |                               |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 153                                 |       | 145                                |       | 460 |   | 427 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 54                                  |       | 176                                |       | 409 |   | 613 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                              |       | —                             |       | — |   | 1,313 |   |
| Other income                                                            |       | 697                                 |       | 962                                |       | 2,389 |   | 3,076 |   |
| Total  non-interest income                                              |       | 904                                 |       | 1,283                              |       | 3,258 |   | 5,429 |   |
| NON-INTEREST  EXPENSE:                                                  |       |                                |       |                               |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 1,004                               |       | 925                                |       | 3,064 |   | 2,759 |   |
| Stock Based  Compensation Expense                                       |       | —                              |       | —                             |       | — |   | 18 |   |
| Occupancy and  Equipment Expense                                        |       | 195                                 |       | 210                                |       | 622 |   | 591 |   |
| Professional  Fees                                                      |       | 36                                  |       | 35                                 |       | 124 |   | 118 |   |
| Data Processing                                                         |       | 92                                  |       | 65                                 |       | 270 |   | 231 |   |
| Other general  and administrative                                       |       | 870                                 |       | 860                                |       | 2,580 |   | 2,579 |   |
| Total  non-interest expense                                             |       | 2,197                               |       | 2,095                              |       | 6,660 |   | 6,296 |   |
|                                                                    |       |                                |       |                               |       |   |   |   |   |
| Income before  tax provision                                            |       | 777                                 |       | 1,420                              |       | 2,763 |   | 5,172 |   |
| Income tax  provision                                                   |       | 413                                 |       | 678                                |       | 1,278 |   | 2,327 |   |
| Net income                                                              |       | $                                   | 364        |                               | $          | 742 |   | $ | 1,485 |   | $ | 2,845 |   |
|                                                                    |       |                                |       |                               |       |   |   |   |   |
| Earnings per  common share                                              |       |                                |       |                               |       |   |   |   |   |
| Basic                                                                   |       | $                                   | 0.207      |                               | $          | 0.446 |   | $ | 0.851 |   | $ | 1.735 |   |
| Diluted                                                                 |       | $                                   | 0.180      |                               | $          | 0.405 |   | $ | 0.802 |   | $ | 1.568 |   |

 

4

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NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

** **
| ** **                                                    | ** **                     | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**              | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|--------------------------------|--------------------|------------|------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                                    | ** **                     | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                    | ** **                     | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **Income**                   | ** ** | ** ** | ** ** |
| **(in thousands except share data)**      | ** **                     | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**                   | ** ** | **Total**  | ** ** |
| ** **                                                    | ** **                     | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                                 |                           | 1,631,439          |       | $          | 4,772      |         | $          | 4,129                        |       | $          | 30         |   | $ | 8,931 |   |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                        |                           |               |       |       |       |         |       |                         |       |       |       |
| Net income                                                    |                           | —             |       | —     |       | 3,837        |       | —                       |       | 3,837      |       |
| Change in net  unrealized gain on securities and other assets |                           |               |       |       |       |         |       |                         |       |       |       |
| net of tax  effects                                           |                           | —             |       | —     |       | —       |       | (51                          | )          | (51        | )          |
| Total  comprehensive income                                   |                           |               |       |       |       |         |       |                         |       | 3,786      |       |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| $                                                             |  0.35 per  share dividend |               | —     |       | —     |         | (603       | )                            | —     |       | (603       | ) |
| Stock based  compensation                                     |                           | —             |       | 18         |       | —       |       | —                       |       | 18         |       |
| Exercise of  stock options                                    |                           | 90,276             |       | 270        |       | —       |       | —                       |       | 270        |       |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| Balance at  December 31, 2006 (audited)                       |                           | 1,721,715          |       | 5,060      |       | 7,363        |       | (21                          | )          | 12,402     |       |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                        |                           |               |       |       |       |         |       |                         |       |       |       |
| Net income                                                    |                           | —             |       | —     |       | 1,485        |       | —                       |       | 1,485      |       |
| Change in net  unrealized gain on securities and other assets |                           |               |       |       |       |         |       |                         |       |       |       |
| net of tax  effects                                           |                           | —             |       | —     |       | —       |       | 98                           |       | 98         |       |
| Total  comprehensive income                                   |                           |               |       |       |       |         |       |                         |       | 1,583      |       |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| Exercise of  stock options                                    |                           | 73,150             |       | 279        |       | —       |       | —                       |       | 279        |       |
|                                                          |                           |               |       |       |       |         |       |                         |       |       |       |
| Balance at  September 30, 2007 (unaudited)                    |                           | 1,794,865          |       | $          | 5,339      |         | $          | 8,848                        |       | $          | 77         |   | $ | 14,264 |   |
|                                                               |                                |                    |            |            |            |              |            |                              |            |            |            |  |  |  |  |  |

 

5

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDEDSEPTEMBER 30, 2007 AND 2006

 
| ** **                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |     |       |     |       |
| Net income                                                                         |       | $        | 1,485      |     | $          | 2,845 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation and  amortization expense                                             |       | 214      |       | 207      |       |
|                                                                               |       |     |       |     |       |
| Realized gain on  sales of available-for-sale securities, net                      |       | —   |       | (1,313   | )          |
| Amortization of  deferred loan costs                                               |       | 243      |       | 159      |       |
| Accretion of  discounts and premiums on investment securities, net                 |       | (6       | )          | (1       | )          |
| Provision for  loan losses                                                         |       | 415      |       | 145      |       |
| Stock based  compensation                                                          |       | —   |       | 18       |       |
| (Increase)  decrease in trading assets                                             |       | 431      |       | (235     | )          |
| (Increase)  decrease in loans held for sale                                        |       | (395     | )          | 4,595    |       |
| Increase in interest  receivable                                                   |       | (434     | )          | (45      | )          |
| Increase in  other assets                                                          |       | (892     | )          | (1,092   | )          |
| (Increase)  decrease in deferred tax asset                                         |       | 45       |       | (52      | )          |
| Increase in  interest payable                                                      |       | 532      |       | 519      |       |
| Increase in  other liabilities                                                     |       | 1,473    |       | 523      |       |
| Net cash  provided by operating activities                                         |       | 3,111    |       | 6,273    |       |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |     |       |     |       |
| Proceeds from  maturity/sale of investment securities                              |       | 11,964   |       | 2,054    |       |
| Purchase of  investments                                                           |       | (34,024  | )          | (3,588   | )          |
| Net increase in  loans                                                             |       | (46,647  | )          | (36,987  | )          |
| Loan purchases                                                                     |       | (1,462   | )          | (13,200  | )          |
| Loan sales                                                                         |       | 21,474   |       | 30,988   |       |
| Proceeds from  sale of equipment                                                   |       | —   |       | 19       |       |
| Additions to  bank premises and equipment                                          |       | (496     | )          | (363     | )          |
| Net cash used by  investing activities                                             |       | (49,191  | )          | (21,077  | )          |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |     |       |     |       |
| Net increase in  deposits                                                          |       | 19,941   |       | 10,882   |       |
| Proceeds from  borrowings                                                          |       | 17,500   |       | 10,000   |       |
| Repayments of  borrowings                                                          |       | (2,750   | )          | (2,000   | )          |
| Proceeds from  exercise of stock options                                           |       | 279      |       | 215      |       |
| Net cash  provided by financing activities                                         |       | 34,970   |       | 19,097   |       |
|                                                                               |       |     |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | (11,110  | )          | 4,293    |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 22,434   |       | 24,131   |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, ENDING**                                             |       | $        | 11,324     |     | $          | 28,424 |   |

 

See Note 9 for supplemental disclosures

 

6

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**SUMMARY OF ACCOUNTING POLICIES**

** **

(NOTE 1) NATURE OFBUSINESS AND ****BASIS OF PRESENTATION****

**** ****

*Nature of Business*

* *

Northern CaliforniaBancorp, Inc. (the “Corporation”) was incorporated on August 29, 1995, as afor-profit corporation under the California Corporate laws for the principalpurpose of engaging in banking and non-banking activities as allowed for a bankholding company.  The Corporation owns100% of Monterey County Bank (the “Bank”). The Corporation’s sources of revenues at this time are dividends oninvestments, gains on securities transactions and potential dividends,management fees and tax equalization payments, if any, from the Bank.

 

*Basisof Presentation*

* *

Theinterim condensed financial statements of Northern California Bancorp,Inc. and subsidiary (“Corporation”) are unaudited and reflect alladjustments (consisting only of normal recurring adjustments), which are, inthe opinion of management, necessary for a fair presentation, in all materialrespects, of the financial position and operating results of the Corporationfor the interim periods.  The results of operations for the ninemonths ended September 30, 2007 are not necessarily indicative of the resultsto be expected for the entire fiscal year ending December 31, 2007. The year-end balance sheet data at December 31, 2006 was derived fromthe audited financial statements.

 

Thisfinancial information should be read in conjunction with the audited financialstatements and notes thereto included in the Corporation’s Form 10-KSB for thefiscal year ended December 31, 2006.

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157 (“SFAS 157”), *“Fair Value Measurements”*,effective for the Company beginning on January 1, 2008, with earlier adoptionpermitted. This Statement defines fair value, establishes a framework formeasuring fair value, and expands disclosures about fair value measurements.

 

Thisstatement establishes a fair value hierarchy that distinguishes betweenvaluations obtained from sources independent of the entity and those from theentity’s own unobservable inputs that are not corroborated by observable marketdata. SFAS 157 expands disclosures about the use of fair value to measureassets and liabilities in interim and annual periods subsequent to initialrecognition.  The disclosures focus onthe inputs used to measure fair value and for recurring fair value measurementsusing significant unobservable inputs, the effect of the measurements onearnings or changes in net assets for the period. This statement encourages anentity to combine the fair value information disclosed under this statementwith the fair value information disclosed under other accountingpronouncements, including SFAS 107, “Disclosures about Fair Value of FinancialInstruments”, where practicable. The Bank is currently assessing the impact ofthis guidance on its financial statements.

 

In February 2007, the FASBissued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — including an amendment of FASB StatementNo. 115” which is effective for the Company as of the beginning of thefirst fiscal year that begins after November 15, 2007.

 

7

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Early adoption is permittedas of the fiscal year that begins on or after November 15, 2006, provided thatthe Company also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”.  The Bankis currently evaluating the impact of adopting this Statement on the Company’sfinancial statements.

 

(NOTE3). STOCK BASED COMPENSATION

 

TheCorporation records compensation expense associated with stock-based awards inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107. SFASNo. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, the approachin SFAS No. 123R is similar to the approach described in SFAS No. 123, *Accounting for Stock Based Compensation*(SFASNo. 123).  However, SFAS No. 123R requires all stock-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values at the date of grant.  Thestock-based compensation expense totaled $0 and $18,000 for the nine monthsended September 30, 2007 and 2006, respectively.  The Corporation selectedto use the modified prospective method of adopting SFAS 123R.  Thus, stockoption expense is recognized only for options that vested after January 1,2006.  Future compensation expense may be greater if additional stockoptions are granted by the Corporation.

 

Underthe Corporation’s Stock Option Plan, the Corporation may grant incentive stockoptions and non-qualified stock options to directors, officers, and employeesof the Corporation and its subsidiary, so long as the Corporation owns amajority of the equity interest of such subsidiary.  Incentive StockOptions are granted at fair value of the common stock on the date ofgrant.  However, an incentive stock option granted to an individual owning10% or more of the Corporation’s stock after such grant must have an exerciseprice of at least 110%****of suchfair market value and an exercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85% of thefair market value of the common stock on the date of grant.  The Board ofDirectors is authorized to determine when options become exercisable within aperiod not exceeding 10 years from the date of grant.

 

**There were no options grantedduring the nine months ended September 30, 2007 or 2006.**

** **

(NOTE 4). EARNINGS PER SHARE

 

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

** **

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

** **

**8**

----

 
| ** **                                                         | ** ** | **Earnings per share calculation**                         | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the nine months ended September 30,** | ** ** |
| ** **                                                         | ** ** | **2007**                                                                  | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                                | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                                   | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                                | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                         | 1,485      |   | 1,744,444 |   | $ | 0.851 |   | $ | 2,845 |   | 1,639,356 |   | $ | 1.735 |   |
|                                                               |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                                    |       | 106,927 |   | (0.049 | ) | — |   | 174,454 |   | (0.167 | ) |
|                                                               |       |                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                        |       | $                                                                         | 1,485      |   | 1,851,371 |   | $ | 0.802 |   | $ | 2,845 |   | 1,813,810 |   | $ | 1.568 |   |

** **
| ** **                                  | ** ** | **SEPTEMBER 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2007**              | ** ** | **2006**             | ** ** |
| ** **                                  | ** ** | **(Unaudited)**       | ** ** | **(Audited)**        | ** ** |
| (NOTE 5)  INVESTMENT SECURITIES:            |       |                  |       |                 |       |
| Available for  sale:                        |       |                  |       |                 |       |
| Government  National Mortgage Association   |       | $                     | 412        |                 | $          | 626 |   |
| U.S. government  Agencies                   |       | 35,371                |       | 14,660               |       |
|                                        |       | $                     | 35,783     |                 | $          | 15,286 |   |
|                                        |       |                  |       |                 |       |
| Held to  maturity:                          |       |                  |       |                 |       |
| State/Local  Agency                         |       | $                     | 7,873      |                 | $          | 7,012 |   |
|                                        |       |                  |       |                 |       |
| (NOTE 6) OTHER  INVESTMENTS                 |       |                  |       |                 |       |
| AT Services LLC                             |       | $                     | 20         |                 | $          | 20 |   |
| Federal Home  Loan Bank stock, restricted   |       | 2,456                 |       | 1,634                |       |
| Independent  Bankers Financial Corporation  |       | 51                    |       | 50                   |       |
| MasterCard Inc  Class “B” Stock   |       | 5                     |       | 5                    |       |
| Metrocities  Mortgage, LLC                  |       | 10                    |       | 10                   |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93                    |       | 93                   |       |
| Northern  California Bancorp, Inc. Trust II |       | 155                   |       | 155                  |       |
|                                        |       | $                     | 2,790      |                 | $          | 1,967 |   |

 

9

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| ** **                                              | ** ** | **SEPTEMBER 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2007**              | ** ** | **2006**             | ** ** |
| ** **                                              | ** ** | **(Unaudited)**       | ** ** | **(Audited)**        | ** ** |
| (NOTE 7) LOANS  AND ALLOWANCE FOR POSSIBLE LOAN LOSSES: |       |                  |       |                 |       |
|                                                    |       |                  |       |                 |       |
| Commercial and  Industrial                              |       | $                     | 27,971     |                 | $          | 26,361 |   |
| Construction                                            |       | 20,980                |       | 17,326               |       |
| Real Estate -  Mortgage                                 |       | 107,054               |       | 86,207               |       |
| Installment                                             |       | 718                   |       | 695                  |       |
| Government  Guaranteed Loans Purchased                  |       | 34                    |       | 39                   |       |
|                                                    |       | 156,757               |       | 130,628              |       |
| Allowance for  loan losses                              |       | (1,575                | )          | (1,409               | )          |
| Deferred  origination fees, net                         |       | (337                  | )          | (351                 | )          |
| Net Loans                                               |       | $                     | 154,845    |                 | $          | 128,868 |   |
|                                                    |       |                  |       |                 |       |
| Balance at  Beginning of Period                         |       | $                     | 1,409      |                 | $          | 1,101 |   |
| Recoveries                                              |       | 1                     |       | 7                    |       |
| Provision for  Possible Loan Losses                     |       | 415                   |       | 410                  |       |
| Loans Charged  Off                                      |       | (250                  | )          | (109                 | )          |
| Balance at End  of Period                               |       | $                     | 1,575      |                 | $          | 1,409 |   |

** **

**10**

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(NOTE8) COMPREHENSIVE INCOME (LOSS):

 

Thecomponents of other comprehensive income and related tax effects for the ninemonth period ended September 30, 2007 and the year ended December 31, 2006 areas follows:

 
| ** **                                                                                     | ** ** | **September**   | ** ** | **December**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                                     | ** ** | **2007**        | ** ** | **2006**      | ** ** |
| ** **                                                                                     | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding gains (losses) on available - for - sale securities and other assets,  net |       | $               | 178        |          | $          | (93 | ) |
| Tax effect                                                                                     |       | (80             | )          | 42            |       |
|                                                                                           |       |            |       |          |       |
| Net-of-tax  amount                                                                             |       | $               | 98         |          | $          | (51 | ) |

 

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

 
| ** **                                                              | ** ** | **2007**        | ** ** | **2006**      | ** ** |
|-------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                              | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding gains (losses) on available - for - sale securities |       | $               | 115        |          | $          | (79 | ) |
| Unrealized  holding gains on available - for - sale strip receivable    |       | 24              |       | 41            |       |
| Tax effect                                                              |       | (62             | )          | 17            |       |
|                                                                    |       |            |       |          |       |
| Net-of-tax  amount                                                      |       | $               | 77         |          | $          | (21 | ) |

 
| (NOTE 9)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |   |   |   |   |   |
|--------------------------------------------------------------|--------|--------|--------|--------|--------|

 
| ** **                              | ** ** | **SEPTEMBER 30** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| **Payments  during the period ending:** | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Interest                                |       | $                     | 5,000      |   | $ | 3,186 |   |
| Income Taxes                            |       | $                     | 1,041      |   | $ | 2,376 |   |

 
| **ITEM 2:** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

**Statements Regarding Forward-Looking Information**

 

Except for historical information contained herein,the matters discussed or incorporated by reference in this report containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended (the “Securities Act”), and Section 21E of theSecurities Exchange Act of 1934 (the “Exchange Act”), that involve substantialrisks and uncertainties.  When used in this report, or in the documentsincorporated by reference herein, the words “anticipate,” “believe,” “estimate,”“may,” “intend,” “expect,” and similar expressions identify certain of suchforward-looking statements.  Actual results of Monterey County Bank coulddiffer materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectations

 

11

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include, but are not limited to, the following: changes in economicconditions (both generally and more specifically in the markets in which theBank operates); changes in interest rates, deposit flows, loan demand, realestate values and competition; changes in accounting principles, policies orguidelines and in government legislation and regulation (which change from timeto time and over which the Bank has no control); other factors affecting theBank’s operations, markets, products and services; and other risks detailed inthis Form 10-QSB and in the Bank’s other reports filed with the Federal DepositInsurance Corporation and pursuant to the rules and regulations of theSecurities and Exchange Commission.  Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof.  The Corporation undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances that arise after the date thereof.

 

**CRITICAL ACCOUNTING POLICIES**

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makea number of judgments, estimates and assumptions that affect the reportedamount of assets, liabilities, income and expenses in the Corporation’sfinancial statements and accompanying notes. Management believes that thejudgments, estimates and assumptions used in preparation of the Corporation’sfinancial statements are appropriate given the factual circumstances as ofSeptember 30, 2007.

 

Various elements of the Corporation’s accountingpolicies, by their nature, are inherently subject to estimation techniques,valuation assumptions and other subjective assessments. Critical accountingpolicies are those that involve the most complex and subjective decisions andassessments and have the greatest potential impact on the Corporation’s resultsof operation. In particular, management has identified one accounting policythat, due to judgments, estimates and assumptions inherent in this policy, andthe sensitivity of the Corporation’s financial statements to those judgments,estimates and assumptions, is critical to an understanding of the Corporation’sfinancial statements. This policy relates to the methodology that determinesthe Corporation’s allowance for loan losses. Management has discussed thedevelopment and selection of this critical accounting policy with theCorporation’s Audit Committee of the Board of Directors. Although Managementbelieves the level of the allowance at September 30, 2007 is adequate to absorblosses inherent in the loan portfolio, a decline in the regional economy mayresult in increasing losses that cannot reasonably be predicted at this time. Forfurther information regarding the allowance for loan losses see “Provision andAllowance for Loan Losses” included elsewhere herein.

 

**OVERVIEW**

 

The following discussionreviews and analyzes the operating results and financial condition of the Corporation,focusing on the Bank. It should be read in conjunction with the financialstatements and the other financial data presented elsewhere herein.

 

For the three monthsended September 30, 2007 net income was $364,000, compared to $742,000 for thesame period in 2006. For the three months ended September 30, 2007 net interestincome after provision for loan losses decreased $162,000, total non-interestincome decreased $379,000, while non-interest expense increased $102,000 andincome tax provision decreased $265,000. The decrease in non-interest incomewas attributable primarily to

 

12

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decreased income fromsales and servicing of Small Business Administration guaranteed loans,decreased credit card program revenues and a trading asset mark to market loss.

 

For the nine months endedSeptember 30, 2007 net income was $1,485,000, compared to $2,845,000 for thesame period in 2006. For the nine months ended September 30, 2007 net interestincome after provision for loan losses increased $126,000, total non-interestincome decreased $2,171,000, while non-interest expense increased $364,000 andincome tax provision decreased $1,049,000. The decrease in non-interest incomewas attributable primarily to the recording of a $1,313,000 gain on the sale ofan investment during the first quarter of 2006, decreased credit card programrevenues and a trading asset mark to market loss.

 

13

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The following table setsforth certain selected financial ratios of the Corporation at and for the threeand the nine months ended September 30, 2007 and 2006.

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Summary of Operating Results:                        |       |                                                    |       |                                                   |       |   |   |   |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total interest  income                               |       | $                                                       | 4,383      |                                                   | $          | 3,651 |   | $ | 12,214 |   | $ | 9,889 |   |
| Total interest  expense                              |       | 2,173                                                   |       | 1,369                                                  |       | 5,634 |   | 3,705 |   |
| Net interest  income                                 |       | 2,210                                                   |       | 2,282                                                  |       | 6,580 |   | 6,184 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Provision for  possible loan losses                  |       | 140                                                     |       | 50                                                     |       | 415 |   | 145 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 2,070                                                   |       | 2,232                                                  |       | 6,165 |   | 6,039 |   |
| Total  non-interest income                           |       | 904                                                     |       | 1,283                                                  |       | 3,258 |   | 5,429 |   |
| Total  non-interest expense                          |       | 2,197                                                   |       | 2,096                                                  |       | 6,660 |   | 6,296 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before  taxes                                 |       | 777                                                     |       | 1,420                                                  |       | 2,763 |   | 5,172 |   |
| Provision for  income taxes                          |       | 413                                                     |       | 678                                                    |       | 1,278 |   | 2,327 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                                           |       | $                                                       | 364        |                                                   | $          | 742 |   | $ | 1,485 |   | $ | 2,845 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Per Common Share  Data:                              |       |                                                    |       |                                                   |       |   |   |   |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income -  Basic (1)                              |       | $                                                       | 0.207      |                                                   | $          | 0.446 |   | $ | 0.851 |   | $ | 1.735 |   |
| Net income -  Diluted (2)                            |       | 0.180                                                   |       | 0.405                                                  |       | 0.802 |   | 1.568 |   |
| Book value, end  of period                           |       | 7.95                                                    |       | 7.32                                                   |       | 7.95 |   | 7.32 |   |
| Avg shares  outstanding (3)                          |       | 1,793,961                                               |       | 1,639,356                                              |       | 1,744,444 |   | 1,639,356 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Balance Sheet  Data:                                 |       |                                                    |       |                                                   |       |   |   |   |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total loans, net  of unearned income (4)             |       | $                                                       | 156,422    |                                                   | $          | 121,600 |   | $ | 156,422 |   | $ | 121,600 |   |
| Total assets                                         |       | 229,129                                                 |       | 185,607                                                |       | 229,129 |   | 185,607 |   |
| Total deposits                                       |       | 151,569                                                 |       | 129,002                                                |       | 151,569 |   | 129,002 |   |
| Stockholders’  equity                           |       | 14,264                                                  |       | 11,967                                                 |       | 14,264 |   | 11,967 |   |

 

14

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| ** **                                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Selected  Financial Ratios:                                    |       |                                                    |       |                                                   |       |   |   |   |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Return on  average assets (5) (6)                              |       | 0.66                                                    | %          | 1.55                                                   | %          | 0.98 | % | 2.25 | % |
| Return on  average stockholders’ equity (5) (6)           |       | 10.45                                                   | %          | 24.03                                                  | %          | 14.73 | % | 35.59 | % |
| Net interest  spread                                           |       | 3.69                                                    | %          | 4.75                                                   | %          | 4.09 | % | 4.61 | % |
| Net yield on  interest earning assets (5)                      |       | 4.37                                                    | %          | 5.64                                                   | %          | 4.78 | % | 5.38 | % |
| Avg  shareholders’ equity to average assets (5)           |       | 6.27                                                    | %          | 6.45                                                   | %          | 6.63 | % | 6.33 | % |
| Risked-Based  capital ratios                                   |       |                                                    |       |                                                   |       |   |   |   |   |
| Tier 1                                                         |       | 9.70                                                    | %          | 10.44                                                  | %          | 9.70 | % | 10.44 | % |
| Total                                                          |       | 13.03                                                   | %          | 14.91                                                  | %          | 13.03 | % | 14.91 | % |
| Total loans to  total deposits at end of period (4)            |       | 103.20                                                  | %          | 94.26                                                  | %          | 103.20 | % | 94.26 | % |
| Allowance for  loan losses to total loans at end of period (4) |       | 1.00                                                    | %          | 1.01                                                   | %          | 1.00 | % | 1.01 | % |
| Nonperforming  loans to total loans at end of period (4)       |       | 0.10                                                    | %          | 0.21                                                   | %          | 0.10 | % | 0.21 | % |
| Net charge-offs  to average loans (4)                          |       | 0.18                                                    | %          | 0.00                                                   | %          | 0.18 | % | 0.00 | % |

 

----

(1)        Basicearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock outstanding during the year. The weightedaverage number of common shares used for this computation was 1,744,444 and1,639,356 for September 30, 2007 and 2006, respectively.

 

(2)        Dilutedearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock and common stock equivalents outstandingduring the year. Common stock equivalents include director/employee stockoptions. The weighted average number of shares used for this computation was1,851,371 and 1,813,810 for September 30, 2007 and 2006, respectively.

 

(3)        Weightedaverage common shares.

 

(4)        Includesloans being held for sale.

 

(5)        Averagesare of daily balances.

 

(6)        September30, 2007 calculated on an annualized basis.

 

**NET INTEREST INCOME**

 

Net interest income, thedifference between (a) interest and fees earned on interest-earning assets and(b) interest paid on interest-bearing liabilities, is the most significantcomponent of the Bank’s earnings. Changes in net interest income from period toperiod result from increases or decreases in the average balances ofinterest-earning assets, the availability of particular sources of funds andchanges in prevailing interest rates.

 

15

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Net interest income forthe three months ended September 30, 2007 was $2,210,000 compared to $2,282,000for the same period in 2006. The decrease of $72,000 resulted primarily fromthe decline in loan rates as shown on page 19 in the rate and volume analysistable.

 

Net interest income forthe nine months ended September 30, 2007 was $6,580,000 compared to $6,184,000for the same period in 2006. The increase of $396,000 resulted primarily fromincreased loan volume as shown on page 19 in the rate and volume analysistable.

 

The following tablesshow the components of the Bank’s net interest income, setting forth, for eachof the three months ended and nine months ended September 30, 2007 and 2006,(i) average assets, liabilities and investments, (ii) interest income earned oninterest-earning assets and interest expense paid on interest-bearingliabilities, (iii) average yields earned on interest-earning assets and averagerates paid on interest-bearing liabilities, (iv) the net interest spread (i.e.,the average yield earned on interest-earning assets less the average rate paidon interest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets). Yields are computed on a tax-equivalent basis,resulting in adjustments to interest earned on municipal bonds of $37,000 forboth the three months ended September 30, 2007 and 2006, respectively and$107,000 and $111,000 for the nine months ended September 30, 2007 and 2006, respectively.Non-accrual loans and overdrafts are included in average loan balances. Averageloans are presented net of unearned income.

 

16

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| ** **                                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                 | ** ** | **2006**                                                 | ** ** |
| ** **                                                  | ** ** | **Average**                                              | ** ** | ** **                                               | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                              | ** ** | **Interest**                                             | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                        | 150,935    |                                                     | $          | 3,640 |   | 9.65 | % | $ | 120,846 |   | $ | 3,126 |   | 10.35 | % |
| Time deposits -  in other banks                             |       | 1,000                                                    |       | 13                                                       |       | 5.37 | % | 1,000 |   | 14 |   | 5.73 | % |
| Invest  securities - taxable                                |       | 36,566                                                   |       | 516                                                      |       | 5.64 | % | 17,163 |   | 188 |   | 4.38 | % |
| Invest  securities - nontaxable                             |       | 7,127                                                    |       | 120                                                      |       | 6.71 | % | 7,017 |   | 120 |   | 6.86 | % |
| Federal funds  sold                                         |       | 10,245                                                   |       | 133                                                      |       | 5.20 | % | 17,050 |   | 220 |   | 5.16 | % |
| Total  interest-earning assets                              |       | 205,873                                                  |       | 4,422                                                    |       | 8.59 | % | 163,076 |   | 3,668 |   | 9.00 | % |
|                                                        |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,443                                                   | )          |                                                     |       |   |   | (1,198 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,024                                                    |       |                                                     |       |   |   | 5,155 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,929                                                    |       |                                                     |       |   |   | 4,469 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,219                                                    |       |                                                     |       |   |   | 837 |   |   |   |   |   |
| Other assets                                                |       | 5,486                                                    |       |                                                     |       |   |   | 5,054 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                        | 222,088    |                                                     |       |   |   |   | $ | 177,393 |   |   |   |   |   |
|                                                        |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                        | 14,721     |                                                     | $          | 10 |   | 0.27 | % | $ | 13,255 |   | $ | 9 |   | 0.27 | % |
| Money market  savings                                       |       | 1,513                                                    |       | 3                                                        |       | 0.73 | % | 3,131 |   | 6 |   | 0.74 | % |
| Savings deposits                                            |       | 4,588                                                    |       | 12                                                       |       | 1.01 | % | 7,214 |   | 18 |   | 1.02 | % |
| Time deposits  >$100M                                    |       | 50,863                                                   |       | 673                                                      |       | 5.29 | % | 33,505 |   | 400 |   | 4.77 | % |
| Time deposits  <$100M                                    |       | 52,609                                                   |       | 698                                                      |       | 5.30 | % | 32,508 |   | 351 |   | 4.32 | % |
| Other Borrowing                                             |       | 52,987                                                   |       | 779                                                      |       | 5.88 | % | 39,476 |   | 586 |   | 5.94 | % |
| Total  interest-bearing liabilities                         |       | 177,281                                                  |       | 2,175                                                    |       | 4.90 | % | 129,089 |   | 1,370 |   | 4.25 | % |
|                                                        |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,728                                                   |       |                                                     |       |   |   | 34,472 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,619                                                    |       |                                                     |       |   |   | 1,073 |   |   |   |   |   |
| Other  liabilities                                          |       | 3,566                                                    |       |                                                     |       |   |   | 1,321 |   |   |   |   |   |
| Total  Liabilities                                          |       | 208,194                                                  |       |                                                     |       |   |   | 165,955 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 13,894                                                   |       |                                                     |       |   |   | 11,438 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                        | 222,088    |                                                     |       |   |   |   | $ | 177,393 |   |   |   |   |   |
| Net interest  income                                        |       |                                                     |       | $                                                        | 2,247      |   |   |   |   |   | $ | 2,298 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                     |       |                                                     |       | 8.59 | % |   |   |   |   | 9.00 | % |
| Interest expense  as a percentage of average earning assets |       |                                                     |       |                                                     |       | 4.23 | % |   |   |   |   | 3.36 | % |
| Net yield on  interest earning assets                       |       |                                                     |       |                                                     |       | 4.36 | % |   |   |   |   | 5.64 | % |
| Net interest  spread                                        |       |                                                     |       |                                                     |       | 3.69 | % |   |   |   |   | 4.75 | % |

 

17

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| ** **                                                  | ** ** | **Nine Months Ended September 30, 2007** | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                        | ** ** | **Int**                                                           | ** ** | **Avg** | ** ** | ** ** | ** ** | **Int** | ** ** | **Avg** | ** ** |
| ** **                                                  | ** ** | **Avg**                                                           | ** ** | **Earn**                                                          | ** ** | **%** | ** ** | **Avg** | ** ** | **Earn** | ** ** | **%** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Bal**                                                           | ** ** | **Paid**                                                          | ** ** | **Rate** | ** ** | **Bal** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                                 | 140,301    |                                                              | $          | 10,373 |   | 9.86 | % | $ | 115,677 |   | $ | 8,526 |   | 9.83 | % |
| Time deposits -  in other banks                             |       | 1,048                                                             |       | 41                                                                |       | 5.28 | % | 1,000 |   | 36 |   | 4.83 | % |
| Invest  securities - taxable                                |       | 28,912                                                            |       | 1,194                                                             |       | 5.51 | % | 15,395 |   | 467 |   | 4.05 | % |
| Invest  securities - nontaxable                             |       | 7,049                                                             |       | 346                                                               |       | 6.54 | % | 7,020 |   | 357 |   | 6.77 | % |
| Federal funds  sold                                         |       | 9,382                                                             |       | 367                                                               |       | 5.21 | % | 16,162 |   | 582 |   | 4.80 | % |
| Total  interest-earning assets                              |       | 186,692                                                           |       | 12,321                                                            |       | 8.80 | % | 155,254 |   | 9,968 |   | 8.56 | % |
|                                                        |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,386                                                            | )          |                                                              |       |   |   | (1,134 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,358                                                             |       |                                                              |       |   |   | 5,041 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,848                                                             |       |                                                              |       |   |   | 4,407 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,099                                                             |       |                                                              |       |   |   | 761 |   |   |   |   |   |
| Other assets                                                |       | 5,124                                                             |       |                                                              |       |   |   | 4,131 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                                 | 202,735    |                                                              |       |   |   |   | $ | 168,461 |   |   |   |   |   |
|                                                        |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                              |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                                 | 14,633     |                                                              | $          | 28 |   | 0.25 | % | $ | 12,998 |   | $ | 32 |   | 0.33 | % |
| Money market  savings                                       |       | 1,793                                                             |       | 10                                                                |       | 0.73 | % | 3,890 |   | 22 |   | 0.75 | % |
| Savings deposits                                            |       | 4,567                                                             |       | 35                                                                |       | 1.01 | % | 7,714 |   | 58 |   | 1.01 | % |
| Time deposits  >$100M                                    |       | 43,183                                                            |       | 1,670                                                             |       | 5.16 | % | 31,378 |   | 1,040 |   | 4.42 | % |
| Time deposits  <$100M                                    |       | 48,843                                                            |       | 1,860                                                             |       | 5.08 | % | 32,621 |   | 966 |   | 3.95 | % |
| Other Borrowing                                             |       | 46,401                                                            |       | 2,032                                                             |       | 5.84 | % | 36,518 |   | 1,588 |   | 5.80 | % |
|                                                        |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities                         |       | 159,420                                                           |       | 5,635                                                             |       | 4.71 | % | 125,119 |   | 3,706 |   | 3.95 | % |
|                                                        |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Non-interest bearing  liabilities:                          |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,777                                                            |       |                                                              |       |   |   | 30,122 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,500                                                             |       |                                                              |       |   |   | 909 |   |   |   |   |   |
| Other  liabilities                                          |       | 2,597                                                             |       |                                                              |       |   |   | 1,655 |   |   |   |   |   |
| Total  Liabilities                                          |       | 189,294                                                           |       |                                                              |       |   |   | 157,805 |   |   |   |   |   |
| Total  shareholders’ equity                            |       | 13,441                                                            |       |                                                              |       |   |   | 10,656 |   |   |   |   |   |
| Total average  liabilities and Shareholders’ equity    |       | $                                                                 | 202,735    |                                                              |       |   |   |   | $ | 168,461 |   |   |   |   |   |
| Net interest  income                                        |       |                                                              |       | $                                                                 | 6,686      |   |   |   |   |   | $ | 6,262 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                              |       |                                                              |       | 8.80 | % |   |   |   |   | 8.56 | % |
| Interest expense  as a percentage of average earning assets |       |                                                              |       |                                                              |       | 4.02 | % |   |   |   |   | 3.18 | % |
| Net yield on  interest earning assets                       |       |                                                              |       |                                                              |       | 4.78 | % |   |   |   |   | 5.38 | % |
| Net interest  spread                                        |       |                                                              |       |                                                              |       | 4.09 | % |   |   |   |   | 4.61 | % |

 

18

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**Rate and Volume Analysis:**

 

Thefollowing tables show the increase or decrease in interest income, interestexpense and net interest income, resulting from changes in rates and volumes,for each of the three months ended and the nine months ended September 30, 2007compared with the same periods in 2006.

 
| ** **                                  | ** ** | **Increase (decrease) in the three months ended**            | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **September 30, 2007 compared with September 30, 2006** | ** ** |
| ** **                                  | ** ** | **Volume**                                                                                 | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:    |       |                                                                                       |       |   |   |   |   |
| Loans                                       |       | $                                                                                          | 778        |   | $ | (265 | ) | 513 |   |
| Time deposits -  in other banks             |       | —                                                                                     |       | (1 | ) | (1 | ) |
| Invest  securities - taxable                |       | 213                                                                                        |       | 115 |   | 328 |   |
| Invest  securities - nontaxable             |       | 2                                                                                          |       | (3 | ) | (1 | ) |
| Federal funds  sold                         |       | (88                                                                                        | )          | 1 |   | (87 | ) |
|                                        |       | 905                                                                                        |       | (153 | ) | 752 |   |
|                                        |       |                                                                                       |       |   |   |   |   |
| Increase  (decrease) in interest expense:   |       |                                                                                       |       |   |   |   |   |
| Interest-bearing  demand                    |       | 1                                                                                          |       | — |   | 1 |   |
| Money market  savings                       |       | (3                                                                                         | )          | — |   | (3 | ) |
| Savings deposits                            |       | (7                                                                                         | )          | — |   | (7 | ) |
| Time deposits  >$100M                    |       | 207                                                                                        |       | 65 |   | 272 |   |
| Time deposits  <$100M                    |       | 217                                                                                        |       | 129 |   | 346 |   |
| Other Borrowing                             |       | 201                                                                                        |       | (8 | ) | 193 |   |
|                                        |       | 615                                                                                        |       | 186 |   | 801 |   |
| Increase  (decrease) in net interest income |       | $                                                                                          | 290        |   | $ | (339 | ) | $ | (49 | ) |
|                                             |            |                                                                                            |            |  |  |  |  |  |  |  |

 
| ** **                                  | ** ** | **Increase (decrease) in the nine months ended**             | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **September 30, 2007 compared with September 30, 2006** | ** ** |
| ** **                                  | ** ** | **Volume**                                                                                 | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:    |       |                                                                                       |       |   |   |   |   |
| Loans                                       |       | $                                                                                          | 1,815      |   | $ | 31 |   | $ | 1,846 |   |
| Time deposits -  in other banks             |       | 2                                                                                          |       | 3 |   | 5 |   |
| Invest  securities - taxable                |       | 410                                                                                        |       | 317 |   | 727 |   |
| Invest  securities - nontaxable             |       | 1                                                                                          |       | (12 | ) | (11 | ) |
| Federal funds  sold                         |       | (244                                                                                       | )          | 29 |   | (215 | ) |
|                                        |       |                                                                                       |       |   |   |   |   |
|                                        |       | 1,984                                                                                      |       | 368 |   | 2,352 |   |
|                                        |       |                                                                                       |       |   |   |   |   |
| Increase  (decrease) in interest expense:   |       |                                                                                       |       |   |   |   |   |
| Interest-bearing  demand                    |       | 4                                                                                          |       | (8 | ) | (4 | ) |
| Money market  savings                       |       | (12                                                                                        | )          | — |   | (12 | ) |
| Savings deposits                            |       | (24                                                                                        | )          | — |   | (24 | ) |
| Time deposits  >$100M                    |       | 391                                                                                        |       | 239 |   | 630 |   |
| Time deposits  <$100M                    |       | 480                                                                                        |       | 414 |   | 894 |   |
| Other Borrowing                             |       | 430                                                                                        |       | 14 |   | 444 |   |
|                                        |       | 1,269                                                                                      |       | 659 |   | 1,928 |   |
| Increase  (decrease) in net interest income |       | $                                                                                          | 715        |   | $ | (291 | ) | $ | 424 |   |

 

19

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**Provision and Allowance for LoanLosses**

 

The provision for loanlosses is an expense charged against operating income and added to theallowance for loan losses. The allowance for loan losses represents amounts setaside for the specific purpose of absorbing losses that may occur in the Bank’sloan 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. Managementand the Board of Directors review the results of the State Banking Departmentand FDIC examinations, independent accountants’ observations, and the Bank’sexternal credit reviews as additional indicators to determine if the amount inthe allowance for loan losses is adequate to protect against estimated futurelosses

 

Provisionsto the allowance for loan losses are made quarterly if needed, in anticipationof future potential loan losses. The quarterly provision is calculated on apredetermined formula to ensure adequacy as the portfolio grows. The formula iscomposed of various components. Allowance factors are utilized in estimatingthe adequacy of the allowance for loan losses. The allowance is determined byassigned specific allowances for all loans. As higher allowance levels becomenecessary as a result of this analysis, the allowance for loan losses will beincreased through the provision for loan losses.

 
| **Loan Category**                        | ** ** | **Reserve %** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
|                                          |       |               |       |
| Classified  Loans:                            |       |               |       |
| Loans classified  loss                        |       | 100.00             | %          |
| Loans classified  doubtful                    |       | 50.00              | %          |
| Loans classified  substandard                 |       | 5.00-20.00         | %          |
|                                          |       |               |       |
| Unclassified  Loans:                          |       |               |       |
| Real Estate -  Loan to value 80% or less      |       | 0.10               | %          |
| Real Estate -  Loan to value over 80%         |       | 0.70               | %          |
| Real Estate -  Construction                   |       | 0.25               | %          |
| Loans to  Individuals                         |       | 3.00               | %          |
| Commercial                                    |       | 2.00               | %          |
| SBA Loans –  Unguaranteed portion        |       | 2.00               | %          |
| Unfunded Loan  Commitments                    |       | .10                | %          |
| Concentration  Risk Factor – Real Estate |       | .10                | %          |
| Economic Risk  Factor                         |       | .20                | %          |
| 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 September 30, 2007 and 2006 theBank’s allowance stood at 1.00 percent and 1.01 percent, respectively.

 

Provisions made to theallowance during the three months ended September 30, 2007 and 2006 were$140,000 and $50,000, respectively. Loans charged off during the three monthsended September 30,2007 totaled $4,000, while no loans were charged off during the same

 

20

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period in 2006. Recoveriesduring the three months ended September 30, 2007 were $1,000 for both September 30, 2007 and2006, respectively.

 

Provisions made to theallowance during the nine months ended September 30, 2007 and 2006 were $415,000and $145,000, respectively. Loans charged off during the nine months ended September 30, 2007 totaled $250,000,while no loans were charged off during the same period in 2006. Recoveries were$1,000 for both September 30, 2007 and 2006, respectively.

 

The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.12 percent at September 30,2007 compared with 0.20 percent for the same period in 2006.

 

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

 

**Non-Interest Income**

 

Total non-interest incomefor the three months ended September30, 2007 was $904,000 compared with $1,283,000 for the same period in2006. The decrease of $379,000 resulted from significant changes in thefollowing; a mark to market loss of $444,000 in the trading assets comparedwith a $171,000 loss during the same period in 2006, decreases of $59,000 inmerchant credit card income, $122,000 in income from sales and servicing ofSmall Business Administration Loans and an increase of $82,000 in income fromstored value card programs.

 

Total non-interest incomefor the nine months ended September30, 2007 was $3,258,000 compared with $5,429,000 for the same period in2006. The decrease of $2,171,000 resulted from significant changes in thefollowing;  the first quarter 2006 gainof $1,313,000 on the sale of the Bank’s investment in Pacific Coast Bankers’Bancshares, mark to market loss of $579,000 in the trading assets compared witha $114,000 loss during the same period in 2006, decreases of $174,000 in creditcard program revenues, $104,000 in commercial banking origination fees,$154,000 in merchant credit card income, $204,000 in income from sales andservicing of Small Business Administration Loans and increases of $214,000 inincome from stored value card programs and $33,000 in service charges ondeposit accounts.

 

The sale of SmallBusiness Administration (SBA) guaranteed loans is a significant contributor tothe Bank’s income. SBA guaranteed loans yield up to 3 3/4% over the New Yorkprime rate, and the guaranteed portions can be sold at premiums, which varywith market conditions. SBA loans are guaranteed by the full faith of theUnited States Government from 75 to 85 percent of the principal amount.

 

There can be no assurancethat the gains on sale will continue at, or above, the levels realized in thepast three years. In addition, increasing competition among lenders forqualified SBA borrowers makes it difficult for the Bank to continually expandits program in this area, and may limit the level of premium that can be earnedwith regard thereto.

 

21

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**Non-Interest Expense**

 

Salary and benefitsexpense for the three months ended September 30, 2007 increased $79,000 compared with the sameperiod in 2006. The increase was due tothe addition of a Marketing Officer and merit pay increases partiallyoffset by decreased commissions on credit card programs.

 

Salary and benefits expensefor the nine months ended September30, 2007 increased $305,000 compared with the same period in 2006. Theincrease was due to the addition of aMarketing Officer, Credit Analyst, and merit pay increases partiallyoffset by decreased commissions on credit card programs.

 

Total occupancy andequipment expense for the three months ended September 30, 2007 was $195,000compared to $210,000 for the same period in 2006. The decrease was primarilydue to a decrease in premises rent of $26,000.

 

Total occupancy andequipment expense for the nine months ended September 30, 2007 was $622,000compared to $591,000 for the same period in 2006. The increase was primarilydue to increases in depreciation expense of $7,000, janitorial services of$5,000, storage rental of $11,000, maintenance and repairs of $13,000 and netmerchant terminal expense of $14,000 partially offset by decreases in premises rent of $16,000.

 

Professional fees for thethree months ended September30, 2007 were $36,000 compared to $35,000 for the same period in 2006.

 

Professional fees for thenine months ended September30, 2007 were $124,000 compared to $118,000 for the same period in 2006.

 

Data processing expensefor the three months ended September30, 2007 was $92,000 compared to $65,000 for the same period in 2006. Theincrease of $27,000 was due to the use of additional data processing systemmodules beginning in the fourth quarter of 2006, growth in the number ofaccounts on file and net of one time credit of $17,000 posted in September 2006for overcharges recorded in prior months. 

 

Data processing expensefor the nine months ended September30, 2007 was $270,000 compared to $231,000 for the same period in 2006. Theincrease of $39,000 was due to the use of additional data processing systemmodules beginning in the fourth quarter of 2006, growth in the number ofaccounts on file and net of a one time credit of $17,000 posted in September2006 for overcharges recorded in prior months.

 

Other general andadministrative expenses for the three months ended September 30, 2007 totaled $870,000compared with $860,000 for the same period in 2006, which is an increase of$10,000. Significant changes occurred in the following categories; no provision for possible losses on debtsecurities was made during 2007 while the provision was decreased $72,000during the same period in 2006; increases occurred in director fees of$21,000, stationary/supplies of $13,000 and business development of $11,000; while decreases occurred inmerchant credit card processing expense of $45,000, advertising expense of$12,000, donations of $17,000 and the provisionfor possible losses on unfunded loan commitments of $17,000.

 

22

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Other general andadministrative expenses for the nine months ended September 30, 2007 totaled $2,580,000compared with $2,579,000 for the same period in 2006. Significant changesoccurred in the following categories; no provisionfor possible losses on debt securities was made during 2007 while the provisionwas decreased $118,000 during the same period in 2006; the provision for possible losses on unfundedloan commitments was decreased $5,000 in 2007 while the provision was decreased$31,000 during the same period in 2006; increases occurred in businessdevelopment of $48,000, director fees of $56,000, stationary/supplies of$21,000 and entertainment and meals of $19,000; while decreases occurred inmerchant credit card processing expense of $112,000, other operating losses of$65,000, advertising expense of $41,000, donations of $34,000, collectionexpense of $14,000 and bank fees of $11,000.

 

The income tax provisionfor the three months ended September30, 2006 totaled $678,000 at an effective tax rate of 47.75%. Theeffective tax rates The income tax provision for the three months ended September 30, 2007 totaled $413,000 atan effective tax rate of 53.15%. were affected by mark to market losses ontrading assets of $444,000 and $171,000 for the three months ended September31, 2007 and 2006, respectively.

 

The income tax provisionfor the nine months ended September30, 2007 totaled $1,278,000 at an effective tax rate of 46.25%. Theincome tax provision for the nine months ended September 30, 2006 totaled $2,327,000 at an effective tax rateof 45.00%. The decrease of $1,049,000 was due to a $591,000 provision in 2006related to the gain on sale of an investment, decreased other income and theaffect of mark to market losses on trading assets of $579,000 and $114,000 forthe nine months ended September 30, 2007 and 2006, respectively.

 

The income tax rates used in determining the Bank’s income taxprovision or benefit, if any, were 34% for federal income tax purposes and7.20% for state income taxes, net of federal tax benefit. Generally, thecurrent tax expense is the result of applying the current tax rate to taxableincome. The deferred portion is intended to account for the fact that income onwhich taxes are paid differs from financial statement pre-tax income becausesome items of income and expense are recognized in different years for incometax purposes than in the financial statements. These recognition anomaliescause “temporary differences”; eventually, all taxes are paid.

 

**LOANS**

 

Loans represented 73.31%of average earning assets, and 67.96% of average total assets for the threemonths ended September 30,2007 compared with 74.10% and 68.12%, respectively during 2006. For the threemonths ended September 30, 2007,average loans increased 24.90% from $120,846,000 for the same period in 2006 to$150,935,000. Average real estate loans increased $17,208,000 (20.74%), averageconstruction loans increased $10,170,000 (86.17%), average commercial loansincreased $2,711,000 (10.69%), and average installment loans were unchanged.

 

Loans represented 75.15%of average earning assets, and 69.20% of average total assets for the ninemonths ended September 30,2007 compared with 74.51% and 68.67%, respectively during 2006. For the ninemonths ended September 30, 2007,average loans increased 21.29% from $115,677,000 for the same period in 2006 to$140,301,000. Average real estate loans increased $14,157,000 (18.13%), averageconstruction loans increased $9,028,000 (80.69%), average commercial loansincreased $1,653,000 (6.48%), and average installment loans decreased $214,000(24.33%).

 

23

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The Bank’s commercial andindustrial 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 of one year or longer. Short-termbusiness loans are generally intended to finance current transactions andtypically provide for monthly interest payments with principal being payable atmaturity or at 90-day intervals. Term loans (usually for a term of two to fiveyears) normally provide for monthly installments of principal and interest. TheBank from time to time utilizes accounts receivable and inventory as securityfor loans.

 

The Bank is a recognizedleader for Small Business Administration lending in Monterey County, and holdsSBA’s coveted Preferred Lender Status. Generally, SBA loans are guaranteed, bythe SBA, for 75 to 85 percent of their principal amount, which can be retainedin portfolio or sold to investors. Such loans are made at floating interestrates, generally with longer terms (up to 25 years) than are available on aconventional loan basis to small businesses.  The unguaranteed portion ofthe loans, although generally supported by collateral, is considered to be morerisky than conventional commercial loans because they may be based upon creditstandards the Bank would not otherwise apply, such as lower cash flow coverage,or longer repayment terms.

 

The Bank’s real estateloan portfolio consists both of real estate construction loans and real estatemortgage loans. The Bank has initiated a program to generate more commercialand industrial real estate loans, which generally yield higher returns thannormal commercial loans. The Bank has also developed a broker program forgenerating residential real estate loans. The Bank does not make real estatedevelopment loans.  Real estate construction loans are made for a muchshorter term, and often at higher interest rates, than conventionalsingle-family residential real estate loans. The cost of administering suchloans is often higher than for other real estate loans, as principal is drawnon periodically as construction progresses.

 

The Bank also makes realestate loans secured by a first deed of trust on single family residentialproperties and commercial and industrial real estate. California commercialbanks are permitted, depending on the type and maturity of the loan, to lend upto 90 percent of the fair market value of real property (or more if the loan isinsured either by private mortgage insurers or governmental agencies). Incertain instances, the appraised value may exceed the actual amount that couldbe realized on foreclosure, or declines in market value subsequent to makingthe loan can impair the Bank’s security.

 

Consumer loans are madefor the purpose of financing the purchase of various types of consumer goods,home improvement loans, auto loans and other personal loans. Consumerinstallment loans generally provide for monthly payments of principal andinterest, at a fixed rate. Most of the Bank’s consumer installment loans aregenerally secured by the personal property being purchased. The Bank generallymakes consumer loans to those customers with a prior banking relationship withthe Bank.

 

**Non-performing and Non-accrualLoans**

 

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 onnon-accrual, previously accrued and unpaid interest is generally reversed outof income unless adequate collateral from which to collect the principal of,and interest on, the loan appears to be available.

 

24

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

 
| ** **                                                    | ** ** | **Nine months as of****September 30****,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**                           | ** ** |
|                                                          |       |                                                           |       |   |   |
| Accruing, past  due 90 days or more:                          |       |                                                           |       |   |   |
|                                                          |       |                                                           |       |   |   |
| Real estate                                                   |       | $                                                              | —     |   | $ | — |   |
| Commercial                                                    |       | —                                                         |       | — |   |
| Installment                                                   |       | —                                                         |       | — |   |
| Other                                                         |       | —                                                         |       | — |   |
| Total accruing                                                |       | —                                                         |       | — |   |
|                                                          |       |                                                           |       |   |   |
| Non-accrual  Loans:                                           |       |                                                           |       |   |   |
|                                                          |       |                                                           |       |   |   |
| Real estate                                                   |       | —                                                         |       | — |   |
| Commercial                                                    |       | 41                                                             |       | 95 |   |
| Installment                                                   |       | 155                                                            |       | 155 |   |
| Other                                                         |       | —                                                         |       | — |   |
| Total  non-accrual                                            |       | 196                                                            |       | 250 |   |
|                                                          |       |                                                           |       |   |   |
| Total nonperforming                                           |       | $                                                              | 196        |   | $ | 250 |   |
|                                                          |       |                                                           |       |   |   |
| Total loans end  of period                                    |       | 156,422                                                        |       | 121,600 |   |
|                                                          |       |                                                           |       |   |   |
| Ratio of  nonperforming loans to total loans at end of period |       | 0.13                                                           | %          | 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 Bank does not have any foreign loans or loansfor highly leveraged transactions.

 

**Subsequent Event**

 

The Bank transferred a$3.2 million loan participation purchased to non-accrual status on October 23,2007 when it was informed by the originating bank that it had placed the loanon non-accrual status. Management believes the acquisition and development loanto a regional home builder is well secured and the originating bank has ordereda new appraisal of the underlying collateral in order to validate thecollateral value. Pending the receipt of the new appraisal it is not considerednecessary to take any special reserve to the allowance for loan 

 

25

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losses. The transfer ofthe loan to non-accrual status resulted in a charge to interest income of$53,000 and will reduce future interest income approximately $21,000 per month.

 

26

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## **Summaryof Loan Loss Experience**

 
| ** **                                                                     | ** ** | ** **                           | ** ** | ** **            | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period**  | ** ** | **Year ended**   | ** ** |
| ** **                                                                     | ** ** | **Ended September 30,**    | ** ** | **December 31,** | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006**              | ** ** | **2006**                | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Average loans  outstanding                                                     |       | $                                    | 140,301    |                  | $          | 115,677                 |       | $ | 118,699 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance,  beginning of period                                                |       | $                                    | 1,409      |                  | $          | 1,101                   |       | $ | 1,101 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Loans charged  off during period:                                              |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | 249                                  |       | —                |       | —                  |       |
| Installment                                                                    |       | 1                                    |       | —                |       | 109                     |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | —                  |       |
| Total charge  offs                                                             |       | 250                                  |       | —                |       | 109                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Recoveries  during period:                                                     |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | 1                                    |       | 1                     |       | —                  |       |
| Installment                                                                    |       | —                               |       | —                |       | 7                       |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | —                  |       |
| Total recoveries                                                               |       | 1                                    |       | 1                     |       | 7                       |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Net loans  charged off during the period                                       |       | 249                                  |       | (1                    | )          | 102                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | 415                                  |       | 145                   |       | 410                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance, end  of period                                                      |       | $                                    | 1,575      |                  | $          | 1,247                   |       | $ | 1,409 |   |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.18                                 | %          | 0.00                  | %          | 0.09                    | %          |
| Ratio of  allowance to total loans at end of period                            |       | 1.00                                 | %          | 1.01                  | %          | 1.07                    | %          |

 

**Deposits**

 

Average deposits for thethree months ended September30, 2007 were $150,021,000 an increase of 20.90% compared with the sameperiod in 2006. Average certificates of deposit represented 68.97% of averagedeposits for the three months ended September30, 2007 compared with 53.20% for the same period in 2006. Averageinterest bearing checking, money market and savings accounts as a group were13.88% of average deposits for the three months ended September 30, 2007 compared with 19.02% for the same period in2006. Average 

 

27

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demand depositsrepresented 17.15% of average deposits for the three months ended September 30, 2007 compared with27.78% for the same period in 2006.

 

Average deposits for thenine months ended September30, 2007 were $138,794,000 an increase of 16.91% compared with the sameperiod in 2006. Average certificates of deposit represented 66.30% of averagedeposits for the nine months ended September30, 2007 compared with 53.91% for the same period in 2006. Averageinterest bearing checking, money market and savings accounts as a group were15.12% of average deposits for the nine months ended September 30, 2007 compared with 20.72% for the same period in2006. Average demand deposits represented 18.57% of average deposits for thenine months ended September 30,2007 compared with 25.37% for the same period in 2006.

 

Thefollowing table sets forth the scheduled maturities of the Company’s timedeposits in denominations of $100,000 or greater at September 30, 2007:

 

Maturities of Time Deposits of $ 100,000 or More

(Dollars in Thousands)

 
| Three months or  less                  |   | $      | 15,919 |   |
|----------------------------------------|--------|--------|--------|--------|
| Over three  months through six months  |   | 7,387  |   |
| Over six months  through twelve months |   | 16,873 |   |
| Over twelve  months                    |   | 11,694 |   |
| Total                                  |   | $      | 51,873 |   |

** **

**Borrowing**

** **

**The Bank has lines of credit from the Federal Home LoanBank (FHLB) of San Francisco, Bank of the West, Pacific Coast Bankers’ Bank andThe Independent Bank with remaining available borrowing capacity on**September 30, 2007 of $4,143,000 (based on pledged collateral),$4,500,000, $6,000,000 and $5,000,000, respectively. The Federal Home Loan Bankline of credit has a maximum borrowing capacity of twenty five percent (25%) ofthe Bank’s total assets, adjusted quarterly. The Federal Home Loan Bank line ofcredit is secured by a portion of the Bank’s real estate secured loans andsecurities at September 30, 2007. The total principal balance of pledged loanswas $35,748,000 and securities of $30,806,000. The following table providesinformation on sixteen FHLB advances totaling $49,500,000 and outstanding at September 30, 2007.

 

28

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| ** ** | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 3,000,000  |       | 4.30       | %           | 6/17/05    |         | 6/17/10    |   |
| 2,500,000  |       | 4.88       | %          | 8/20/07     |       | 8/20/10      |       |
| 5,000,000  |       | 4.96       | %          | 11/14/05    |       | 11/15/10     |       |
| 2,250,000  |       | 4.75       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,750,000  |       | 4.72       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,500,000  |       | 5.52       | %          | 7/17/06     |       | 7/18/11      |       |
| 3,500,000  |       | 5.49       | %          | 7/17/06     |       | 7/18/11      |       |
| 1,000,000  |       | 5.22       | %          | 8/25/06     |       | 8/25/11      |       |
| 5,000,000  |       | 5.20       | %          | 7/30/07     |       | 7/30/12      |       |
| 5,000,000  |       | 5.00       | %          | 9/18/07     |       | 9/18/14      |       |
| 1,000,000  |       | 7.72       | %          | 6/1/00      |       | 6/3/30       |       |
| 4,000,000  |       | 5.96       | %          | 8/2/04      |       | 7/28/34      |       |
| 5,000,000  |       | 5.63       | %          | 12/24/04    |       | 12/22/34     |       |
| 2,000,000  |       | 5.13       | %          | 5/4/05      |       | 5/1/35       |       |
| 2,000,000  |       | 5.31       | %          | 11/17/06    |       | 11/17/36     |       |
| 5,000,000  |       | 5.88       | %          | 6/29/07     |       | 6/29/37      |       |
| $          | 49,500,000 |       |       |        |       |         |       |   |

** **

**The**Bank of the West, Pacific Coast Bankers’ Bank and TheIndependent Bank lines of credit are unsecured. The Bank did notutilize any overnight borrowings in 2007 or 2006.

** **

**The Bank has a letter of credit in the amount of$330,000, expiring April 17, 2011, issued by Federal Home Loan Bank of SanFrancisco, which is used to secure local agency deposits. The beneficiary ofthe letter of credit is the Administrator of Local Agency Security, Departmentof Financial Institutions.**

** **

**Capital Resources**

 

The Corporationmaintains capital to comply with legal requirements, to provide a margin ofsafety for its depositors and stockholders, and to provide for future growthand the ability to pay dividends. At September 30,2007, stockholders’ equity was $14,264,000 versus $12,402,000 at December 31,2006. The Corporation paid no cash dividends during the nine months ended September 30,2007 and $0.35 for the year ended December 31, 2006. The Bank paid theCorporation a $100,000 cash dividend during the nine months ended September 30,2007 and $625,000 during the year ended December 31, 2006.

 

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

 

Under current rules, allbanks are required to maintain Tier 1 capital of at least 4 percent and totalcapital of 8.0% of risk-adjusted assets. The Bank had Tier 1 risk-based capitalratios of 11.64% and 12.69% at September 30, 2007 and 2006, respectively. The Bank’s Tier 1capital exceeds the minimum regulatory requirement by $13,261,000. The Bank hadTotal risk-based capital ratios of 12.48% and 13.60% at September 30, 2007 and 2006, respectively. The Bank’s 

 

29

----

 

Total Risk-Based capitalexceeds the minimum regulatory requirement by $7,885,000. These ratios are wellabove the minimum regulatory requirements. The Corporation had Tier 1risk-based capital ratios of 9.70% and 10.44% at September 30, 2007 and 2006,respectively. The Corporation had Total risk-based capital ratios of 13.03% and14.91% at September 30, 2007 and2006, respectively.

 

The leverage capitalratio guidelines require a minimum leverage capital ratio of 3% of Tier 1capital to total assets less goodwill. The Corporation had leverage capitalratios of 7.54% and 7.80% at September 30, 2007 and 2006, respectively; while the Bank’sleverage capital ratios were 8.89% and 10.23% at September 30, 2007 and 2006. The Bank’s Tier 1 leverage capitalexceeds the minimum regulatory requirement by $13,567,000.

 

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

 

## **Liquidity**

 

Liquidity represents abank’s ability to provide sufficient cash flows or cash resources in a mannerthat enables it to meet obligations in a timely fashion and adequately providesfor anticipated future cash needs. For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers. In the ordinary course of the Bank’s business, funds are generatedfrom the repayment of loans, maturities within the investment securitiesportfolio and the acquisition of deposit balances and short-term borrowings. Inaddition, the Bank has a secured borrowing arrangement with the Federal HomeLoan Bank of San Francisco of approximately $53,643,000 of which $49,500,000 hadbeen advanced at September 30,2007****and unsecured federal fundslines of credit with Bank of the West,Pacific Coast Bankers’ Bank and The Independent Bank of $4,500,000, $6,000,000and $5,000,000, respectively; to meet temporary liquidity requirements.

 

As a matter of policy,the Bank seeks to maintain a level of liquid assets, including marketableinvestment securities, equal to a least 15 percent of total assets (“totalliquidity”). Additionally the Bank maintains secondary sources of liquidity(borrowing lines from other institutions) equal to at least an additional 10percent 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 totalliquidity at September30, 2007 and 2006 was 25.20% and 24.55%,respectively, while its average loan to deposit ratio for such years was104.15% and 95.01%, respectively.

 

Brokered deposits aredeposit instruments, such as certificates of deposit, deposit notes, bankinvestment contracts and certain municipal investment contracts that are issuedthrough brokers and dealers who then offer and/or sell these depositinstruments to one or more investors. Additionally, deposits on which afinancial institution pays an interest rate significantly higher thanprevailing rates are considered to be brokered deposits. Federal law andregulation restricts banks from soliciting or accepting brokered deposits,unless the bank is well capitalized under Federal guidelines. The Bank had nobrokered deposits at September 30, 2007 compared with approximately $5,143,000or 3.98% of total deposits at September 30, 2006. None of the Bank’s brokered deposits paid aninterest rate significantly higher than prevailing rates.

 

30

----

 

The Corporation’s sourcesof revenues and liquidity are the dividends, tax equalization payments ormanagement fees from the Bank, gains on securities held in a trading accountand the line of credit from the Pacific Coast Bankers’ Bank. The ability of theBank to pay such items to the Corporation is subject to limitations under stateand Federal law.

 

**InterestRate Risk**

 

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

 

The purpose forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk. The Bank expectsto generate earnings from increasing loan volume, appropriate loan pricing andexpense control and not from trying to accurately forecast interest rates. Anotherimportant function of asset/liability management is managing the risk/returnrelationships between interest rate risk, liquidity, market risk and capitaladequacy. The Bank gives priority to liquidity concerns followed by capitaladequacy, then interest rate risk and market risk in the investment portfolio. Thepolicy of the Bank will be to control the exposure of the Bank’s earnings tochanging interest rates by generally maintaining a position within a narrowrange around an “earnings neutral position.” An earnings neutral position isdefined as the mix of assets and liabilities that generate a net interestmargin that is not affected by interest rate changes. However, Management doesnot believe that the Bank can maintain a totally earnings neutral position. Further,the actual timing of repricing of assets and liabilities does not alwayscorrespond to the timing assumed by the Bank for analytical purposes. Therefore,changes in market rates of interest will generally impact on the Bank’s netinterest income and net interest margin for long or short periods of time.

 

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed funds rate.The model converts a fed funds rate change into rate changes for each majorclass of asset and liability, then simulates the bank’s net interest marginbased on the bank’s actual repricing over a one year period, assuming thatmaturities are reinvested in instruments identical to those maturing during theperiod. The following table shows the affect on net interest income of anupward or downward 100 and a 200 basis point rate shocks at September 30, 2007.

 
| **Rate Shock  Increase(Decrease) in Basis Points** | ** ** | **Percent  Increase(Decrease) in Net  Interest Income** | ** ** | **Asset/Liability Policy Limits  for Increase(Decrease) in Net  Interest Income** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| 100                                                                    |       | 5.5                                                                    | %          | 10.0                                                                                                            | %          |
| (100)                                                                  |       | (6.4                                                                   | )%         | (10.0                                                                                                           | )%         |
| 200                                                                    |       | 11.1                                                                   | %          | 20.0                                                                                                            | %          |
| (200)                                                                  |       | (12.8                                                                  | )%         | (20.0                                                                                                           | )%         |

 

31

----

 

**Investment Securities**

 

The Corporation maintains a trading account, at fair value, consisting of marketable securities. At September 30, 2007 and 2006 the account value was $1,331,000 and $1,263,000, respectively. The Corporation has investments of $20,000 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC. In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000, these are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

 

Thefollowing table sets forth the book and market value of the Bank’s investmentsecurities at September 30, 2007:

 
| ** **                                | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **SEPTEMBER 30, 2007**       | ** ** |
| ** **                                | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Securities  Available for Sale            |       |                                   |       |   |   |
| Government  National Mortgage Association |       | $                                      | 419        |   | $ | 412 |   |
| U.S. Government  Agency Securities        |       | 35,248                                 |       | 35,371 |   |
| Total                                     |       | $                                      | 35,667     |   | $ | 35,783 |   |
|                                      |       |                                   |       |   |   |
| Held to Maturity                          |       |                                   |       |   |   |
| State/Local  Agency Bonds                 |       | $                                      | 7,873      |   | $ | 8,052 |   |

 
| ** **                                  | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **SEPTEMBER 30, 2007**       | ** ** |
| ** **                                  | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Other  Investments, at cost                 |       |                                   |       |   |   |
| AT Services LLC                             |       | $                                      | 20         |   | $ | 20 |   |
| Metrocities  Mortgage, LLC                  |       | 10                                     |       | 10 |   |
| Federal Home  Loan Bank stock, restricted   |       | 2,456                                  |       | 2,456 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93                                     |       | 93 |   |
| Northern  California Bancorp, Inc. Trust II |       | 155                                    |       | 155 |   |
| Independent  Bankers Financial Corporation  |       | 51                                     |       | 51 |   |
| MasterCard, Inc.  Class B Stock             |       | 5                                      |       | 5 |   |
|                                        |       | $                                      | 2,790      |   | $ | 2,790 |   |

 

32

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The following tablesummarizes the maturity of the Bank’s investment securities at September 30, 2007:

 

INVESTMENT PORTFOLIO MATURITIES

(Dollars in thousands)

 
| ** **                              | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| Available for  Sale                     |       |                    |       |                |       |
| Due within one  year                    |       | $                       | 2,998      |                | $          | 2,991 |   |
| Due between one  and five years         |       | —                  |       | —              |       |
| Due between five  and ten years         |       | 10,000                  |       | 10,026              |       |
| Due between ten  and fifteen years      |       | 22,250                  |       | 22,354              |       |
| GNMA – Mortgage  Backed Securities |       | 419                     |       | 412                 |       |
|                                    |       | $                       | 35,667     |                | $          | 35,783 |   |
|                                    |       |                    |       |                |       |
| Held to Maturity              | ** ** | ** **              | ** ** | ** **          | ** ** |
| Due in over ten years                   |       | $                       | 7,873      |                | $          | 8,052 |   |

** **

**Item 3. Controls and Procedures**

** **

(a) The Bank’s Chief Executive Officer and itsChief Financial Officer, after evaluating the effectiveness of the Bank’sdisclosure controls and procedures as defined in Exchange Act Rules 13a-15(e)promulgated under the Exchange Act as of the end of the period covered by thisreport (the “Evaluation Date”) have concluded that as of the Evaluation Date,the Bank’s disclosure controls and procedures were adequate and effective toensure that material information relating to the Bank would be made known tothem by others within the Bank, particularly during the period in which thisreport was being prepared. Disclosure controls and procedures are designed toensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

(b) Changes in Internal Controls:  In the quarter ended September 30,2007, the Company did not make any significant changes in, nor take anycorrective actions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

33

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**PART II-OTHER INFORMATION**

 

**Item 1. LegalProceedings.**

 

There are no known pending legal proceedings to which the Corporation or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability will not have a material effect on the consolidated financial position of the Corporation and its subsidiary.

 

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

 

None

 

**Item 3. Defaultsof Senior Securities**

 

None

 

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

** **

None

 

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

####  

None

 

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

####  

A.        EXHIBITS

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

 

B.         Reports on Form 8-K

 

None

 

34

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Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

NORTHERN CALIFORNIABANCORP, INC.

 
| Date:  November 9, 2007 | By:                           |   /s/ Charles  T. Chrietzberg, Jr. |   |
|------------------------------|-------------------------------|----------------------------------------------|--------|
|                         | Charles T. Chrietzberg,  Jr.  |
|                         | Chairman of the Board  &  |
|                         | Chief Executive Officer       |
|                         |                          |
|                         |                          |
| Date:  November 9, 2007 | By:                           |   /s/ Bruce  N. Warner             |   |
|                         | Bruce N. Warner               |
|                         | Chief  Financial Officer and  |
|                         | Principal  Accounting Officer |

 

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