**U.S. SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM10-QSB**

**x****      Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of 1934**

**for thequarterly period ended March 31, 2007**

**o****       Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of 1934**

**(No feerequired) for the period from                  to                  **

**Commission File Number 0-27666**

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of Small Business 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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.

Yes      o         No       x

As of April 27, 2007, theCorporation had 1,792,238 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                                                             |   | 7-12 |
| Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 12-27 |
| Item 3                | Controls and  Procedures                                                                    |   | 28 |
|                  |                                                                                        |   |   |
| **PART II**           | Other Information                                                                           |   |   |
| Item 1                | Legal Proceedings                                                                           |   | 28 |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 28 |
| Item 3                | Defaults Upon  Senior Securities                                                            |   | 28 |
| Item 4                | Submission of  Matters to a Vote of Security Holders                                        |   | 28 |
| Item 5                | Other Information                                                                           |   | 28 |
| Item 6                | Exhibits and  Reports on Form 8-K                                                           |   | 29 |
| Signatures            |                                                                                        |   | 29 |
| Certifications        |                                                                                        |   | 30-33 |

 

2

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**PART I-FINANCIAL INFORMATION**

### Item 1.              FINANCIAL STATEMENTS

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS
| ** **                                                                                                               | ** ** | **MARCH 31** | ** **  | **  DECEMBER 31  ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|----------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2007**          | ** **  | **2006**                                     | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**   | ** **  | **(Audited)**                                | ** ** |
| ASSETS:                                                                                                                  |       |              |        |                                         |       |
| Cash and Due From Banks                                                                                                  |       | $                 | 5,053,500   |                                         | $          | 4,979,200 |   |
| Federal Funds Sold                                                                                                       |       | 11,495,000        |        | 17,455,000                                   |       |
| Total Cash and  Cash Equivalents                                                                                         |       | 16,548,500        |        | 22,434,200                                   |       |
| Trading Assets                                                                                                           |       | 1,925,000         |        | 1,762,300                                    |       |
| Time Deposits with  other Financial Institutions                                                                         |       | 1,000,000         |        | 1,000,000                                    |       |
| Investment Securities,  available for sale (Note 4)                                                                      |       | 21,256,900        |        | 15,285,900                                   |       |
| Investment Securities,  held to maturity cost (fair value approximates $7,289,700 in 2007; $7,281,000  in 2006) (Note 4) |       | 7,009,100         |        | 7,012,300                                    |       |
| Other Investments (Note  5)                                                                                              |       | 1,990,100         |        | 1,966,800                                    |       |
| Loans Held for Sale                                                                                                      |       | 2,035,400         |        | 1,182,100                                    |       |
| Loans, net of allowance  for loan losses of $1,409,200 in 2007; $1,408,800 in 2006 (Note 6)                              |       | 130,707,000       |        | 128,867,600                                  |       |
| Bank Premises and  Equipment, Net                                                                                        |       | 4,836,200         |        | 4,613,000                                    |       |
| Cash Surrender Value of  Life Insurance                                                                                  |       | 3,702,400         |        | 3,671,000                                    |       |
| Interest Receivable and  Other Assets                                                                                    |       | 2,660,500         |        | 2,774,700                                    |       |
| Total Assets                                                                                                             |       | $                 | 193,671,100 |                                         | $          | 190,569,900 |   |
|                                                                                                                     |       |              |        |                                         |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                              |       |              |        |                                         |       |
|                                                                                                                     |       |              |        |                                         |       |
| Non interest bearing  demand                                                                                             |       | $                 | 26,191,400  |                                         | $          | 30,079,100 |   |
| Interest-bearing demand                                                                                                  |       | 17,103,800        |        | 17,261,800                                   |       |
| Savings                                                                                                                  |       | 4,441,800         |        | 5,326,400                                    |       |
| Time less than $100,000                                                                                                  |       | 44,772,100        |        | 43,134,600                                   |       |
| Time in denominations  of $100,000 or more                                                                               |       | 40,778,100        |        | 35,825,800                                   |       |
| Total Deposits                                                                                                           |       | 133,287,200       |        | 131,627,700                                  |       |
|                                                                                                                     |       |              |        |                                         |       |
| Federal Home Loan Bank  Borrowed Funds                                                                                   |       | 34,750,000        |        | 34,750,000                                   |       |
| Junior Subordinated  Debt Secuirites                                                                                     |       | 8,248,000         |        | 8,248,000                                    |       |
| Interest Payable and  Other Liabilities                                                                                  |       | 3,883,700         |        | 3,542,300                                    |       |
| Total  Liabilities                                                                                                       |       | 180,168,900       |        | 178,168,000                                  |       |
|                                                                                                                     |       |              |        |                                         |       |
| Shareholders’ Equity:                                                                                               |       |              |        |                                         |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,792,239 in 2007 and 1,721,715  in 2006                  |       | 5,328,400         |        | 5,059,700                                    |       |
| Retained  Earnings                                                                                                       |       | 8,172,400         |        | 7,363,100                                    |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 7)                                                                  |       | 1,400             |        | (20,900                                      | )          |
| Total  Shareholders’ Equity                                                                                         |       | 13,502,200        |        | 12,401,900                                   |       |
| Total Liabilities &  Shareholders’ Equity                                                                       |       | $                 | 193,671,100 |                                         | $          | 190,569,900 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)
| ** **                                                              | ** ** | **THREE-MONTH PERIOD ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                              | ** ** | **MARCH 31**                       | ** ** |
| ** **                                                              | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                                        |       |                                    |       |   |   |
| Loans                                                                   |       | $                                       | 3,289,700  |   | $ | 2,532,200 |   |
| Time deposits with  other financial institutions                        |       | 13,700                                  |       | 10,700 |   |
| Investment securities                                                   |       | 400,300                                 |       | 225,300 |   |
| Federal funds sold                                                      |       | 123,400                                 |       | 172,300 |   |
| Total Interest  Income                                                  |       | 3,827,100                               |       | 2,940,500 |   |
|                                                                    |       |                                    |       |   |   |
| INTEREST EXPENSE:                                                       |       |                                    |       |   |   |
| Interest-bearing  transaction accounts                                  |       | 12,800                                  |       | 23,200 |   |
| Savings and time  deposit accounts                                      |       | 530,100                                 |       | 317,200 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 472,900                                 |       | 301,900 |   |
| Notes payable and other                                                 |       | 624,100                                 |       | 490,400 |   |
| Total Interest  Expense                                                 |       | 1,639,900                               |       | 1,132,700 |   |
|                                                                    |       |                                    |       |   |   |
| Net Interest  Income                                                    |       | 2,187,200                               |       | 1,807,800 |   |
| Provision for loan  losses                                              |       | —                                  |       | — |   |
| Net interest  income, after provision for loan losses                   |       | 2,187,200                               |       | 1,807,800 |   |
|                                                                    |       |                                    |       |   |   |
| NONINTEREST INCOME:                                                     |       |                                    |       |   |   |
| Service charges on  deposit accounts                                    |       | 165,600                                 |       | 138,800 |   |
| Income from sales and  servicing of Small Business Administration Loans |       | 182,200                                 |       | 288,900 |   |
| Sale of Pacific Coast  Bankers’ Bank Stock                         |       | —                                  |       | 1,313,400 |   |
| Other income                                                            |       | 977,800                                 |       | 983,900 |   |
| Total  noninterest income                                               |       | 1,325,600                               |       | 2,725,000 |   |
|                                                                    |       |                                    |       |   |   |
| NONINTEREST EXPENSE:                                                    |       |                                    |       |   |   |
| Salaries and Employee  Benefits                                         |       | 1,077,400                               |       | 945,400 |   |
| Occupancy and Equipment  Expense                                        |       | 205,500                                 |       | 180,800 |   |
| Professional Fees                                                       |       | 37,700                                  |       | 39,600 |   |
| Data Processing                                                         |       | 88,300                                  |       | 86,300 |   |
| Other general and  administrative                                       |       | 793,800                                 |       | 850,500 |   |
| Total  noninterest expenses                                             |       | 2,202,700                               |       | 2,102,600 |   |
|                                                                    |       |                                    |       |   |   |
| Income before tax  provision                                            |       | 1,310,100                               |       | 2,430,200 |   |
| Income tax provision                                                    |       | 500,800                                 |       | 1,001,300 |   |
| Net income                                                              |       | $                                       | 809,300    |   | $ | 1,428,900 |   |
|                                                                    |       |                                    |       |   |   |
| Earnings per common  share                                              |       |                                    |       |   |   |
| Basic                                                                   |       | $                                       | 0.468      |   | $ | 0.876 |   |
| Diluted                                                                 |       | $                                       | 0.435      |   | $ | 0.794 |   |

 

4

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**NORTHERNCALIFORNIA BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**THREEMONTHS ENDED MARCH 31, 2007**
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Compre-**  | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **hensive Income** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**              | ** ** | **Total**  | ** ** |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at December 31,  2005                                                    |       | 1,631,439          |       | $          | 4,771,800  |         | $          | 4,128,600               |       | $          | 30,500     |   | $ | 8,930,900 |   |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                    |       |       |       |
| Net income for  the year                                                         |       | —             |       | —     |       | 3,837,200    |       | —                  |       | 3,837,200  |       |
| Change in net  unrealized gain on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | (51,400                 | )          | (51,400    | )          |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                    |       | 3,785,800  |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| $0.35 per share  dividend                                                        |       | —             |       | —     |       | (602,700     | )          | —                  |       | (602,700   | )          |
| Stock based  compensation                                                        |       | —             |       | 17,800     |       | —       |       | —                  |       | 17,800     |       |
| Exercise of  stock options                                                       |       | 90,276             |       | 270,100    |       | —       |       | —                  |       | 270,100    |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at  December 31, 2006                                                    |       | 1,721,715          |       | 5,059,700  |       | 7,363,100    |       | (20,900                 | )          | 12,401,900 |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                    |       |       |       |
| Net income for  the year                                                         |       | —             |       | —     |       | 809,300      |       | —                  |       | 809,300    |       |
| Change in net  unrealized gain on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | 22,300                  |       | 22,300     |       |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                    |       | 831,600    |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Exercise of  stock options                                                       |       | 70,523             |       | 268,700    |       | —       |       | —                  |       | 268,700    |       |
|                                                                             |       |               |       |       |       |         |       |                    |       |       |       |
| Balance at March 31, 2007                                                        |       | 1,792,238          |       | $          | 5,328,400  |         | $          | 8,172,400               |       | $          | 1,400      |   | $ | 13,502,200 |   |

 

5

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDEDMARCH 31, 2007 AND 2006
| ** **                                                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $          | 809,300    |       | $          | 1,428,900 |   |
| Adjustments to  reconcile net income to net cash provided (used) by operating activities: |       |       |       |       |       |
| Depreciation and  amortization expense                                                    |       | 69,200     |       | 69,100     |       |
| Realized gain on  sales of available-for-sale securities, net                             |       | —     |       | (1,313,400 | )          |
| Amortization of  deferred loan costs                                                      |       | 71,000     |       | 81,000     |       |
| Amortization  (accretion) of discounts and premiums on investment securities              |       | (400       | )          | 700        |       |
| Gain on sale of  equipment                                                                |       | (700       | )          | —     |       |
| Stock based  compensation                                                                 |       | —     |       | 17,800     |       |
| Increase in  trading assets                                                               |       | (162,700   | )          | (405,700   | )          |
| Increase  (decrease) in interest receivable                                               |       | (59,400    | )          | 115,200    |       |
| Increase  (decrease) in other assets                                                      |       | 186,600    |       | (1,496,100 | )          |
| Increase in  deferred tax asset                                                           |       | (53,400    | )          | (82,100    | )          |
| Increase in  interest payable                                                             |       | 219,500    |       | 58,800     |       |
| Increase in  other liabilities                                                            |       | 121,900    |       | 1,359,300  |       |
| Net cash  provided (used) by operating activities                                         |       | 1,200,900  |       | (166,500   | )          |
|                                                                                      |       |       |       |       |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  maturity/sale of investment securities                                     |       | 1,080,900  |       | 1,843,000  |       |
| Purchase of  investments                                                                  |       | (7,041,600 | )          | (153,500   | )          |
| Net increase in  loans                                                                    |       | (9,634,300 | )          | (7,719,700 | )          |
| Loan purchases                                                                            |       | (1,750,000 | )          | (5,500,000 | )          |
| Loan sales                                                                                |       | 9,473,900  |       | 9,207,400  |       |
| (Increase)  decrease in loans held for sale                                               |       | (853,300   | )          | 2,470,200  |       |
| Proceeds from  sale of equipment                                                          |       | 700        |       | 17,800     |       |
| Additions to  bank premises and equipment                                                 |       | (291,100   | )          | (77,700    | )          |
| Net cash  provided (used) by investing activities                                         |       | (9,014,800 | )          | 87,500     |       |
|                                                                                      |       |       |       |       |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase in  deposits                                                                 |       | 1,659,500  |       | (4,325,500 | )          |
| Proceeds from  borrowings                                                                 |       | —     |       | 4,000,000  |       |
| Repayments of  borrowings                                                                 |       | —     |       | (2,000,000 | )          |
| Proceeds from  exercise of stock options                                                  |       | 268,700    |       | —     |       |
| Net cash  provided (used) by financing activities                                         |       | 1,928,200  |       | (2,325,500 | )          |
|                                                                                      |       |       |       |       |       |
| Net decrease in  cash and cash equivalents                                                |       | (5,885,700 | )          | (2,404,500 | )          |
|                                                                                      |       |       |       |       |       |
| **CASH AND CASH EQUIVALENTS,  BEGINNING**                                                 |       | 22,434,200 |       | 24,130,600 |       |
|                                                                                      |       |       |       |       |       |
| **CASH AND CASH EQUIVALENTS, ENDING**                                                     |       | $          | 16,548,500 |       | $          | 21,726,100 |   |

 

See Note 8 for supplemental disclosures

6

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**SUMMARY OF ACCOUNTING POLICIES**

(NOTE 1) ****BASISOF PRESENTATION****

The interim condensed financial statements of Northern CaliforniaBancorp, 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 threemonths ended March 31, 2007 are not necessarily indicative of the results to beexpected for the entire fiscal year ending December 31, 2007.  Theyear-end balance sheet data at December 31, 2006 was derived from theaudited financial statements.

This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Corporation’sForm 10-KSB for the fiscal year ended December 31, 2006.

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In March of 2006, the FASB published SFAS No. 156, *Accounting for Servicing of Financial Assets*, which amendsSFAS No. 140,*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,*with respect to the accounting for servicing offinancial assets. SFAS No. 156 requires that all separately recognizedservicing rights be initially measured at fair value, if practicable. For eachclass of separately recognized servicing assets and liabilities, SFAS No. 156permits an entity to choose either of the following subsequent measurementmethods: (1) the amortization of servicing assets or liabilities in proportionto and over the period of estimated net servicing income or net servicing lossor (2) the reporting of servicing assets or liabilities at fair value at eachreporting date and reporting changes in fair value in earnings in the period inwhich the changes occur. SFAS No. 156 also requires additional disclosures forall separately recognized servicing rights.Early adoption is permitted as of the beginning of an entity’s fiscal year,provided the entity has not yet issued financial statements, includinginterim financial statements, for any period of that fiscal year. SFAS No. 156is effective the earlier of the date an entity adopts the requirements of SFASNo. 156, or as of the beginning of its first fiscal year beginning after September 15, 2006. An entity should apply therequirements for recognition and initial measure­ment of servicing assets and servicing liabilities prospectively to alltransactions after the effective date of SFAS No. 156. The Bank iscurrently evaluating the impact of the adoption of this standard.

InSeptember 2006, the FASB issued Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes*, aninterpretation of FASB Statement No. 109, *Accounting for IncomeTaxes*,” effective for the Company beginning after December 15, 2006with earlier adoption encouraged. FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interestand penalties, accounting in interim periods, disclosure and transition. TheBank is currently assessing the impact of this guidance on its financialstatements.

In September 2006, the FASB issued Statement of Financial AccountingStandards No. 157 (“SFAS 157”), *“Fair Value Measurements”*,effective for the Company beginning on January 1, 2008,

7

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with earlier adoption permitted. This Statement defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.

This statement establishes a fair value hierarchy that distinguishesbetween valuations obtained from sources independent of the entity and thosefrom the entity’s own unobservable inputs that are not corroborated byobservable market data. SFAS 157 expands disclosures about the use of fairvalue to measure assets and liabilities in interim and annual periods subsequentto initial recognition.  The disclosuresfocus on the inputs used to measure fair value and for recurring fair valuemeasurements using significant unobservable inputs, the effect of themeasurements on earnings or changes in net assets for the period. Thisstatement encourages an entity to combine the fair value information disclosedunder this statement with the fair value information disclosed under otheraccounting pronouncements, including SFAS 107, “Disclosures about Fair Value ofFinancial Instruments”, where practicable. The Bank is currently assessing theimpact of this guidance on its financial statements.

The Corporation records compensation expense associated withstock-based awards in accordance with Statement of Financial Accounting Standards(SFAS) No. 123 (revised 2004), *Share-BasedPayment* (SFAS No. 123R) as interpreted by SEC Staff AccountingBulletin No. 107. SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in 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.  Stock-based compensation expense totaled $0and $17,800 for the three months ended March 31, 2007 and March 31, 2006,respectively. The Corporation selected to use the modified prospective method ofadopting SFAS 123R. Thus, stock option expense is recognized only for optionsthat vested after January 1, 2006. Future compensation expense may be greater if additional stock optionsare granted by the Corporation.

Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option-pricing model.  TheBank uses the following input variables as of the grant date, to arrive at thefair value for each grant:

| 1) | Grant date                            |
|----|---------------------------------------|
| 2) | Options granted                       |
| 3) | Exercise price                        |
| 4) | Stock price on date of grant          |
| 5) | Expected dividend rate                |
| 6) | Expected volatility                   |
| 7) | Risk free interest rate on grant date |
| 8) | Expected term                         |
| 9) | Expected forfeiture rate              |

 

8

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The following table illustrates the pro-forma effecton net income and earnings per share:
|                                                                        | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
|                                                                   |       |                             |       |                             |       |
| Reported net  earnings                                                 |       | $                                | 809,300    |                             | $          | 1,428,900 |   |
| Stock-based  employee compensation expense, net of related tax effects |       | —                           |       | (17,800                          | )          |
| Pro forma net  earnings                                                |       | $                                | 809,300    |                             | $          | 1,411,100 |   |
|                                                                   |       |                             |       |                             |       |
| Earnings per  share as reported:                                       |       |                             |       |                             |       |
| Basic                                                                  |       | $                                | 0.468      |                             | $          | 0.876 |   |
| Diluted                                                                |       | $                                | 0.435      |                             | $          | 0.794 |   |
| Pro forma  earnings per share:                                         |       |                             |       |                             |       |
| Basic                                                                  |       | $                                | 0.468      |                             | $          | 0.865 |   |
| Diluted                                                                |       | $                                | 0.435      |                             | $          | 0.785 |   |

 

(NOTE 3). 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:**

9

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| ** **                                                         | ** ** | **Earnings per share calculation**                      | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the three months ended March 31,** | ** ** |
| ** **                                                         | ** ** | **2007**                                                               | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                             | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                                | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                             | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings per  share                                          |       | $                                                                      | 809,300    |   | 1,728,657 |   | $ | 0.468 |   | $ | 1,428,900 |   | 1,631,439 |   | $ | 0.876 |   |
|                                                               |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive  shares assumed exercise of outstanding options |       | —                                                                 |       | 133,486 |   | (0.033 | ) | — |   | 167,208 |   | (0.081 | ) |
|                                                               |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per share                                         |       | $                                                                      | 809,300    |   | 1,862,143 |   | $ | 0.435 |   | $ | 1,428,900 |   | 1,798,647 |   | $ | 0.794 |   |

 

(NOTE 4) INVESTMENTSECURITIES:
|                                             | ** ** | **MARCH 31** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                                        |       |              |       |                 |       |
| Available for  sale:                        |       |              |       |                 |       |
| Government  National Mortgage Association   |       | $                 | 546,800    |                 | $          | 625,600 |   |
| U.S. government  Agencies                   |       | 20,709,200        |       | 14,660,300           |       |
|                                        |       | $                 | 21,256,000 |                 | $          | 15,285,900 |   |
|                                        |       |              |       |                 |       |
| Held to  maturity:                          |       |              |       |                 |       |
| State/Local  Agency                         |       | $                 | 7,009,100  |                 | $          | 7,012,300 |   |
|                                        |       |              |       |                 |       |
|  (NOTE 5) OTHER INVESTMENTS            |       |              |       |                 |       |
| AT Services LLC                             |       | $                 | 20,100     |                 | $          | 20,100 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,656,600         |       | 1,633,300            |       |
| Independent  Bankers Financial Corporation  |       | 50,000            |       | 50,000               |       |
| MasterCard Inc  Class “B” Stock   |       | 5,400             |       | 5,400                |       |
| Metrocities  Mortgage, LLC                  |       | 10,000            |       | 10,000               |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000            |       | 93,000               |       |
| Northern  California Bancorp, Inc. Trust II |       | 155,000           |       | 155,000              |       |
|                                        |       | $                 | 1,990,100  |                 | $          | 1,966,800 |   |

 

10

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(NOTE 6) LOANS ANDALLOWANCE FOR POSSIBLE LOAN LOSSES:
|                                       | ** ** | **MARCH 31** | ** **  | **DECEMBER 31,** | ** ** |
|---------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                            | ** ** | **2007**          | ** **  | **2006**              | ** ** |
|                                  |       |              |        |                  |       |
| Commercial and Industrial             |       | $                 | 23,817,900  |                  | $          | 26,361,000 |   |
| Construction                          |       | 19,096,900        |        | 17,325,900            |       |
| Real Estate - mortgage                |       | 88,895,100        |        | 86,207,200            |       |
| Installment                           |       | 605,300           |        | 693,900               |       |
| Government guaranteed loans purchased |       | 37,300            |        | 38,900                |       |
|                                  |       | 132,452,500       |        | 130,626,900           |       |
| Allowance for loan losses             |       | (1,409,200        | )           | (1,408,800            | )          |
| Deferred origination fees, net        |       | (336,300          | )           | (350,500              | )          |
| Net loans                             |       | $                 | 130,707,000 |                  | $          | 128,867,600 |   |
|                                  |       |              |        |                  |       |
| Balance at beginning of period        |       | $                 | 1,408,800   |                  | $          | 1,100,700 |   |
| Recoveries                            |       | 400               |        | 7,100                 |       |
| Provision for possible loan losses    |       | —            |        | 410,000               |       |
| Loans charged off                     |       | —            |        | (108,900              | )          |
| Balance at end  of period             |       | $                 | 1,409,200   |                  | $          | 1,408,900 |   |

 

(NOTE 7) COMPREHENSIVE INCOME (LOSS):

The components of other comprehensive income and related tax effects forthe three month periods ending March 31, 2007 and 2006 are as follows(unaudited):
|                                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding (losses) on available - for - sale securities and other assets, net |       | $        | 40,600     |     | $          | (65,900 | ) |
| Tax effect                                                                              |       | (18,300  | )          | 29,700   |       |
|                                                                                    |       |     |       |     |       |
| Net-of-tax amount                                                                       |       | $        | 22,300     |     | $          | (36,200 | ) |

 

The components of accumulated other comprehensive income and related taxeffects are as follows:
|                                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding losses on available — for - sale securities |       | $        | (30,700    | )        | $          | (153,000 | ) |
| Unrealized  holding gains on available for sale strip receivable     |       | 33,300   |       | 142,600  |       |
| Tax effect                                                           |       | (1,200   | )          | 4,700    |       |
|                                                                 |       |     |       |     |       |
| Net-of-tax amount                                                    |       | $        | 1,400      |     | $          | (5,700 | ) |

 

11

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(NOTE 8) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|                                          | ** ** | **March 31** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2007**          | ** ** | **2006** | ** ** |
|  Payments during the period ending: |       |              |       |   |   |
| Interest                                 |       | $                 | 1,295,000  |   | $ | 1,073,900 |   |
| Income Taxes                             |       | $                 | 279,200    |   | $ | 994,000 |   |

 

**ITEM 2:   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**StatementsRegarding Forward-Looking Information**

**Except for historicalinformation contained herein, the matters discussed or incorporated byreference in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), thatinvolve substantial risks and uncertainties.  When used in this report, orin the documents incorporated by reference herein, the words “anticipate,” “believe,”“estimate,” “may,” “intend,” “expect,” and similar expressions identify certainof such forward-looking statements.  Actual results of Monterey CountyBank could differ materially from such forward-looking statements containedherein.  Factors that could cause future results to vary from currentexpectations include, but are not limited to, the following: changes ineconomic conditions (both generally and more specifically in the markets inwhich the Bank operates); changes in interest rates, deposit flows, loandemand, real estate values and competition; changes in accounting principles,policies or guidelines and in government legislation and regulation (whichchange from time to time and over which the Bank has no control); other factorsaffecting the Bank’s operations, markets, products and services; and otherrisks detailed in this Form 10-QSB and in the Bank’s other reports filed withthe Federal Deposit Insurance Corporation and pursuant to the rules andregulations of the Securities and Exchange Commission.  Readers arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date hereof.  TheCorporation undertakes no obligation to publicly revise these forward-lookingstatements to reflect events or circumstances that arise after the datethereof.**

**OVERVIEW**

Thefollowing discussion reviews and analyzes the operating results and financialcondition of the Corporation, focusing on the Bank.  It should be read in conjunction with thefinancial statements and the other financial data presented elsewhere herein.

For the three monthsended March 31, 2007 net income was $809,300, compared to $1,428,900 for thesame period in 2006.  For the threemonths ended March 31, 2007 net interest income after provision for loan lossesincreased $379,400, total nonitnerest income decreased $1,399,400, whilenoninterest expense increased $100,100 and income tax provision decreased$500,500.  The decrease in other incomewas attributable primarily to the recording of a $1,313,400 gain on the sale ofan investment during the first quarter of 2006. Without the gain

12

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on sale ofinvestment in 2006 net income would have been $809,300 in 2007 and $706,900 anincrease of 14.5%.

The followingtable sets forth certain selected financial ratios of the Corporation at andfor the three months ended, March 31, 2007 and 2006.
|                                                    | ** ** | **The three months**                                                 | ** ** | **The three months**          | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Ended March 31, 2007**                                        | ** ** | **Ended March 31, 2006** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of  Operating Results:                     |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Total interest  income                             |       | $                                                                              | 3,827      |                                    | $          | 2,941 |   |
| Total interest  expense                            |       | 1,640                                                                          |       | 1,133                                   |       |
| Net interest  income                               |       | 2,187                                                                          |       | 1,808                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Provision for possible loan  losses                |       | 0                                                                              |       | 0                                       |       |
| Net interest  income after provision for loan loss |       | 2,187                                                                          |       | 1,808                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Total other  income                                |       | 1,326                                                                          |       | 2,725                                   |       |
| Total other  expense                               |       | 2,203                                                                          |       | 2,103                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Income before  taxes                               |       | 1,310                                                                          |       | 2,430                                   |       |
| Provision for  income tax                          |       | 501                                                                            |       | 1,001                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Net income                                         |       | $                                                                              | 809        |                                    | $          | 1,429 |   |
|                                               |       |                                                                           |       |                                    |       |
| Per Common Share  Data:                            |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Net income -  Primary (1)                          |       | $                                                                              | 0.468      |                                    | $          | 0.876 |   |
| Net income -  Diluted (2)                          |       | 0.435                                                                          |       | 0.742                                   |       |
| Book value, end  of period (3)                     |       | 7.53                                                                           |       | 6.43                                    |       |
| Average shares  outstanding (4)                    |       | 1,728,657                                                                      |       | 1,631,439                               |       |
|                                               |       |                                                                           |       |                                    |       |
| Balance Sheet  Data:                               |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Total loans, net  of                               |       |                                                                           |       |                                    |       |
| unearned income  (5)                               |       | $                                                                              | 132,742    |                                    | $          | 108,761 |   |
| Total assets                                       |       | 193,671                                                                        |       | 163,148                                 |       |
| Total deposits                                     |       | 133,287                                                                        |       | 113,795                                 |       |
| Stockholders’ equity  (6)                     |       | 13,502                                                                         |       | 10,341                                  |       |

 

13

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| ** **                                           | ** ** | **The three months**          | ** ** | **The three months**          | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **Ended March 31, 2007** | ** ** | **Ended March 31, 2006** | ** ** |
| Selected Financial  Ratios (4):                      |       |                                    |       |                                    |       |
|                                                 |       |                                    |       |                                    |       |
| Return on average  assets (5)                        |       | 1.73                                    | %          | 3.64                                    | %          |
| Return on average stockholders’  equity (5)     |       | 25.09                                   | %          | 59.10                                   | %          |
| Net interest spread                                  |       | 4.81                                    | %          | 4.36                                    | %          |
| Net yield on interest  earning assets                |       | 5.37                                    | %          | 4.96                                    | %          |
| Average shareholders’  equity to average assets |       | 6.88                                    | %          | 6.15                                    | %          |
| Risked-Based capital  ratios                         |       |                                    |       |                                    |       |
| Tier 1                                               |       | 10.76                                   | %          | 9.82                                    | %          |
| Total                                                |       | 14.71                                   | %          | 14.91                                   | %          |
| Total loans to total  deposits at end of period      |       | 99.59                                   | %          | 95.58                                   | %          |
| Allowance to total  loans at end of period           |       | 1.05                                    | %          | 1.00                                    | %          |
| Nonperforming loans to  total loans at end of period |       | 0.12                                    | %          | 0.02                                    | %          |
| Net charge-offs to average loans                     |       | 0.00                                    | %          | 0.00                                    | %          |

 

----

| (1)    |   | Basic earnings per share amounts were computed on  the basis of the weighted average number of shares of common stock  outstanding during the year. The weighted average number of common shares  used for this computation was 1,728,657 and 1,631,439 for March 31, 2007 and  2006, respectively.                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Diluted earnings per share amounts were computed on  the basis of the weighted average number of shares of common stock and common  stock equivalents outstanding during the year. Common stock equivalents  include director/employee stock options. The weighted average number of  shares used for this computation was 1,862,143 and 1,798,647 for March 31,  2007 and 2006, respectively. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    |   | Weighted average common shares.                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Includes loans being held for sale.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)    |   | Averages are of daily balances.                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| (6)    |   | March 31, 2007 calculated on an annualized basis.                                                                                                                                                                                                                                                                                                                                              |

 

**NETINTEREST INCOME**

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

Netinterest income for the three months ended March 31, 2007 was $2,187,200compared to $1,807,800 for the same period in 2006.  The increase of $379,400 resulted from totalinterest income increasing $886,600, while total interest expense increased$507,200.  

14

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Averageinterest earning assets increased $23,320,000 (15.77%), while the average rateearned increased 54 basis points. Average interest bearing liabilities increased $22,301,000 (18.06%),while the average rate paid increased 9 basis points.

Thefollowing tables show the components of the Bank’s net interest income, settingforth, for each of the three months ended March 31, 2007 and 2006, (i) averageassets, 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 arecomputed on a tax-equivalent basis, resulting in adjustments to interest earnedon municipal bonds of $36,500 and $36,700 for the three months ended March 31,2007 and 2006, respectively.  Non-accrualloans and overdrafts are included in average loan balances.  Average loans are presented net of unearnedincome.

15

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| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                             | ** ** | **2006**                                             | ** ** |
| ** **                                                 | ** ** | **Average**                                          | ** ** | ** **                                           | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                       | ** ** | **Balance**                                          | ** ** | **Interest**                                         | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                    |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Loans                                                      |       | $                                                    | 130,718    |                                                 | $          | 3,126 |   | 9.57 | % | $ | 109,881 |   | $ | 2,533 |   | 9.22 | % |
| Time deposits - in  other banks                            |       | 1,144                                                |       | 14                                                   |       | 5.01 | % | 1,000 |   | 11 |   | 4.40 | % |
| Invest securities -  taxable                               |       | 23,118                                               |       | 188                                                  |       | 3.25 | % | 14,161 |   | 134 |   | 3.79 | % |
| Invest securities -  nontaxable                            |       | 7,011                                                |       | 120                                                  |       | 6.82 | % | 7,023 |   | 119 |   | 6.75 | % |
| Federal funds sold                                         |       | 9,190                                                |       | 220                                                  |       | 9.56 | % | 15,915 |   | 172 |   | 4.33 | % |
| Total interest-earning  assets                             |       | 171,181                                              |       | $                                                    | 3,668      |   | 8.57 | % | 147,980 |   | $ | 2,969 |   | 8.03 | % |
|                                                       |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Allowance for credit  losses                               |       | (1,409                                               | )          |                                                 |       |   |   | (1,102 | ) |   |   |   |   |
| Non-interest bearing  assets:                              |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                                    |       | 6,491                                                |       |                                                 |       |   |   | 4,559 |   |   |   |   |   |
| Premises and equipment                                     |       | 4,728                                                |       |                                                 |       |   |   | 4,368 |   |   |   |   |   |
| Accrued interest  receivable                               |       | 1,016                                                |       |                                                 |       |   |   | 706 |   |   |   |   |   |
| Other assets                                               |       | 5,559                                                |       |                                                 |       |   |   | 2,193 |   |   |   |   |   |
| Total average assets                                       |       | $                                                    | 187,567    |                                                 |       |   |   |   | $ | 158,703 |   |   |   |   |   |
|                                                       |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                             |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                                    |       | $                                                    | 14,434     |                                                 | $          | 9 |   | 0.25 | % | $ | 12,517 |   | $ | 15 |   | 0.47 | % |
| Money market savings                                       |       | 2,000                                                |       | 6                                                    |       | 1.16 | % | 4,451 |   | 9 |   | 0.77 | % |
| Savings deposits                                           |       | 4,724                                                |       | 18                                                   |       | 1.55 | % | 8,147 |   | 20 |   | 0.99 | % |
| Time deposits >$100M                                    |       | 37,724                                               |       | 400                                                  |       | 4.24 | % | 30,163 |   | 302 |   | 4.00 | % |
| Time deposits <$100M                                    |       | 43,927                                               |       | 351                                                  |       | 3.20 | % | 33,197 |   | 297 |   | 3.58 | % |
| Other borrowing                                            |       | 42,998                                               |       | 586                                                  |       | 5.46 | % | 35,031 |   | 490 |   | 5.60 | % |
| Total interest-bearing  liabilities                        |       | 145,807                                              |       | $                                                    | 1,371      |   | 3.76 | % | 123,506 |   | $ | 1,133 |   | 3.67 | % |
|                                                       |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Non-interest bearing  liabilities:                         |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                              |       | 25,273                                               |       |                                                 |       |   |   | 24,272 |   |   |   |   |   |
| Accrued interest  payable                                  |       | 1,375                                                |       |                                                 |       |   |   | 679 |   |   |   |   |   |
| Other liabilities                                          |       | 2,211                                                |       |                                                 |       |   |   | 1,315 |   |   |   |   |   |
| Total liabilities                                          |       | 174,666                                              |       |                                                 |       |   |   | 149,773 |   |   |   |   |   |
| Total shareholders  equity                                 |       | 12,901                                               |       |                                                 |       |   |   | 8,931 |   |   |   |   |   |
| Total average liabilities and shareholders equity          |       | $                                                    | 187,567    |                                                 |       |   |   |   | $ | 158,703 |   |   |   |   |   |
| Interest income as a percentage of average earning assets  |       |                                                 |       | 8.57                                                 | %          |   |   |   |   |   |   | 8.03 | % |
| Interest expense as a percentage of average earning assets |       |                                                 |       | 3.20                                                 | %          |   |   |   |   |   |   | 3.06 | % |
| Net yield on interest earning assets                       |       |                                                 |       | 5.37                                                 | %          |   |   |   |   |   |   | 4.96 | % |

 

16

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**Rate and Volume Analysis:**

The following tables show the increase ordecrease in interest income, interest expense and net interest income, resultingfrom changes in rates and volumes, for the three months ended March 31, 2007compared with the same period in 2006.
|                                           | ** ** | **Increase (decrease) in the three months ended**    | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **March 31, 2007 compared with March 31, 2006** | ** ** |
| ** **                                | ** ** | **Volume**                                                                         | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:  |       |                                                                               |       |   |   |   |   |
| Loans                                     |       | $                                                                                  | 480        |   | $ | 113 |   | $ | 593 |   |
| Time deposits -  in other banks           |       | 2                                                                                  |       | 2 |   | 3 |   |
| Investment  securities - taxable          |       | 85                                                                                 |       | (31 | ) | 55 |   |
| Investment  securities – nontaxable  |       | —                                                                             |       | 1 |   | 1 |   |
| Federal funds  sold                       |       | (73                                                                                | )          | 120 |   | 47 |   |
| Total  interest-earning assets            |       | 494                                                                                |       | 205 |   | 699 |   |
|                                      |       |                                                                               |       |   |   |   |   |
| Increase  (decrease) in interest expense: |       |                                                                               |       |   |   |   |   |
| Interest-bearing  demand                  |       | 2                                                                                  |       | (9 | ) | (6 | ) |
| Money market  savings                     |       | (5                                                                                 | )          | 2 |   | (3 | ) |
| Savings deposits                          |       | (8                                                                                 | )          | 7 |   | (2 | ) |
| Time deposits  >$100M                  |       | 76                                                                                 |       | 23 |   | 98 |   |
| Time deposits  <$100M                  |       | 96                                                                                 |       | (42 | ) | 54 |   |
| Other borrowing                           |       | 112                                                                                |       | (16 | ) | 96 |   |
| Total  interest-bearing liabilities       |       | 272                                                                                |       | (34 | ) | 238 |   |
| Increase in net  interest income          |       | $                                                                                  | 221        |   | $ | 239 |   | $ | 461 |   |

 

**Provisionand Allowance for Loan Losses**

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

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of the StateBanking Department and FDIC examinations, independent accountants’observations, and the Bank’s internal review as additional indicators todetermine if the amount in the allowance for loan losses is adequate to protectagainst estimated future losses.

Provisions to the allowancefor loan losses are made quarterly if needed, in anticipation of futurepotential loan losses.  The quarterlyprovision is calculated on a predetermined formula to ensure adequacy as the portfoliogrows.  The formula is composed ofvarious components.  Allowance factorsare utilized in estimating the adequacy of the allowance for loan losses.  The allowance is determined by assignedspecific allowances for all loans.  Ashigher allowance

17

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levels become necessary as a result of thisanalysis, the allowance for loan losses will be increased through the provisionfor 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 can be given that actual losseswill not exceed the amount provided for in the allowance, Management believesthat the allowance is adequate to provide for all estimated credit losses inlight of all known relevant factors. At March 31, 2007 and 2006 the Bank’sallowance stood at 1.05 percent and 1.00 percent of gross loans,respectively.  No provisions were made tothe allowance during the three months ended March 31, 2007 or 2006.  No loans were charged off during the threemonths ended March 31, 2007 and March 31, 2006. Recoveries for the same periods were $400 and $1,100, respectively.

TheBank’s non-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.12 percent at March 31, 2007 compared with 0.02percent for the same period in 2006.

Basedupon statistics released by Federal and state banking authorities regardingbanks of similar size or otherwise located in California, management believesthat the Bank ‘s ratios of delinquent and non-performing loans to total loansare far better than average.  Prudentcollection efforts, and tighter lending controls, are responsible for the Bank’sstrong performance on these measures of credit quality.  However, no assurance can be given that theBank’s loan portfolio will continue to measure well against its peers on theseratios and quality measures, or that losses will not otherwise occur in thefuture.

**Non-InterestIncome**

Total other income for the three months ended March31, 2007 was $1,325,600 compared with $2,725,000 for the same period in2006.  The decrease of $1,399,400resulted from the first quarter 2006 gain of $1,313,400 on the sale of aninvestment, a decrease of

18

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$106,700in income from sales and servicing of Small Business Administration Loans andan increase $26,800 in service charges on deposit accounts.

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

There can be noassurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA recently began requiringlenders to share a portion of premiums in excess of 10% earned on the sale ofthe guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannotpredict the significance of the impact these changes will have on SBA income.

**Non-InterestExpense**

Salary andbenefits expense for the three months ended March 31, 2007 increased $132,000compared with the same period in 2006. The increase was due to the addition of a Marketing Officer, Business Development Officer anda Credit Analyst, and merit pay increases.

Total occupancyand equipment expense for the three months ended March 31, 2007 was $205,500compared to $180,800 for the same period in 2006.  The increase was primarily due to increasesin premises rent expense less sublease income $9,100 and merchant terminalexpense net of terminal rent $13,100.

Professional feesfor the three months ended March 31, 2007 was $37,700 compared to $39,600 forthe same period in 2006.

Data processingexpense for the three months ended March 31, 2007 was $88,300 compared to$88,600 for the same period in 2006.

Other general and administrative expenses for thethree months ended March 31, 2007 totaled $793,800 compared with $850,500 forthe same period in 2006, a decrease of $56,700. Significant changes occurred in the following categories with increasesin director fees of $16,700 and insurance expense of $4,500; while decreasesoccurred in merchant credit card processing expense of $38,500, advertisingexpense of $59,200, donations of $6,500, entertainment and meals of $6,200,dues and memberships of $5,100 and collection expense of $4,100.

19

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The income tax provision for the three months ended March31, 2007 totaled $500,800 compared with $1,001,300 for the same period of2006.  The decrease of $500,500 was dueto a $591,000 provision in 2006 related to the gain on sale of an investment.  Without the gain on sale of investment in2006, income before tax provision would have been $1,116,800 compared to$1,310,100 in 2007.

**LOANS**

Loans represented 76.36% of average earning assets,and 69.69% of average total assets for the three months ended March 31, 2007compared with 74.25% and 69.24%, respectively during 2006. For the three monthsended March 31, 2007, average loans increased 18.96% from $109,881,000 for thesame period in 2006 to $130,718,000. Average real estate loans increased $12,238,000 (16.66%), averageconstruction loans increased $6,862,000 (60.85%), average commercial loansincreased $2,133,000 (8.82%), and average installment loans decreased $396,000(40.88%).

The Bank’scommercial and industrial loans are generally made for the purpose of providingworking capital, financing the purchase of equipment or inventory, and otherbusiness purposes. Such loans generally have maturities of one year orlonger.  Short-term business loans aregenerally intended to finance current transactions and typically provide formonthly interest payments with principal being payable at maturity or at 90-dayintervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

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

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

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

20

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Consumerloans are made for the purpose of financing the purchase of various types ofconsumer goods, home improvement loans, auto loans and other personalloans.  Consumer installment loansgenerally provide for monthly payments of principal and interest, at a fixedrate.  Most of the Bank’s consumerinstallment loans are generally secured by the personal property beingpurchased.  The Bank generally makesconsumer loans to those customers with a prior banking relationship with theBank.

**Non-performingand Non-accrual Loans**

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

The following table presents information with respectto loans which, as of the dates indicated, were past due 90 days or more orwere placed on non-accrual status (referred to collectively as “non-performingloans”):
|                                                               | ** ** | **Three months as of** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **March 31,**                    | ** ** |
| ** **                                                    | ** ** | **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                                                    |       | 155                                   |       | 18 |   |
| Installment                                                   |       | —                                |       | — |   |
| Other                                                         |       | —                                |       | — |   |
| Total non-accrual                                             |       | 155                                   |       | 18 |   |
|                                                          |       |                                  |       |   |   |
| Total nonperforming                                           |       | $                                     | 155        |   | $ | 18 |   |
|                                                          |       |                                  |       |   |   |
| Total loans end  of period                                    |       | 132,742                               |       | 108,761 |   |
|                                                          |       |                                  |       |   |   |
| Ratio of nonperforming  loans to total loans at end of period |       | 0.12                                  | %          | 0.02 | % |

 

21

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

## **Summary of Loan Loss Experience**

| ** **                                                                     | ** ** | ** **                           | ** ** | ** **            | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period**  | ** ** | **Year ended**   | ** ** |
| ** **                                                                     | ** ** | **Ended March 31,**        | ** ** | **December 31,** | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006**              | ** ** | **2006**                | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Average loans  outstanding                                                     |       | $                                    | 130,718    |                  | $          | 109,881                 |       | $ | 118,699 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance,  beginning of period                                                |       | 1,409                                |       | 1,101                 |       | 1,101                   |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Loans charged  off during period:                                              |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | —                               |       | —                |       | 109                     |       |
| Installment                                                                    |       | —                               |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | —                  |       |
| Total charge offs                                                              |       | —                               |       | —                |       | 109                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Recoveries  during period:                                                     |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | —                               |       | 1                     |       | 7                       |       |
| Installment                                                                    |       | —                               |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | 1                     |       | —                  |       |
| Total recoveries                                                               |       | —                               |       | 1                     |       | 7                       |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Net loans  charged off during the period                                       |       | —                               |       | (1                    | )          | 102                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | —                               |       | —                |       | 410                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance, end  of period                                                      |       | 1,409                                |       | 1,102                 |       | 1,409                   |       |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.00                                 | %          | 0.00                  | %          | 0.09                    | %          |
| Ratio of allowance to  total loans at end of period                            |       | 1.05                                 | %          | 1.00                  | %          | 1.07                    | %          |
|                                                                                |            |                                      |            |                       |            |                         |            |  |  |  |

 

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**Deposits**

Average deposits for the three months ended March 31,2007 were $128,082,000 an increase of 13.60% compared with the same period in2006.  Average certificates of deposit represented63.75% of average deposits for the three months ended March 31, 2007.  Average interest bearing checking, moneymarket and savings accounts as a group was 16.52% of average deposits for thethree months ended March 31, 2007. Average demand deposits represented 19.73% of average deposits for thethree months ended March 31, 2007.

Thefollowing table sets forth the scheduled maturities of the Company’s timedeposits in denominations of $100,000 or greater at March 31, 2007:

Maturities of Time Depositsof$100,000 or More

(Dollars in Thousands)
| Three months or less                   |   | $          | 13,046,800 |   |
|----------------------------------------|--------|------------|------------|--------|
| Over three  months through six months  |   | 10,425,000 |       |
| Over six months  through twelve months |   | 11,311,400 |       |
| Over twelve  months                    |   | 5,994,900  |       |
| Total                                  |   | $          | 40,778,100 |   |

 

**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 March 31,2007 of $4,698,200 (based on pledged collateral), $4,500,000, $6,000,000 and$5,000,000, respectively.  The FederalHome Loan Bank line of credit has a maximum borrowing capacity of twenty fivepercent (25%) of the Bank’s total assets, adjusted quarterly.  The Federal Home Loan Bank line of credit issecured by a portion of the Bank’s real estate secured loans and securities atMarch 31, 2007.  The total principalbalance of pledged loans was $27,708,400 and securities of $19,267,400.  The following table provides information onthirteen FHLB advances totaling $34,750,000 and outstanding at March 31, 2007.**
|            | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 2,750,000  |       | 3.44       | %           | 9/27/02    |         | 9/27/07    |   |
| 3,000,000  |       | 4.30       | %          | 6/17/05     |       | 6/17/10      |       |
| 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      |       |
| 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     |       |
| $          | 34,750,000 |       |       |        |       |         |       |   |

 

23

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**The**Bank of the West, Pacific Coast Bankers’ Bank and TheIndependent Bank lines of credit are unsecured.  The Bank did not utilize any overnightborrowings in 2007 or 2006.

**The Bank has a letter of creditin the amount of $330,000, expiring April 17, 2011, issued by Federal Home LoanBank of San Francisco, which is used to secure local agency deposits.  The beneficiary of the letter of credit isthe Administrator of Local Agency Security, Department of FinancialInstitutions.**

**Capital Resources**

TheCorporation maintains capital to comply with legal requirements, to provide amargin of safety for its depositors and stockholders, and to provide for futuregrowth and the ability to pay dividends. At March 31, 2007, stockholders’ equity was $13,502,200 versus$12,401,900 at December 31, 2006.  TheCorporation paid cash dividends of $0 for the three months ended March 31, 2007and $0.35 for the year ended December 31, 2006. The Bank paid a $100,000 cash dividend during the three months endedMarch 31, 2007 and $625,000 during the year ended December 31, 2006.

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

Undercurrent rules, all banks are required to maintain Tier 1 capital of at least 4percent and total capital of 8.0% of risk-adjusted assets. The Bank had Tier 1risk-based capital ratios of 12.65% and 12.18% at March 31, 2007 and 2006,respectively.  The Bank’s Tier 1 capitalexceeds the minimum regulatory requirement by $12,874,200.  The Bank had Total risk-based capital ratiosof 13.62% and 13.05% at March 31, 2007 and 2006, respectively.  The Bank’s Total Risk-Based capital exceedsthe minimum regulatory requirement by $8,360,800. These ratios are well abovethe minimum regulatory requirements.  TheCorporation had Tier 1 risk-based capital ratios of 10.76% and 10.35% at March31, 2007 and 2006, respectively.  TheCorporation had Total risk-based capital ratios of 14.71% and 15.72% at March31, 2007 and 2006, respectively.

Theleverage capital ratio guidelines require a minimum leverage capital ratio of3% of Tier 1 capital to total assets less goodwill.  The Company had leverage capital ratios of8.40% and 8.02% at March 31, 2007 and 2006, respectively; while the Bank’sleverage capital ratios were 10.16% and 10.25% at March 31, 2007 and 2006.  The Bank’s Tier 1 leverage capital exceedsthe minimum regulatory requirement by $14,363,200.

Underregulatory guidelines, the $8 million in Trust Preferred Securities outstandingwill qualify as Tier 1 capital up to 25% of Tier 1 capital.  Any additional Trust Preferred Securitieswill qualify as Tier 2 capital.

24

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## **Liquidity**

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future cash needs.  For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course of theBank’s business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings.  Inaddition, the Bank has a secured borrowing arrangement with the Federal HomeLoan Bank of San Francisco of approximately $46,174,500 of which $35,080,000 hadbeen advanced at March 31, 2007****andunsecured federal funds lines of credit with Bank of the West, Pacific Coast Bankers’ Bank and The Independent Bankof $4,500,000, $6,000,000 and $5,000,000, respectively; to meet temporaryliquidity requirements.

Asa matter of policy, the Bank seeks to maintain a level of liquid assets,including marketable investment securities, equal to a least 15 percent oftotal assets (“total liquidity”), while maintaining sources of secondaryliquidity (borrowing lines from other institutions) equal to at least an additional10 percent of assets.  Within theseratios, the Bank generally has excess funds available to sell as federal fundson a daily basis, and is able to fund its own liquidity needs without the needof short-term borrowing.  The Bank’stotal liquidity at March 31, 2007 and 2006 was 24.21% and 25.42%, respectively,while its average loan to deposit ratio for such years was 101.96% and 97.13%,respectively.

Brokereddeposits are deposit instruments, such as certificates of deposit, depositnotes, bank investment contracts and certain municipal investment contractsthat are issued through brokers and dealers who then offer and/or sell thesedeposit instruments to one or more investors. Additionally, deposits on which a financial institution pays an interestrate significantly higher than prevailing rates are considered to be brokereddeposits.  Federal law and regulationrestricts banks from soliciting or accepting brokered deposits, unless the bankis well capitalized under Federal guidelines. The Bank’s brokered deposits totaled approximately $3,664,900 or 2.74%of total deposits at March 31, 2007 and $10,974,800 or 9.63% of total depositsat March 31, 2006. None of the Bank’s brokered deposits paid an interest ratesignificantly higher than prevailing rates.

**Interest Rate Risk**

Management of interestrate sensitivity (asset/liability management) involves matching and repricingrates of interest-earning assets with interest-bearing liabilities in a mannerdesigned to optimize net interest income within the constraints imposed byregulatory authorities, liquidity determinations and capitalconsiderations.  The Bank institutedformal 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 expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liabilitymanagement is managing the risk/return relationships between interest raterisk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidity concerns

25

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followed bycapital adequacy, then interest rate risk and market risk in the investmentportfolio.  The policy of the Bank willbe to control the exposure of the Bank’s earnings to changing interest rates bygenerally maintaining a position within a narrow range around an “earningsneutral position.” An earnings neutral position is defined as the mix of assetsand liabilities that generate a net interest margin that is not affected byinterest rate changes.  However,Management does not believe that the Bank can maintain a totally earningsneutral position.  Further, the actualtiming of repricing of assets and liabilities does not always correspond to thetiming assumed by the Bank for analytical purposes.  Therefore, changes in market rates ofinterest will generally impact on the Bank’s net interest income and netinterest margin for long or short periods of time.

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  The following tableshows the affect on net interest income of a 100 and a 200 basis point rateshock at March 31, 2007.
| Rate Shock Increase(Decrease) in  Basis Points | ** ** | **Percent Increase(Decrease) in  Net Interest Income** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| 100                                                                |       | 5.0                                                                        | %          |
| (100                                                               | )          | (5.2                                                                       | )%         |
| 200                                                                |       | 10.0                                                                       | %          |
| (200                                                               | )          | (10.5                                                                      | )%         |

 

TheCorporation’s sources of revenues and liquidity are the dividends, taxequalization payments or management fees from the Bank, gains on securitiesheld in a trading account and the line of credit from the Pacific Coast Bankers’Bank.  The ability of the Bank to paysuch items to the Corporation is subject to limitations under state and Federallaw.

**InvestmentSecurities**

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At March 31, 2007 and 2006 the account value was $1,925,000 and $1,433,200, respectively.  The Corporation has investments of $20,100 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.

26

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The following table sets forth the book and marketvalue of the Bank’s investment securities at March 31, 2007:
|                                             | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **March 31, 2007**           | ** ** |
| ** **                                  | ** ** | **Book**                               | ** ** | **Market** | ** ** |
| ** **                                  | ** ** | **Value**                              | ** ** | **Value** | ** ** |
| Securities  Available for Sale              |       |                                   |       |   |   |
| Government  National Mortgage Association   |       | $                                      | 556,900    |   | $ | 546,800 |   |
| U.S. Government  Agency Securities          |       | 20,729,800                             |       | 20,710,100 |   |
| Total                                       |       | $                                      | 21,286,700 |   | $ | 21,256,900 |   |
|                                        |       |                                   |       |   |   |
| Held to Maturity                            |       |                                   |       |   |   |
| State/Local  Agency Bonds                   |       | $                                      | 7,009,100  |   | $ | 7,289,700 |   |
|                                        |       |                                   |       |   |   |
| Other  Investments, at cost                 |       |                                   |       |   |   |
| AT Services LLC                             |       | $                                      | 20,100     |   | $ | 20,100 |   |
| Metrocities  Mortgage, LLC                  |       | 10,000                                 |       | 10,000 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,656,600                              |       | 1,656,600 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000                                 |       | 93,000 |   |
| Northern California  Bancorp, Inc. Trust II |       | 155,000                                |       | 155,000 |   |
| Independent  Bankers Financial Corporation  |       | 50,000                                 |       | 50,000 |   |
| MasterCard, Inc.  Class B Stock             |       | 5,400                                  |       | 5,400 |   |
|                                        |       | $                                      | 1,990,100  |   | $ | 1,990,100 |   |

 

The followingtable summarizes the maturity of the Bank’s investment securities at March 31,2007:
|                                         | ** ** | **INVESTMENT PORTFOLIO MATURITIES** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)**          | ** ** |
| ** **                              | ** ** | **Amortized Cost**                       | ** ** | **Fair Value** | ** ** |
| Available for  Sale                     |       |                                          |       |   |   |
| Due within one  year                    |       | $                                             | 3,740,600  |   | $ | 3,710,000 |   |
| Due between one  and five years         |       | —                                        |       | — |   |
| Due between five  and ten years         |       | 16,989,200                                    |       | 17,000,100 |   |
| GNMA – Mortgage  Backed Securities |       | 556,900                                       |       | 546,800 |   |
|                                    |       | $                                             | 21,286,700 |   | $ | 21,256,900 |   |
|                                    |       |                                          |       |   |   |
| Held to Maturity                        |       |                                          |       |   |   |
| Due in over ten years                   |       | $                                             | 7,009,200  |   | $ | 7,289,700 |   |

 

27

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**Item3.  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.  Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  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 thequarter ended March 31, 2007, the Company did not make any significant changesin, nor take any corrective actions regarding, its internal controls or otherfactor that could significantly affect these controls.

**PARTII-OTHER INFORMATION**

**Item1.  Legal Proceedings.**

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.

**Item2.  Unregistered Sales of EquitySecurities and use of Proceeds**

None

**Item3.  Default of Senior Securities**

None

**Item4.  Submission of Matters to a vote ofSecurity Holders.**

None

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

None

28

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#### **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

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                     | NORTHERN CALIFORNIA BANCORP, INC. |
|---------------------|-----------------------------------|
|                |                              |
| Date: May 11, 2007  | By:                               |   /s/  Charles T. Chrietzberg, Jr. |   |
|                |                              | Charles T. Chrietzberg, Jr. |
|                |                              | Chairman of the Board & |
|                |                              | Chief Executive Officer |
|                |                              |   |
|                |                              |   |
| Date: May 11,  2007 | By:                               |   /s/ Bruce N. Warner |   |
|                |                              | Bruce N. Warner |
|                |                              | Chief Financial Officer and |
|                |                              | Principal Accounting Officer |

 

29

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