**U.S.SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**FORM10-QSB**
| **x**      | ** ** | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934 for the quarterly period ended June 30,  2006**                                                                                                                                                         |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                   |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of  the Securities Exchange Act of 1934 (No fee required) for the period  from                 to         ** |

 

**Commission File Number 0-27666**

**NORTHERN CALIFORNIA BANCORP, INC.**(Name of Small Business Issuer in its Charter)

**Incorporated in the State of CaliforniaIRS Employer Identification Number 77-0421107Address:  601 Munras Avenue, Monterey,CA  93940Telephone: (831) 649-4600**

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x      No o

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

As of July 28, 2006, theCorporation had 1,633,989 shares of common stock outstanding.

 

 

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TABLE OF CONTENTS
| **Facing Page**        |   | 1                                                                                           |   |
|------------------------|--------|---------------------------------------------------------------------------------------------|--------|
| **Table  of Contents** |   | 2                                                                                           |   |
| **PART  I**            |   | Financial  Information                                                                      |   | 3-7 |   |
| Item  1                |   | Financial  Statements                                                                       |   |   |   |
|                   |   | Consolidated  Balance Sheets                                                                |   | 3 |   |
|                   |   | Consolidated Statements of Operations                                                       |   | 4-5 |   |
|                   |   | Consolidated Statements of Changes in Shareholders’  Equity                            |   | 6 |   |
|                   |   | Consolidated Statements of Cash Flows                                                       |   | 7 |   |
|                   |   | Summary of Accounting Policies                                                              |   | 8-12 |   |
| Item 2                 |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 13-29 |   |
| Item 3                 |   | Controls and Procedures                                                                     |   | 29-30 |   |
|                   |   |                                                                                        |   |   |   |
| **PART  II**           |   | Other  Information                                                                          |   |   |   |
| Item  1                |   | Legal  Proceedings                                                                          |   | 30 |   |
| Item 2                 |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                |   | 30 |   |
| Item 3                 |   | Defaults Upon Senior Securities                                                             |   | 30 |   |
| Item 4                 |   | Submission of Matters to a Vote of Security Holders                                         |   | 30 |   |
| Item  5                |   | Other  Information                                                                          |   | 30 |   |
| Item 6                 |   | Exhibits and Reports on Form 8-K                                                            |   | 31 |   |
| Signatures             |   | 31                                                                                          |   |
| Certifications         |   | 32-35                                                                                       |   |

 

 

2

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**PARTI-FINANCIAL INFORMATION**

### Item 1.    FINANCIALSTATEMENTS

NORTHERNCALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS
| ** **                                                                                                                  | ** ** | **JUNE 30** | ** **  | **DECEMBER 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|----------------------|------------|
| ** **                                                                                                                  | ** ** | **2006**         | ** **  | **2005**             | ** ** |
| ** **                                                                                                                  | ** ** | **(Unaudited)**  | ** **  | **(Audited)**        | ** ** |
| ASSETS:                                                                                                                     |       |             |        |                 |       |
| Cash and Due  From Banks                                                                                                    |       | $                | 5,382,500   |                 | $          | 5,830,600 |   |
| Federal Funds  Sold                                                                                                         |       | 11,970,000       |        | 18,300,000           |       |
| Total Cash and Cash Equivalents                                                                                             |       | 17,352,500       |        | 24,130,600           |       |
| Trading Assets                                                                                                              |       | 1,404,400        |        | 1,027,500            |       |
| Time Deposits  with other Financial Institutions                                                                            |       | 1,000,000        |        | 1,000,000            |       |
| Investment  Securities, available for sale (Note 4)                                                                         |       | 13,918,200       |        | 11,065,300           |       |
| Investment  Securities, held to maturity at cost (fair value approximates $7,072,400 in  2006; $7,161,900 in 2005) (Note 4) |       | 7,018,600        |        | 7,025,000            |       |
| Other  Investments (Note 5)                                                                                                 |       | 1,869,300        |        | 2,020,500            |       |
| Loans Held for  Sale                                                                                                        |       | 2,844,800        |        | 5,315,000            |       |
| Loans, net of  allowance for loan losses of $1,196,800 in 2006; $1,100,700 in 2005 (Note 6)                            |       | 115,684,200      |        | 101,985,000          |       |
| Bank Premises  and Equipment, Net                                                                                           |       | 4,454,800        |        | 4,362,300            |       |
| Cash Surrender  Value of Life Insurance                                                                                     |       | 3,509,200        |        | 2,466,700            |       |
| Interest  Receivable and Other Assets                                                                                       |       | 2,390,200        |        | 2,247,200            |       |
| Total Assets                                                                                                                |       | $                | 171,446,200 |                 | $          | 162,645,100 |   |
|                                                                                                                        |       |             |        |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                                 |       |             |        |                 |       |
| Noninterest-bearing  demand                                                                                                 |       | $                | 34,758,600  |                 | $          | 30,814,900 |   |
| Interest-bearing  demand                                                                                                    |       | 15,955,300       |        | 17,824,500           |       |
| Savings                                                                                                                     |       | 7,841,300        |        | 7,659,300            |       |
| Time less than  $100,000                                                                                                    |       | 32,089,500       |        | 32,143,200           |       |
| Time in  denominations of $100,000 or more                                                                                  |       | 32,053,800       |        | 29,678,200           |       |
| Total Deposits                                                                                                              |       | 122,698,500      |        | 118,120,100          |       |
|                                                                                                                        |       |             |        |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                                      |       | 26,750,000       |        | 24,750,000           |       |
| Junior  Subordinated Debt Securities                                                                                        |       | 8,248,000        |        | 8,248,000            |       |
| Interest Payable  and Other Liabilities                                                                                     |       | 2,812,200        |        | 2,596,100            |       |
| Total Liabilities                                                                                                           |       | 160,508,700      |        | 153,714,200          |       |
|                                                                                                                        |       |             |        |                 |       |
| Shareholders’ Equity:                                                                                                  |       |             |        |                 |       |
| Common Stock -  No Par Value                                                                                                |       |             |        |                 |       |
| Authorized:  2,500,000                                                                                                      |       |             |        |                 |       |
| Outstanding: 1,633,989 in 2006 and 1,631,439 in 2005                                                                        |       | 4,786,300        |        | 4,771,800            |       |
| Retained  Earnings                                                                                                          |       | 6,231,400        |        | 4,128,600            |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 7)                                                                     |       | (80,200          | )           | 30,500               |       |
| Total Shareholders’ Equity                                                                                             |       | 10,937,500       |        | 8,930,900            |       |
| Total  Liabilities & Shareholders’ Equity                                                                          |       | $                | 171,446,200 |                 | $          | 162,645,100 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| ** **                                                              | ** ** | **THREE-MONTH PERIOD**  | ** ** | **SIX-MONTH PERIOD**    | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **ENDING JUNE 30** | ** ** | **ENDING JUNE 30** | ** ** |
| ** **                                                              | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| INTEREST INCOME:                                                        |       |                         |       |                         |       |   |   |   |   |
| Loans                                                                   |       | $                            | 2,866,000  |                         | $          | 2,543,400 |   | $ | 5,398,200 |   | $ | 4,647,900 |   |
| Time deposits  with other financial institutions                        |       | 11,200                       |       | 7,100                        |       | 21,900 |   | 11,000 |   |
| Investment  securities                                                  |       | 230,100                      |       | 197,000                      |       | 455,400 |   | 347,100 |   |
| Federal funds  sold                                                     |       | 189,600                      |       | 54,700                       |       | 361,900 |   | 124,100 |   |
| Total Interest Income                                                   |       | 3,296,900                    |       | 2,802,200                    |       | 6,237,400 |   | 5,130,100 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| INTEREST EXPENSE:                                                       |       |                         |       |                         |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 16,100                       |       | 16,900                       |       | 39,300 |   | 32,800 |   |
| Savings and time  deposit accounts                                      |       | 337,300                      |       | 258,300                      |       | 654,500 |   | 491,400 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 338,500                      |       | 239,400                      |       | 640,400 |   | 460,800 |   |
| Notes payable  and other                                                |       | 511,000                      |       | 375,700                      |       | 1,001,400 |   | 716,400 |   |
| Total Interest Expense                                                  |       | 1,202,900                    |       | 890,300                      |       | 2,335,600 |   | 1,701,400 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Net Interest Income                                                     |       | 2,094,000                    |       | 1,911,900                    |       | 3,901,800 |   | 3,428,700 |   |
| Provision for  loan losses                                              |       | 95,000                       |       | 75,000                       |       | 95,000 |   | 125,000 |   |
| Net interest income, after provision for loan losses                    |       | 1,999,000                    |       | 1,836,900                    |       | 3,806,800 |   | 3,303,700 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| NONINTEREST INCOME:                                                     |       |                         |       |                         |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 143,000                      |       | 176,700                      |       | 281,800 |   | 317,100 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 147,500                      |       | 234,500                      |       | 436,400 |   | 470,200 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                       |       | —                       |       | 1,313,400 |   | — |   |
| Other non  interest income                                              |       | 1,130,100                    |       | 544,100                      |       | 2,114,000 |   | 946,600 |   |
| Total non interest income                                               |       | 1,420,600                    |       | 955,300                      |       | 4,145,600 |   | 1,732,900 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| NONINTEREST EXPENSE:                                                    |       |                         |       |                         |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 898,300                      |       | 796,700                      |       | 1,843,700 |   | 1,655,000 |   |
| Stock Based  Compensation Expense                                       |       | —                       |       | —                       |       | 7,500 |   | — |   |
| Occupancy and  Equipment Expense                                        |       | 199,900                      |       | 155,500                      |       | 380,700 |   | 287,400 |   |
| Professional  Fees                                                      |       | 43,300                       |       | 35,900                       |       | 82,900 |   | 73,400 |   |
| Data Processing                                                         |       | 79,300                       |       | 83,900                       |       | 165,600 |   | 174,500 |   |
| Other general  and administrative                                       |       | 869,200                      |       | 942,600                      |       | 1,719,700 |   | 1,690,300 |   |
| Total noninterest expense                                               |       | 2,090,000                    |       | 2,014,600                    |       | 4,200,100 |   | 3,880,600 |   |
|                                                                    |       |                         |       |                         |       |   |   |   |   |
| Income before  tax provision                                            |       | 1,329,600                    |       | 777,600                      |       | 3,752,300 |   | 1,156,000 |   |
| Income tax  provision                                                   |       | 648,200                      |       | 351,100                      |       | 1,649,500 |   | 594,400 |   |
| Net income                                                              |       | $                            | 681,400    |                         | $          | 426,500 |   | $ | 2,102,800 |   | $ | 561,600 |   |

 

 

4

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NORTHERNCALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                | ** ** | **THREE-MONTH PERIOD  ENDING  JUNE 30** | ** ** | **SIX-MONTH PERIOD  ENDING  JUNE 30** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                          | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Earnings per common share |       |                                              |       |                                            |       |   |   |   |   |
| Basic                     |       | $                                                 | 0.418      |                                            | $          | 0.265 |   | $ | 1.289 |   | $ | 0.349 |   |
| Diluted                   |       | $                                                 | 0.354      |                                            | $          | 0.222 |   | $ | 1.093 |   | $ | 0.292 |   |

 

 

5

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**NORTHERN CALIFORNIA BANCORP, INC. ANDSUBSIDIARY****CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

 
| ** **                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-----------------|------------|------------|------------|
| ** **                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Compre-**     | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **hensive**     | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **Income**      | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**      | ** ** | **Total**  | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **      | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004         |       | 1,608,019          |       | $          | 4,719,900  |         | $          | 2,525,600       |       | $          | 75,600     |   | $ | 7,321,100 |   |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| Comprehensive income:                 |       |               |       |       |       |         |       |            |       |       |       |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| Net income for the year               |       | —             |       | —     |       | 1,929,300    |       | —          |       | 1,929,300  |       |
| Change in net  unrealized gain        |       |               |       |       |       |         |       |            |       |       |       |
| on securities  and other assets       |       |               |       |       |       |         |       |            |       |       |       |
| net of tax effects                    |       | —             |       | —     |       | —       |       | (45,100         | )          | (45,100    | )          |
| Total comprehensive income            |       |               |       |       |       |         |       |            |       | 1,884,200  |       |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| $0.20 per share dividend              |       | —             |       | —     |       | (326,300     | )          | —          |       | (326,300   | )          |
| Repurchase of common stock            |       | (3,795             | )          | —     | ** ** | —       |       | —          |       | (15,200    | )          |
| Exercise of stock options             |       | 27,215             |       | 67,100     |       | —       |       | —          |       | 67,100     |       |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| 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               |       | —             |       | —     |       | 2,102,800    |       | —          |       | 2,102,800  |       |
| Change in net  unrealized losses      |       |               |       |       |       |         |       |            |       |       |       |
| on securities  and other assets       |       |               |       |       |       |         |       |            |       |       |       |
| net of tax effects                    |       | —             |       | —     |       | —       |       | (110,700        | )          | (110,700   | )          |
| Total comprehensive income            |       |               |       |       |       |         |       |            |       | 1,992,100  |       |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| Stock based compensation              |       |               |       | 7,500      |       | —       |       | —          |       | 7,500      |       |
| Exercise of stock options             |       | 2,550              |       | 7,000      |       | —       |       | —          |       | 7,000      |       |
|                                  |       |               |       |       |       |         |       |            |       |       |       |
| Balance at June  30, 2006 (Unaudited) |       | 1,633,989          |       | $          | 4,786,300  |         | $          | 6,231,400       |       | $          | (80,200    | ) | $10,937,500 |   |
|                                  |       |               |       |       |       |         |       |            |       |       |       |

 

6

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NORTHERNCALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)SIX MONTHS ENDED JUNE 30, 2006 AND 2005

 
| ** **                                                                   | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                                    | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net income                                                                   |       | $           | 2,102,800  |        | $          | 561,600 |   |
| Adjustments to  reconcile net income to net cash                             |       |        |       |        |       |
| used in  operating activities:                                               |       |        |       |        |       |
| Depreciation and  amortization expense                                       |       | 137,800     |       | 97,300      |       |
| Realized (gain)  loss on sales of available-for-sale securities, net         |       | (1,313,400  | )          | —      |       |
| Amortization of  net deferred loan fees                                      |       | 158,900     |       | 50,300      |       |
| Amortization  (accretion) of discounts and premiums on investment securities |       | (100        | )          | 2,900       |       |
| Provision for  loan losses                                                   |       | 95,000      |       | 125,000     |       |
| Stock based  compensation                                                    |       | 7,500       |       | —      |       |
| Increase in  trading assets                                                  |       | (376,900    | )          | (50,800     | )          |
| Increase in  interest receivable                                             |       | (95,000     | )          | (55,000     | )          |
| Increase in  other assets                                                    |       | (1,078,900  | )          | (1,838,400  | )          |
| Increase in  deferred tax asset                                              |       | (93,400     | )          | (24,300     | )          |
| Increase in  interest payable                                                |       | 139,400     |       | 200,800     |       |
| Increase in  other liabilities                                               |       | 27,400      |       | 185,900     |       |
| Net cash used in  operating activities                                       |       | (288,900    | )          | (744,700    | )          |
|                                                                         |       |        |       |        |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                                    | ** ** | ** **  | ** ** | ** **  | ** ** |
| Increase in time  deposits                                                   |       | —      |       | (1,000,000  | )          |
| Proceeds from  maturity/sale of investment securities                        |       | 1,873,800   |       | 303,500     |       |
| Purchase of  investments                                                     |       | (3,237,000  | )          | (2,376,000  | )          |
| Net increase in  loans                                                       |       | (34,605,000 | )          | (32,850,100 | )          |
| Loan purchases                                                               |       | (7,000,000  | )          | (3,925,900  | )          |
| Proceeds from  loan sales                                                    |       | 27,651,900  |       | 25,565,200  |       |
| (Increase)  decrease in loans held for sale                                  |       | 2,470,200   |       | (578,100    | )          |
| Proceeds from  sale of equipment                                             |       | 17,800      |       | 400         |       |
| Additions to  bank premises and equipment                                    |       | (246,300    | )          | (2,154,200  | )          |
| Net cash used in  investing activities                                       |       | (13,074,600 | )          | (17,015,200 | )          |
|                                                                         |       |        |       |        |       |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                                    | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net increase in  deposits                                                    |       | 4,578,400   |       | 8,648,400   |       |
| Proceeds from  borrowings                                                    |       | 4,000,000   |       | 5,000,000   |       |
| Repayments of  borrowings                                                    |       | (2,000,000  | )          | —      |       |
| Proceeds from  exercise of stock options                                     |       | 7,000       |       | 1,100       |       |
| Net cash  provided by financing activities                                   |       | 6,585,400   |       | 13,649,500  |       |
|                                                                         |       |        |       |        |       |
| Net decrease in  cash and cash equivalents                                   |       | (6,778,100  | )          | (4,110,400  | )          |
|                                                                         |       |        |       |        |       |
| **CASH AND CASH EQUIVALENTS,  BEGINNING**                                    |       | 24,130,600  |       | 16,809,000  |       |
|                                                                         |       |        |       |        |       |
| **CASH AND CASH EQUIVALENTS, ENDING**                                        |       | $           | 17,352,500 |        | $          | 12,698,600 |   |

 

See Note 8 for supplemental disclosures

 

7

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**SUMMARY OF ACCOUNTING POLICIES**

(NOTE 1) ****BASIS OF PRESENTATION****

The interimcondensed financial statements of Northern California Bancorp, Inc. andsubsidiary (“Corporation”) are unaudited and reflect all adjustments(consisting only of normal recurring adjustments), which are, in the opinion ofmanagement, necessary for a fair presentation, in all material respects, of thefinancial position and operating results of the Corporation for the interimperiods.  The results of operations for the six months ended June 30,2006 are not necessarily indicative of the results to be expected for theentire fiscal year ending December 31, 2006.  The year-end balancesheet data at December 31, 2005 was derived from the auditedfinancial statements.

This financialinformation should be read in conjunction with the audited financial statementsand notes thereto included in the Corporation’s Form 10-KSB for the fiscal yearended December 31, 2005.

(NOTE2)  RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS

Prior to January1, 2006, the Corporation accounted for its stock options under the recognitionand measurement principles of Accounting Principle Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*(APB No. 25), and related interpretations. Accordingly, no stock-based employeecompensation cost was reflected in net earnings prior to January 1, 2006 as alloptions to purchase common stock of the Bank had an exercise price equal to, orgreater than, the market value of the underlying common stock on the date ofgrant.

Effective January1, 2006, the Corporation began recording compensation expense associated withstock-based awards in accordance with Statement of Financial AccountingStandards (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. Thestock-based compensation expense amount recorded was $7,500 through June 30,2006.

The fair value of eachoption granted is estimated on the date of grant using the Black-Scholesoption-pricing model.  The Bank uses thefollowing input variables as of the grant date, to arrive at the fair value foreach grant:

8

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| 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              |

 

Proforma information regarding net income and earnings per share for the sixmonths ended June 30, 2005 is presented below as if the Bank had accounted forall stock-based compensation under the fair value method of SFAS No. 123.  In February 2004, options were granted thatprovided full vesting on January 1, 2005 and 10,000 options were granted inJune 2005.

 

|                                                                       | ** ** | **Six months  ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                                  |       |                                                |       |
| Reported net  earnings                                                |       | $                                                   | 561,600    |   |
| Stock-based  employee compensation expense, net f related tax effects |       | (14,600                                             | )          |
| Pro forma net  earnings                                               |       | $                                                   | 547,000    |   |
|                                                                  |       |                                                |       |
| Earnings per share as  reported:                                      |       |                                                |       |
| Basic                                                                 |       | $                                                   | 0.349      |   |
| Diluted                                                               |       | $                                                   | 0.292      |   |
| Pro forma earnings per  share:                                        |       |                                                |       |
| Basic                                                                 |       | $                                                   | 0.341      |   |
| Diluted                                                               |       | $                                                   | 0.286      |   |

 

In June 2006, the FASB issued FASB Interpretation No.48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASBStatement No. 109”) which is effective for the fiscal years beginning afterDecember 15, 2006 with earlier adoption encouraged.  This interpretation was issued to clarify theaccounting for uncertainly in income taxes recognized in the financialstatements by prescribing a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.  Weare currently evaluating the potential impact of this interpretation.

(NOTE3).  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.**

9

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** **

**The weighted-average number of shares used in computingbasic and diluted earnings per share is as follows:**
| ** **                                                       | ** ** | **Earnings per share calculation**                   | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **For the six months ended June 30,** | ** ** |
| ** **                                                       | ** ** | **2006**                                                            | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **Net  Income**                                                     | ** ** | **Weighted  Average  Shares** | ** ** | **Per Share  Amount** | ** ** | **Net   Income** | ** ** | **Weighted  Average  Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic earnings  per share                                        |       | $                                                                   | 2,102,800  |   | 1,631,766 |   | $ | 1.289 |   | $ | 561,600 |   | 1,608,334 |   | $ | 0.349 |   |
|                                                             |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares asumed exercise of utstanding options |       | —                                                              |       | 292,814 |   | (0.196 | ) | — |   | 312,833 |   | (0.057 | ) |
|                                                             |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                      |       | $                                                                   | 2,102,800  |   | 1,924,580 |   | $ | 1.093 |   | $ | 561,600 |   | 1,921,167 |   | $ | 0.292 |   |

** **

**(NOTE 4) INVESTMENT SECURITIES:**
| ** **                                  | ** ** | **JUNE 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| ** **                                  | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
|                                        |       |             |       |                 |       |
|                                        |       |             |       |                 |       |
| Available for sale:                         |       |             |       |                 |       |
| Corporate Debt Securities                   |       | $                | 670,100    |                 | $          | 630,500 |   |
| Government National Mortgage Association    |       | 710,600          |       | 837,800              |       |
| U.S. government Agencies                    |       | 12,537,500       |       | 9,597,000            |       |
|                                        |       | $                | 13,918,200 |                 | $          | 11,065,300 |   |
|                                        |       |             |       |                 |       |
| Held to maturity:                           |       |             |       |                 |       |
| State/Local Agency                          |       | $                | 7,018,600  |                 | $          | 7,025,000 |   |
|                                        |       |             |       |                 |       |
| (NOTE 5) OTHER  INVESTMESTS                 |       |             |       |                 |       |
|                                        |       |             |       |                 |       |
| AT Services LLC                             |       | $                | 40,000     |                 | $          | 40,000 |   |
| Metrocities  Mortgage, LLC                  |       | 10,000           |       | 10,000               |       |
| Pan Pacific Bank                            |       | 100,000          |       | 100,000              |       |
| Federal Home  Loan Bank stock, restricted   |       | 1,381,300        |       | 1,182,600            |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000           |       | 93,000               |       |
| Northern  California Bancorp, Inc. Trust II |       | 155,000          |       | 155,000              |       |
| Rush Financial  Technologies, Inc.          |       | 90,000           |       | —               |       |
| Pacific Coast  Bankers’ Bank Stock     |       | —           |       | 439,900              |       |
|                                        |       | $                | 1,869,300  |                 | $          | 2,020,500 |   |

 

10

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(NOTE 6) LOANS ANDALLOWANCE FOR POSSIBLE LOAN LOSSES:
| ** **                            | ** ** | **JUNE 30** | ** **  | **DECEMBER 31** | ** ** |
|---------------------------------------|------------|------------------|-------------|----------------------|------------|
| ** **                            | ** ** | **2006**         | ** **  | **2006**             | ** ** |
| Commercial and Industrial             |       | $                | 24,433,700  |                 | $          | 20,920,900 |   |
| Construction                          |       | 11,773,900       |        | 10,455,900           |       |
| Real Estate - Mortgage                |       | 80,249,100       |        | 71,005,800           |       |
| Installment                           |       | 739,400          |        | 942,300              |       |
| Government Guaranteed Loans Purchased |       | 42,000           |        | 45,300               |       |
|                                  |       | 117,238,100      |        | 103,370,200          |       |
| Allowance for loan losses             |       | (1,196,800       | )           | (1,100,700           | )          |
| Deferred origination fees, net        |       | (357,100         | )           | (284,500             | )          |
| Net Loans                             |       | $                | 115,684,200 |                 | $          | 101,985,000 |   |
|                                  |       |             |        |                 |       |
| Balance at Beginning of Period        |       | $                | 1,100,700   |                 | $          | 963,000 |   |
| Recoveries                            |       | 1,100            |        | 1,900                |       |
| Provision for Possible Loan Losses    |       | 95,000           |        | 150,000              |       |
| Loans Charged Off                     |       | —           |        | (14,200              | )          |
| Balance at End  of Period             |       | $                | 1,196,800   |                 | $          | 1,100,700 |   |

 

(NOTE 7) COMPREHENSIVE INCOME (LOSS):

The components of other comprehensive income and related tax effects forthe six month periods ending June 30, 2006 and 2005 are as follows (unaudited):

 

|                                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding gains (losses) on available-for-sale securities and other assets, net |       | $        | (201,300   | )        | $          | 55,300 |   |
| Tax effect                                                                                |       | 90,600   |       | (24,900  | )          |
|                                                                                      |       |     |       |     |       |
| Net-of-tax amount                                                                         |       | $        | (110,700   | )        | $          | 30,400 |   |

 

The components of accumulated other comprehensive income and related taxeffects are as follows:

 

|                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding losses on available-for-sale securities     |       | $        | (209,400   | )        | $          | (26,100 | ) |
| Unrealized  holding gains on available for ale strip receivable |       | 63,600   |       | 218,900  |       |
| Tax effect                                                      |       | 65,600   |       | (86,800  | )          |
|                                                            |       |     |       |     |       |
| Net-of-tax  amount                                              |       | $        | (80,200    | )        | $          | 106,000 |   |

 

11

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(NOTE 8)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

|                                     | ** ** | **6/30/06** | ** ** | **6/30/05** | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|
| Payments during the  period ending: |       |        |       |        |       |
| Interest                            |       | $           | 2,196,300  |        | $          | 1,477,000 |   |
| Income Taxes                        |       | 1,667,700   |       | 631,000     |       |
|                                     |            |             |            |             |            |  |  |

 

 

12

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

**StatementsRegarding Forward-Looking Information**

Except for historical informationcontained herein, the matters discussed or incorporated by reference in this reportcontain forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E ofthe Securities Exchange Act of 1934 (the “Exchange Act”), that involvesubstantial risks and uncertainties.  When used in this report, or in thedocuments incorporated by reference herein, the words “anticipate,” “believe,” “estimate,”“may,” “intend,” “expect,” and similar expressions identify certain of suchforward-looking statements.  Actual results of Monterey County Bank coulddiffer materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectationsinclude, but are not limited to, the following: changes in economic conditions(both generally and more specifically in the markets in which the Bankoperates); changes in interest rates, deposit flows, loan demand, real estatevalues and competition; changes in accounting principles, policies orguidelines and in government legislation and regulation (which change from timeto time and over which the Bank has no control); other factors affecting theBank’s operations, markets, products and services; and other risks detailed inthis Form 10-QSB and in the Bank’s other reports filed with the Federal DepositInsurance Corporation and pursuant to the rules and regulations of theSecurities and Exchange Commission.  Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof.  The Corporation undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances that arise after the date thereof.

**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 six months endedJune 30, 2006 net income was $2,102,800, compared to $561,600 for the sameperiod in 2005.  For the six months endedJune 30, 2006 net interest income after provision forloan losses increased $503,100, non interest income increased $2,412,700, whileoperating expense increased $319,500 and income tax provision increased$1,055,100.

13

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The following table setsforth certain selected financial ratios of the Corporation at and for the sixmonths ended, June 30, 2006 and 2005.
| ** **                                         | ** ** | **The six months**                                                   | ** ** | **The six months**       | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **Ended  June 30, 2006**                                             | ** ** | **Ended  June 30, 2005** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of Operating Results:       |       |                                                                           |       |                               |       |
| Total interest  income                             |       | $                                                                              | 6,237      |                               | $          | 5,130 |   |
| Total interest  expense                            |       | 2,336                                                                          |       | 1,701                              |       |
| Net interest  income                               |       | 3,902                                                                          |       | 3,429                              |       |
| Provision for  possible loan losses                |       | 95                                                                             |       | 125                                |       |
| Net interest  income after provision for loan loss |       | 3,807                                                                          |       | 3,304                              |       |
| Total other  income                                |       | 4,146                                                                          |       | 1,733                              |       |
| Total other  expense                               |       | 4,200                                                                          |       | 3,881                              |       |
| Income (loss)  before taxes                        |       | 3,752                                                                          |       | 1,156                              |       |
| Provision for  income tax                          |       | 1,650                                                                          |       | 594                                |       |
| Net income                                         |       | $                                                                              | 2,103      |                               | $          | 562 |   |
| Per Common Share  Data:                            |       |                                                                           |       |                               |       |
| Net income -  Basic (1)                            |       | $                                                                              | 1.289      |                               | $          | 0.349 |   |
| Net income -  Diluted (2)                          |       | $                                                                              | 1.093      |                               | $          | .292 |   |
| Book value, end  of period (3)                     |       | $                                                                              | 6.69       |                               | $          | 4.92 |   |
| Avg shares  outstanding (4)                        |       | 1,631,766                                                                      |       | 1,608,334                          |       |
| Balance Sheet  Data:                               |       |                                                                           |       |                               |       |
| Total loans, net  of unearned income (5)           |       | $                                                                              | 118,529    |                               | $          | 106,649 |   |
| Total assets                                       |       | $                                                                              | 171,446    |                               | $          | 148,667 |   |
| Total deposits                                     |       | $                                                                              | 122,699    |                               | $          | 105,912 |   |
| Stockholders’ equity  (6)                     |       | $                                                                              | 10,937     |                               | $          | 7,914 |   |

 

14

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| ** **                                           | ** ** | **The six months**       | ** ** | **The six months**       | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **Ended  June 30, 2006** | ** ** | **Ended  June 30, 2005** | ** ** |
| Selected  Financial Ratios (4):                      |       |                               |       |                               |       |
| Return on  average assets (5)                        |       | 2.57                               | %          | 0.79                               | %          |
| Return on  average stockholders’ equity (5)     |       | 40.99                              | %          | 14.89                              | %          |
| Net interest  spread                                 |       | 4.55                               | %          | 4.95                               | %          |
| Net interest  margin                                 |       | 5.25                               | %          | 5.40                               | %          |
| Avg  shareholders’ equity to average assets     |       | 6.27                               | %          | 5.33                               | %          |
| Risked-Based  capital ratios                         |       |                               |       |                               |       |
| Tier 1                                               |       | 9.85                               | %          | 8.04                               | %          |
| Total                                                |       | 14.66                              | %          | 13.92                              | %          |
| Total loans to  total deposits at end of period      |       | 96.60                              | %          | 100.70                             | %          |
| Allowance to  total loans at end of period           |       | 1.00                               | %          | 1.01                               | %          |
| Nonperforming  loans to total loans at end of period |       | 0.15                               | %          | 0.13                               | %          |
| Net charge-offs to  average loans                    |       | 0.00                               | %          | 0.00                               | %          |

----

(1)          Basic earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of common shares used for this computationwas 1,631,766 and 1,608,334 for June 30, 2006 and 2005, respectively.

(2)          Diluted earnings (loss)per share amounts were computed on the basis of the weighted average number ofshares of common stock and common stock equivalents outstanding during theyear.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,924,580 and 1,921,167 for June 30, 2006 and 2005,respectively.

(3)   Weighted average common shares.

(4)   Includesloans being held for sale.

(5)   Averages are of daily balances.

(6)   June 30,2006 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.

15

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Netinterest income for the six months ended June 30, 2006 was $3,901,800 comparedto $3,428,700 for the same period in 2005. The increase of $473,100 resulted from total interest income increasing$1,107,300, while total interest expense increased $634,200.  Average interest earning assets increased $21,386,000(16.51%), while the average rate earned increased 32 basis points.  Average interest bearing liabilitiesincreased $12,439,000 (11.24%), while the average rate paid increased 72 basispoints.

Thefollowing table shows the components of the Bank’s net interest income, settingforth, for each the six months ended June 30, 2006 and 2005, (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 $73,200 in 2006 and $67,700 in 2005.  Non-accrual loans and overdrafts are includedin average loan balances.  Average loansare presented net of unearned income.

16

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**INTERESTSPREAD ANALYSIS:**

 
| ** **                         | ** ** | **Six Months Ended June 30,** | ** ** | **Twelve Months  Ended December 31,** | ** ** |
|------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2006**                      | ** ** | **2005**                              | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Avg  Bal**                  | ** ** | **Int  Earn   Paid**             | ** ** | **Avg  %  Rate** | ** ** | **Avg  Bal** | ** ** | **Int  Earn  Paid** | ** ** | **Avg  %  Rate** | ** ** | **Avg  Bal** | ** ** | **Int  Earn  Paid** | ** ** | **Avg  %  Rate** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)**    | ** ** |
| Interest Earning  Assets:          |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Time Deposits -  Financial Inst.   |       | $                             | 1,000      |                                  | $          | 22 |   | 4.38 |   | $ | 835 |   | $ | 11 |   | 2.63 |   | $ | 1,000 |   | $ | 29 |   | 2.92 |   |
| Invest securities  - Taxable       |       | 14,316                        |       | 279                                   |       | 3.90 |   | 10,592 |   | 196 |   | 3.70 |   | 13,237 |   | 441 |   | 3.33 |   |
| Invest securities  - Tax free      |       | 7,022                         |       | 236                                   |       | 6.73 |   | 6,422 |   | 218 |   | 6.80 |   | 7,026 |   | 445 |   | 6.33 |   |
| Federal funds  sold                |       | 15,711                        |       | 362                                   |       | 4.61 |   | 9,221 |   | 124 |   | 2.69 |   | 10,481 |   | 352 |   | 3.36 |   |
| Total investments                  |       | 38,048                        |       | 899                                   |       | 4.73 |   | 27,070 |   | 549 |   | 4.06 |   | 31,744 |   | 1,267 |   | 4.12 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                              |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                       |       | 10,878                        |       | 689                                   |       | 12.68 |   | 11,304 |   | 761 |   | 13.46 |   | 9,952 |   | 1,269 |   | 12.75 |   |
| Real estate                        |       | 75,609                        |       | 3,304                                 |       | 8.74 |   | 67,088 |   | 2,768 |   | 8.25 |   | 72,608 |   | 5,935 |   | 8.17 |   |
| Installment                        |       | 970                           |       | 46                                    |       | 9.50 |   | 620 |   | 27 |   | 8.67 |   | 853 |   | 56 |   | 6.57 |   |
| Commercial                         |       | 25,381                        |       | 1,361                                 |       | 10.72 |   | 23,417 |   | 1,092 |   | 9.32 |   | 25,550 |   | 2,302 |   | 9.01 |   |
| Total loans                        |       | 112,837                       |       | 5,400                                 |       | 9.57 |   | 102,429 |   | 4,648 |   | 9.08 |   | 108,963 |   | 9,561 |   | 8.77 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest earning assets      |       | $                             | 150,886    |                                  | $          | 6,299 |   | 8.35 |   | $ | 129,499 |   | $ | 5,197 |   | 8.03 |   | $ | 139,707 |   | $ | 10,828 |   | 7.75 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:     |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                |       | $                             | 12,868     |                                  | $          | 23 |   | 0.36 |   | $ | 12,273 |   | $ | 15 |   | 0.25 |   | $ | 12,584 |   | $ | 32 |   | 0.26 |   |
| Money market  savings              |       | 4,275                         |       | 16                                    |       | 0.75 |   | 4,589 |   | 17 |   | 0.76 |   | 4,818 |   | 32 |   | 0.66 |   |
| Savings deposits                   |       | 7,969                         |       | 40                                    |       | 1.00 |   | 7,935 |   | 39 |   | 0.98 |   | 7,476 |   | 80 |   | 1.07 |   |
| Time deposits  >$100M           |       | 30,297                        |       | 640                                   |       | 4.23 |   | 28,188 |   | 461 |   | 3.27 |   | 29,908 |   | 990 |   | 3.31 |   |
| Time deposits  <$100M           |       | 32,679                        |       | 615                                   |       | 3.76 |   | 28,956 |   | 452 |   | 3.12 |   | 31,981 |   | 971 |   | 3.04 |   |
| Other Borrowing                    |       | 35,015                        |       | 1,001                                 |       | 5.72 |   | 28,721 |   | 716 |   | 4.99 |   | 32,998 |   | 1,567 |   | 4.75 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest bearing liabilities |       | $                             | 123,101    |                                  | $          | 2,336 |   | 3.79 |   | $ | 110,663 |   | $ | 1,701 |   | 3.07 |   | $ | 119,765 |   | $ | 3,672 |   | 3.07 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income               |       |                          |       | 3,964                                 |       |   |   |   |   | 3,496 |   |   |   |   |   | 7,156 |   |   |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread               |       |                          |       |                                  |       | 4.56 |   |   |   |   |   | 4.95 |   |   |   |   |   | 4.68 |   |
|                               |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest             |       |                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| earning assets                     |       |                          |       |                                  |       | 5.25 |   |   |   |   |   | 5.40 |   |   |   |   |   | 5.12 |   |

 

17

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**Rate and Volume Analysis:**
| ** **                              | ** ** | **Six Months**             | ** ** | **Twelve Months**       | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **Ended June 30,**         | ** ** | **Ended December 31,**  | ** ** |
| ** **                              | ** ** | **2006 vs 2005**           | ** ** | **2005 vs 2006**        | ** ** |
| ** **                              | ** ** | **Increase (Decrease)**    | ** ** | **Increase (Decrease)** | ** ** |
| ** **                              | ** ** | **Due to Changes**         | ** ** | **Due to Changes**      | ** ** |
| ** **                              | ** ** | **Avg**                    | ** ** | **Avg**                 | ** ** | ** ** | ** ** | **Avg** | ** ** | **Rate** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Volume**                 | ** ** | **Rate**                | ** ** | **Total** | ** ** | **Volume** | ** ** | **Avg** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Interest Earning  Assets:               |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Time Deposits -  Financial Institutions |       | $                          | 2          |                    | $          | 9 |   | $ | 11 |   | $ | 29 |   | $ | — |   | $ | 29 |   |
| Invest  securities - Taxable            |       | 69                         |       | 14                      |       | 83 |   | 69 |   | 70 |   | 140 |   |
| Invest  securities - Tax free           |       | 20                         |       | (2                      | )          | 18 |   | 234 |   | (15 | ) | 218 |   |
| Federal funds  sold                     |       | 87                         |       | 151                     |       | 238 |   | 0 |   | 211 |   | 211 |   |
|                                    |       | 179                        |       | 171                     |       | 350 |   | 332 |   | 266 |   | 598 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Loans:                                  |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Construction                            |       | (29                        | )          | (43                     | )          | (72 | ) | 276 |   | 198 |   | 474 |   |
| Real estate                             |       | 350                        |       | 185                     |       | 536 |   | 1,003 |   | 433 |   | 1,437 |   |
| Installment                             |       | 15                         |       | 4                       |       | 19 |   | 22 |   | (7 | ) | 16 |   |
| Commercial                              |       | 92                         |       | 178                     |       | 269 |   | 437 |   | 443 |   | 880 |   |
|                                    |       | 428                        |       | 324                     |       | 752 |   | 1,739 |   | 1,067 |   | 2,806 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets          |       | $                          | 607        |                    | $          | 495 |   | $ | 1,102 |   | $ | 2,070 |   | $ | 1,333 |   | $ | 3,404 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:           |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Int-bearing  demand                     |       | $                          | 1          |                    | $          | 7 |   | $ | 8 |   | $ | (1 | ) | $ | 1 |   | $ | (0 | ) |
| Money market  savings                   |       | (1                         | )          | (0                      | )          | (1 | ) | 7 |   | (7 | ) | 0 |   |
| Savings deposits                        |       | 0                          |       | 1                       |       | 1 |   | (5 | ) | 4 |   | (1 | ) |
| Time deposits  >$100M                |       | 34                         |       | 145                     |       | 179 |   | 332 |   | 97 |   | 429 |   |
| Time deposits  <$100M                |       | 58                         |       | 105                     |       | 163 |   | 226 |   | 34 |   | 260 |   |
| Other Borrowing                         |       | 157                        |       | 128                     |       | 285 |   | 362 |   | 187 |   | 549 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
|                                    |       | 249                        |       | 385                     |       | 634 |   | 921 |   | 316 |   | 1,237 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |
| Net change in  net interest             |       | $                          | 357        |                    | $          | 110 |   | $ | 468 |   | $ | 1,149 |   | $ | 1,017 |   | $ | 2,167 |   |
|                                    |       |                       |       |                    |       |   |   |   |   |   |   |   |   |

 

18

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**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.  It isthe Bank’s current practice, which could change in accordance with the factorsmentioned above, to maintain an allowance, which is at least equal to the sumof the following percentage of loan balances by loan category.

 

| Loan Category                            | ** ** | **Reserve %** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
|                                          |       |               |       |
| Classified  Loans:                            |       |               |       |
| Loans classified  loss                        |       | 100.00             | %          |
| Loans classified  doubtful                    |       | 50.00              | %          |
| Loans classified  substandard                 |       |               |       |
| Real Estate Secured                           |       | 5.00               | %          |
| Non Real Estate Secured                       |       | 20.00              | %          |
|                                          |       |               |       |
|                                          |       |               |       |
| Unclassified  Loans:                          |       |               |       |
| Real Estate -  Loan to value 80% or less      |       | 0.10               | %          |
| Real Estate -  Loan to value over 80%         |       | 0.70               | %          |
| Real Estate -  Construction                   |       | 0.25               | %          |
| Loans to  Individuals                         |       | 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 June 30, 2006 and 2005 the Bank’sallowance stood at 1.00 percent and 1.01 percent of gross loans,respectively.  A provision of $95,000 wasmade to the allowance during the six months ended June 30, 2005, compared witha provision of $125,000 for the same period in 2005.  No loans were charged off during the sixmonths ended June 30, 2006 or June 30, 2005. Recoveries for the same periods were $1,100 and $900, respectively.

19

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TheBank’s non-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.15 percent at June 30, 2006 compared with 0.13percent for the same period in 2005.

Based upon statistics released by Federal and statebanking authorities regarding banks of similar size or otherwise located inCalifornia, management believes that the Bank ‘s ratios of delinquent and nonperforming loans to total loans are far better than average.  Prudent collection efforts, and tighterlending controls, are responsible for the Bank’s strong performance on thesemeasures of credit quality.  However, no assurancecan be given that the Bank’s loan portfolio will continue to measure wellagainst its peers on these ratios and quality measures, or that losses will nototherwise occur in the future.

**Non-InterestIncome**

Total other income for the six months ended June 30,2006 was $4,145,600 compared with $1,732,900 for the same period in 2005.  The increase of $2,412,700 resulted from thegain on sale of the Bank’s investment in Pacific Coast Bankers’ Bank of$1,313,400, and an increase in income from other service charges, commissionsand fees of $1,099,300.  The increase inother service charges, commissions and fees was due primarily to a $57,300 markto market gain on trading assets compared with a $348,300 mark to market lossin 2005, and increases of $361,400 in fee income from credit card programs,$166,000 in merchant discount fees and $125,000 in commercial bankingorigination fees.

TheBank entered into an agreement in February 2006 with GC Acquisitions, LLC (“GCA”), the owner of a portfolio of consumer credit card contracts andreceivables, under which the Bank will offer MasterCard® credit cards toqualifying GCA credit card contract holders. GCA will, through itsaffiliates, agents and vendors, establish new credit card accounts with theBank for certain of its existing credit card contract holders, service thecredit card accounts and own the receivables generated from the accounts.  The conversion of the portfolio began inMarch 2006 with approximately 252,000 customers being contacted and by June 30th 199,300 had been activated.  GCA will maintain reserve deposits with theBank based on cardholder activity and available credit.  The Bank’s revenues from the program will bedependent on the number of cards in the portfolio and the amount of reserve depositsmaintained.

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 principalamount.  The guaranteed portion has riskscomparable for an investor to a U. S. Government security and can usually besold in the secondary financial market, either at a premium or at a yield whichallows the Bank to maintain a significant spread for itself.

There can be noassurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA recently began requiringlenders to share a portion of premiums in excess of 10% earned

20

----

 

on the sale of the guaranteed portions, and to pay 50basis points on the outstanding guaranteed balance.  Management cannot predict the significance ofthe impact these changes will have on SBA income.

**Non-InterestExpense**

Salary andbenefits expense for the six months ended June 30, 2006 increased $188,700compared with the same period in 2005. The increase was due to merit pay increases, increased employee benefitscost, increased commissions paid and increased bonus accrual.

Total occupancyand equipment expense for the six months ended June 30, 2006 was $380,700compared to $287,400 for the same period in 2005.  The increase was primarily due to increasesin depreciation expense of $40,500, premises rent expense less sublease income$27,400, merchant terminal expense $9,300, property taxes $6,000 and utilities$4,000.

Professional feesfor the six months ended June 30, 2006 was $82,900 compared to $73,400 for thesame period in 2005.

Data processingexpense for the six months ended June 30, 2006 was $165,600 compared to$174,500 for the same period in 2005.  

Other general andadministrative expenses for the six months ended June 30, 2006 totaled$1,719,700 compared with $1,690,300 for the same period in 2005.  Significant changes occurred in the followingcategories with increases in merchant expense $71,100, other operating losses$61,000, advertising expense $43,800, stationary and supplies $20,800,donations $16,500, business development $15,900, and bank fees $15,000; whiledecreases occurred in provision for possible losses on debt securities$132,500, provision for possible losses on unfunded commitments $71,000 andentertainment and meals $5,000.

The income taxprovision for the six months ended June 30, 2006 totaled $1,649,500 comparedwith $594,400 for the same period of 2005. The increase of $1,055,100 was due to a $591,000 provision related tothe gain on sale of the Bank’s investment in Pacific Coast Bankers’ Bank andincreased income.

**LOANS**

Loans represented 74.78% of average earning assets,and 69.23% of average total assets for the six months ended June 30, 2006compared with 79.10% and 72.62%, respectively during 2005. For the six monthsended June 30, 2005, average loans increased 10.16% from $102,429,000 for thesame period in 2005 to $112,837,000. Average real estate loans increased $8,521,000 (12.70%), averagecommercial loans increased $1,964,000 (8.39%), average installment loansincreased $350,000 (56.44%) while average construction loans decreased $427,000(3.78%).

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 ranging from one yearto several years.  Short-term businessloans are generally intended to finance current transactions and typicallyprovide 

21

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for monthly interest payments with principal beingpayable at maturity or at 90-day intervals. Term loans (usually for a term oftwo to five years) normally provide for monthly installments of principal andinterest.  The Bank from time to timeutilizes accounts receivable 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 higher interestrates, than conventional single-family residential real estate loans.  The cost of administering such loans is oftenhigher than for other real estate loans, as principal is drawn on periodicallyas construction progresses.

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

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.

22

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

 
| ** **                                                    | ** ** | **Six months as of**                 | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **JUNE 30,**                         | ** ** |
| ** **                                                    | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing,                                                     |       |                                 |       |   |   |
| past due 90 days  or more:                                    |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real Estate                                                   |       | $                                    | 0          |   | $ | 0 |   |
| Commercial                                                    |       | 0                                    |       | 0 |   |
| Installment                                                   |       | 0                                    |       | 0 |   |
| Other                                                         |       | 0                                    |       | 0 |   |
| Total accruing                                                |       | 0                                    |       | 0 |   |
|                                                          |       |                                 |       |   |   |
| Nonaccrual  Loans:                                            |       |                                 |       |   |   |
|                                                          |       |                                 |       |   |   |
| Real Estate                                                   |       | 0                                    |       | 0 |   |
| Commercial                                                    |       | 173                                  |       | 137 |   |
| Installment                                                   |       | 0                                    |       | 0 |   |
| Other                                                         |       | 0                                    |       | 0 |   |
| Total nonaccrual                                              |       | 173                                  |       | 137 |   |
|                                                          |       |                                 |       |   |   |
| Total nonperforming                                           |       | 173                                  |       | 173 |   |
|                                                          |       |                                 |       |   |   |
| Total loans end  of period                                    |       | 118,529                              |       | 106,649 |   |
|                                                          |       |                                 |       |   |   |
| Ratio of nonperforming  loans to total loans at end of period |       | 0.15                                 | %          | 0.13 | % |
|                                                               |            |                                      |            |  |  |  |  |

 

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.

23

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**Summary of LoanLoss Experience**

 

 

 

 
| ** **                                                                     | ** ** | **Allowance for Loan Losses** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                     | ** ** | **Six months as of**          | ** ** | **Six months as of** | ** ** |
| ** **                                                                     | ** ** | **June 30,**                            | ** ** | **June 30,** | ** ** |
| ** **                                                                     | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**         | ** ** |
| Average loans  outstanding                                                     |       | $                                            | 112,837    |   | $ | 102,429 |   |
|                                                                           |       |                                         |       |   |   |
| Allowance, beginning of  period                                                |       | 1,101                                        |       | 963 |   |
|                                                                           |       |                                         |       |   |   |
| Loans charged off  during period:                                              |       |                                         |       |   |   |
| Commercial                                                                     |       | 0                                            |       | 0 |   |
| Installment                                                                    |       | 0                                            |       | 0 |   |
| Real Estate                                                                    |       | 0                                            |       | 0 |   |
| Other                                                                          |       | 0                                            |       | 0 |   |
| Total charge  offs                                                             |       | 0                                            |       | 0 |   |
|                                                                           |       |                                         |       |   |   |
| Recoveries during  period:                                                     |       |                                         |       |   |   |
| Commercial                                                                     |       | 1                                            |       | 0 |   |
| Installment                                                                    |       | 0                                            |       | 1 |   |
| Real Estate                                                                    |       | 0                                            |       | 0 |   |
| Other                                                                          |       | 0                                            |       | 0 |   |
| Total recoveries                                                               |       | 1                                            |       | 1 |   |
|                                                                           |       |                                         |       |   |   |
| Net Loans charged off  during the period                                       |       | (1                                           | )          | (1 | ) |
|                                                                           |       |                                         |       |   |   |
| Additions to allowance  for possible loan losses                               |       | 95                                           |       | 125 |   |
|                                                                           |       |                                         |       |   |   |
| Allowance, end of  period                                                      |       | 1,197                                        |       | 1,089 |   |
|                                                                           |       |                                         |       |   |   |
| Ratio of net loans  charged off to average Loans outstanding during the period |       | 0.00                                         | %          | 0.00 | % |
|                                                                           |       |                                         |       |   |   |
| Ratio of allowance to total loans at end of period                             |       | 1.00                                         | %          | 1.01 | % |
|                                                                                |            |                                              |            |  |  |  |  |

 

24

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**Other Assets**

Cash surrender value of life insurance increased$1,042,500 due primarily to the purchase of a $1,000,000 insurance policy.

**Deposits**

Average deposits for the six months ended June 30,2006 were $116,017,000 an increase of 12.36% compared with the same period in2005.  Average certificates of depositrepresented 54.28% of average deposits for the six months ended June 30,2006.  Average interest bearing checking,money market and savings accounts as a group was 21.64% of average deposits forthe six months ended June 30, 2006. Average demand deposits represented 24.07% of average deposits for thesix months ended June 30, 2006.

The following table setsforth the scheduled maturities of the Company’s time deposits in denominationsof $100,000 or greater at June 30, 2006:

**Maturities of Time Deposits of**

$100,000or More

(Dollarsin Thousands)

| Three months or less                   |   | $          | 8,036,600  |   |
|----------------------------------------|--------|------------|------------|--------|
| Over three  months through six months  |   | 10,374,200 |       |
| Over six months  through twelve months |   | 11,291,400 |       |
| Over twelve  months                    |   | 2,351,600  |       |
| Total                                  |   | $          | 32,053,800 |   |

** **

**Borrowing**

**The Bank has a financing arrangement with the Federal HomeLoan Bank of San Francisco which has a total financing availability of twentyfive percent (25%) of the Bank’s total assets, adjusted quarterly;approximately $40,275,000 at June 30, 2006. The Federal Home Loan Bank borrowing is secured by some of the Bank’sreal estate secured loans and securities. The Federal Home Loan Bank assigns a maximum borrowing capacity for eachtype of loan and security pledge.  AtJune 30, 2006 the total principal balances of pledged loans was $32,047,700 andthe carrying value of securities was $13,248,600 with a total borrowingcapacity of $32,966,600.  The followingtable provides information on nine (9) advances totaling $26,750,000outstanding at June 30, 2006.**

** **

| ** ** | ** ** | ** ** | ** ** | 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      |       |
| 1,000,000  |       | 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       |       |

** **

25

----

** **

**The Bank has a letter of creditin the amount of $330,000, expiring April 17, 2007, 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.**

**The Bank also has unsecured federal funds borrowing lineswith Bank of the West, Pacific Coast Bankers’ Bank and The Independent Bankwith available borrowing capacity on June 30, 2006 of $4,500,000, $6,000,000and $5,000,000, respectively. **The Bank did not utilize any overnightborrowings in 2006 or 2005.

**Capital Resources**

TheCompany 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 June 30, 2006, stockholders’ equity was $10,937,400 versus $8,930,900at December 31, 2005.  The Company paidcash dividends of $0.20 and $0.165 in 2005 and 2004, respectively.  The Bank paid no cash dividends during thesix months ended June 30, 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 12.48% and 11.12% at June 30, 2006 and 2005,respectively.  The Bank had Total risk-basedcapital ratios of 13.38% and 12.06% at June 30, 2006 and 2005,respectively.  These ratios are wellabove the minimum regulatory requirements. The Company had Tier 1 risk-based capital ratios of 9.85% and 8.17% atJune 30, 2006 and 2005, respectively. The Company had Total risk-based capital ratios of 14.66% and 14.16% atJune 30, 2006 and 2005, 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 of 7.72%and 6.75% at June 30, 2006 and 2005, respectively; while the Bank’s leveragecapital ratios were 10.33% and 9.30% at June 30, 2006 and 2005.

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.

## **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

26

----

business, fundsare generated from the repayment of loans, maturities within the investmentsecurities portfolio and the acquisition of deposit balances and short-termborrowings.  In addition, the Bank has asecured borrowing arrangement with the Federal Home Loan Bank of San Franciscoof approximately $40,275,000 of which $27,080,000 had been advanced at June 30,2006****and unsecured federal fundslines of credit with Bank of the West, Pacific Coast Bankers’ Bank and TheIndependent Bank of $4,500,000, $6,000,000 and $5,000,000, respectively; tomeet temporary liquidity requirements.

Asa matter of policy, the Bank seeks to maintain a level of liquid assets,including marketable investment securities, equal to a least 10 percent oftotal assets (“primary liquidity”), while maintaining sources of secondaryliquidity (borrowing lines from other institutions) equal to at least anadditional 10 percent of assets.  Withinthese ratios, the Bank generally has excess funds available to sell as federalfunds on a daily basis, and is able to fund its own liquidity needs without theneed of short-term borrowing.  The Bank’sprimary liquidity at June 30, 2006 was 12.83 percent, while primary liquidityplus available borrowing was 23.32 percent of total assets.

The Corporation’s sourcesof revenues and liquidity are the dividends, tax equalization payments ormanagement fees from the Bank, gains on securities held in a tradingaccount.  The ability of the Bank to paysuch items to the Corporation is subject to limitations under state and Federallaw.

**InterestRate 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 concernsfollowed by capital adequacy, then interest rate risk and market risk in theinvestment portfolio.  The policy of theBank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes.  However,Management does not believe that the Bank can maintain 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.

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed fundsrate.  The model converts a fed fundsrate change into rate changes for each major class of asset and liability, thensimulates

27

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the bank’s netinterest margin based on the bank’s actual repricing over a one year period,assuming that maturities are reinvested in instruments identical to thosematuring during the period.  At June 30,2006 the affect of a 200 basis points increase in the federal funds sold rate,expressed, as a percentage change in net interest income, was a positive11.70%; while a 200 basis points decrease in the federal funds sold rate,expressed, as a percentage change in net interest income, was a negative11.80%. These percentage changes in net interest income are well within policylimits of 20%.

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 June 30, 2006 the account value was $1,404,400.  In addition the Corporation has a $40,000 investment 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.

The Corporation also has a $100,000 investment in Pan Pacific Bank a California stat-chartered commercial banking corporation and a $90,000 investment in Rush Financial Technologies, Inc. a holding company that operates through two primary subsidiaries: a real-time financial technology development company, RushGroup Technologies, Inc., (“RushGroup”) and a new generation direct-access online brokerage firm, RushTrade Securities, Inc., (“RushTrade”).

  In addition the Corporation has investmentsin Northern California Bancorp Trust I of $93,000 and Northern CaliforniaBancorp Trust II of $155,000, these are special-purpose trust subsidiarieswhich were formed to facilitate the issuance of trust preferred securities.

Thefollowing table sets forth the book and market value of the Bank’s investmentsecurities at June 30, 2006:

 
| ** **                                | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **June 30, 2006**            | ** ** |
| ** **                                | ** ** | **Book**                               | ** ** | **Market** | ** ** |
| ** **                                | ** ** | **Value**                              | ** ** | **Value** | ** ** |
| Securities  Available for Sale            |       |                                   |       |   |   |
| Government  National Mortgage Association |       | $                                      | 733,400    |   | $ | 711,200 |   |
| U.S. Government  Agency Securities        |       | 12,724,600                             |       | 12,537,400 |   |
| Corporate Debt  Securities                |       | 670,100                                |       | 670,100 |   |
| Total                                     |       | $                                      | 14,128,100 |   | $ | 13,918,700 |   |
|                                      |       |                                   |       |   |   |
| Held to Maturity                          |       |                                   |       |   |   |
| State/Local  Agency Bonds                 |       | $                                      | 7,018,600  |   | $ | 7,072,400 |   |
|                                      |       |                                   |       |   |   |

 

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| Other  Investments, at cost                 |   |      |      |      |   |
|---------------------------------------------|--------|-----------|-----------|-----------|--------|
| AT Services LLC                             |   | $         | 40,000    |      | $      | 40,000 |   |
| Metrocities  Mortgage, LLC                  |   | 10,000    |      | 10,000    |   |
| Federal Home  Loan Bank stock, restricted   |   | 1,381,300 |      | 1,381,300 |   |
| Northern  California Bancorp, Inc. Trust I  |   | 93,000    |      | 93,000    |   |
| Northern  California Bancorp, Inc. Trust II |   | 155,000   |      | 155,000   |   |
| Pan Pacific Bank  Stock                     |   | 100,000   |      | 100,000   |   |
| Rush Financial  Technologies, Inc.          |   | 90,000    |      | 90,000    |   |
|                                        |   | $         | 1,869,300 |      | $      | 1,869,300 |   |
|                                        |   |      |      |      |   |

 

The followingtable summarizes the maturity of the Bank’s investment securities at June 30,2006:

 
| ** **                              | ** ** | **INVESTMENT PORTFOLIO MATURITIES** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)**          | ** ** |
| ** **                              | ** ** | **Amortized Cost**                       | ** ** | **Fair Value** | ** ** |
| Available for  Sale                     |       |                                          |       |   |   |
| Due within one  year                    |       | $                                             | 4,739,800  |   | $ | 4,694,700 |   |
| Due between one  and five years         |       | 2,984,800                                     |       | 2,914,600 |   |
| Due between five  and ten years         |       | 5,670,100                                     |       | 5,598,200 |   |
| GNMA — Mortgage  Backed Securities |       | 733,400                                       |       | 711,200 |   |
|                                    |       | $                                             | 14,128,100 |   | $ | 13,918,700 |   |
|                                    |       |                                          |       |   |   |
| Held to Maturity                        |       |                                          |       |   |   |
| Due in over ten  years                  |       | $                                             | 7,018,600  |   | $ | 7,072,400 |   |

 

**Item 3.**                          Controlsand Procedures

(a) The Bank’sChief Executive Officer and its Chief Financial Officer, after evaluating theeffectiveness of the Bank’s disclosure controls and procedures as defined inExchange Act Rules 13a-15(e) promulgated under the Exchange Act as of the endof the period covered by this report (the “Evaluation Date”) have concludedthat as of the Evaluation Date, the Bank’s disclosure controls and procedureswere adequate and effective to ensure that material information relating to theBank would be made known to them by others within the Bank, particularly duringthe period in which this report was being prepared.  Disclosure controls and procedures aredesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed byus in the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

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(b) Changes inInternal Controls:  In the quarter endedJune 30, 2006, the Company did not make any significant changes in, nor takeany corrective actions regarding, its internal controls or other factor thatcould significantly affect these controls.

**PART II-OTHERINFORMATION**

**Item 1.**                          LegalProceedings.

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

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

None

**Item3.**                          Defaultof Senior Securities

None

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

**The following proposals were presented to shareholders atthe Corporation’s annual shareholders’ meeting held on May 18, 2006.**

**Proposal Number 1:             Electionof Directors**

** **
| ** **                   | ** ** | **Number of  Affirmative Votes** | ** ** | **Number of  Votes Withheld** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| Charles T.  Chrietzberg, Jr. |       | 1,384,927                                  |       | 4,192                                   |       |
| Sandra G.  Chrietzberg       |       | 1,384,927                                  |       | 4,192                                   |       |
| Peter J.  Coniglio           |       | 1,384,927                                  |       | 2,671                                   |       |
| Carla S. Hudson              |       | 1,384,927                                  |       | 2,671                                   |       |
| John M. Lotz                 |       | 1,380,875                                  |       | 6,723                                   |       |

** **

**Item 5.**                          OtherInformation.

None

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**Item 6. Exhibitsand Reports on Form 8-K.**

A.            EXHIBITS

31.1 Certification of theChief Executive Officer of Northern California Bancorp, Inc. pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer of Northern CaliforniaBancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

B.            Reports on Form 8-K

None

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|                   | NORTHERN CALIFORNIA BANCORP,  INC. |                             |   |   |
|------------------------|------------------------------------|----------------------------------|--------|--------|
|                   |                               |                             |   |   |
| Date: August  10, 2006 | By:                                | /s/ Charles T.  Chrietzberg, Jr. |   |   |   |
|                   |                               | Charles T.  Chrietzberg, Jr.     |   |   |   |
|                   |                               | Chairman of the  Board &     |   |   |   |
|                   |                               | Chief Executive  Officer         |   |   |   |
|                   |                               |                             |   |   |   |
| Date: August  10, 2006 | By:                                | /s/ Bruce N.  Warner             |   |   |   |
|                   |                               | Bruce N. Warner                  |   |   |   |
|                   |                               | Chief Financial  Officer and     |   |   |   |
|                   |                               | Principal  Accounting Officer    |   |   |   |

 

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