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

**WashingtonD.C.  20549**

 

**FORM 10-QSB**

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

 

**for thequarterly period ended September 30, 2002**

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

 

**forthe period from             to             **

 

**CommissionFile Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

Incorporated in the Stateof California

 

IRS EmployerIdentification Number **77-0421107**

 

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

 

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

 

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes     ý            No     o

 

As of  November1, 2002, the Corporation had 1,343,538 shares of common stock out-standing.

 

 

----

 

**PART I-FINANCIAL INFORMATION**

 

### **Item 1.    FINANCIAL STATEMENTS**

 

NORTHERNCALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED BALANCE SHEET

 
|                                                                                                                      |   | **SEPTEMBER  30  2002** |   | **DECEMBER  31  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| ASSETS:                                                                                                                   |   |                    |   |                   |   |
| Cash  and Cash Equivalents                                                                                                |   | 5,248,600               |   | 11,392,900             |   |
| Federal  Funds Sold                                                                                                       |   | 5,655,000               |   | 0                      |   |
| Cash  and Cash Equivalents                                                                                                |   | 10,903,600              |   | 11,392,900             |   |
| Due  From Bank - Time Deposits                                                                                            |   | 100,000                 |   | 100,000                |   |
| Investment  Securities, available for sale (Note 1)                                                                       |   | 7,154,100               |   | 9,478,400              |   |
| Trading  Account                                                                                                          |   | 78,200                  |   | 173,000                |   |
| Other  Investments                                                                                                        |   | 1,002,400               |   | 950,600                |   |
| Loans  Held for Sale                                                                                                      |   | 1,159,300               |   | 605,600                |   |
| Gross  Loans (Note 2)                                                                                                     |   | 56,030,200              |   | 52,601,400             |   |
| Allowance  for Possible Loan Losses (Note 3)                                                                              |   | (596,300                | )      | (566,300               | )      |
| Deferred  Origination Fees                                                                                                |   | (76,400                 | )      | (78,800                | )      |
| Net  Loans                                                                                                                |   | 55,357,500              |   | 51,956,300             |   |
| Bank  Premises and Equipment, Net                                                                                         |   | 1,939,700               |   | 1,804,700              |   |
| Cash  Surrender Value of Life Insurance                                                                                   |   | 2,082,900               |   | 2,000,700              |   |
| Interest  Receivable and Other Assets                                                                                     |   | 887,400                 |   | 1,272,700              |   |
| Total  Assets                                                                                                             |   | 80,665,100              |   | 79,734,900             |   |
|                                                                                                                      |   |                    |   |                   |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY:                                                                               |   |                    |   |                   |   |
| Total  Deposits (Note 4)                                                                                                  |   | 66,324,700              |   | 68,332,400             |   |
| Short-term  Borrowing                                                                                                     |   | 200,000                 |   | 200,000                |   |
| Long-term  Borrowing                                                                                                      |   | 1,000,000               |   | 1,000,000              |   |
| Federal  Home Loan Bank Borrowed Funds                                                                                    |   | 6,750,000               |   | 4,000,000              |   |
| Interest  Payable and Other Liabilities                                                                                   |   | 1,016,400               |   | 1,115,600              |   |
| Total  Liabilities                                                                                                        |   | 75,291,100              |   | 74,648,000             |   |
|                                                                                                                      |   |                    |   |                   |   |
| Shareholders’  Equity:                                                                                               |   |                    |   |                   |   |
|                                                                                                                      |   |                    |   |                   |   |
| Common  Stock - No Par Value  Authorized: 2,500,000 in 2002 and 2001  Outstanding:1,343,548 in 2002 and 1,329,257 in 2001 |   | 4,068,500               |   | 4,040,600              |   |
| Retained  Earnings                                                                                                        |   | 1,323,700               |   | 1,038,000              |   |
| Accumulated  Other Comprehensive Income (Loss)                                                                            |   | (18,200                 | )      | 8,300                  |   |
| Total  Shareholders’ Equity                                                                                          |   | 5,374,000               |   | 5,086,900              |   |
| Total  Liabilities & Shareholders’ Equity                                                                        |   | 80,665,100              |   | 79,734,900             |   |

 

2

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NORTHERN CALIFORNIABANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                          |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|---------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
| INTEREST INCOME:                                              |   |                                  |   |                                 |   |   |   |   |   |
| Interest  and Fees on Loans                                   |   | 1,084,700                             |   | 1,163,800                            |   | 3,225,600 |   | 3,473,600 |   |
| Interest  on Time Deposits with Financial Institutions        |   | 600                                   |   | 3,300                                |   | 2,300 |   | 10,900 |   |
| Interest  on Investment Securities                            |   | 104,800                               |   | 76,600                               |   | 291,400 |   | 446,600 |   |
| Interest  on Federal Funds                                    |   | 32,300                                |   | 128,400                              |   | 92,700 |   | 302,700 |   |
| Total  Interest Income                                        |   | 1,222,400                             |   | 1,372,100                            |   | 3,612,000 |   | 4,233,800 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| INTEREST  EXPENSE:                                            |   |                                  |   |                                 |   |   |   |   |   |
| Interest  on Interest-Bearing Transaction Accounts            |   | 25,800                                |   | 30,500                               |   | 81,700 |   | 89,500 |   |
| Interest  on Savings Accounts                                 |   | 14,300                                |   | 18,300                               |   | 42,800 |   | 57,000 |   |
| Interest  on Time Deposits                                    |   | 342,200                               |   | 499,500                              |   | 1,113,900 |   | 1,503,000 |   |
| Interest  on Other Borrowed Funds                             |   | 84,400                                |   | 93,200                               |   | 248,300 |   | 296,000 |   |
| Total  Interest Expense                                       |   | 466,700                               |   | 641,500                              |   | 1,486,700 |   | 1,945,500 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Net  Interest Income                                          |   | 755,700                               |   | 730,600                              |   | 2,125,300 |   | 2,288,300 |   |
| PROVISION  FOR POSSIBLE LOAN LOSSES                           |   | 25,000                                |   | 60,000                               |   | 77,000 |   | 110,000 |   |
| Net  Interest Income After Provision for Possible Loan Losses |   | 730,700                               |   | 670,600                              |   | 2,048,300 |   | 2,178,300 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| NONINTEREST  INCOME:                                          |   |                                  |   |                                 |   |   |   |   |   |
| Service  Charges on Deposit Accounts                          |   | 130,600                               |   | 120,200                              |   | 369,400 |   | 365,100 |   |
| SBA  Loan Sales & Servicing Income                        |   | 84,900                                |   | 71,600                               |   | 330,200 |   | 339,800 |   |
| Other  Operating Income                                       |   | 683,400                               |   | 423,300                              |   | 1,824,200 |   | 1,634,900 |   |
| Total  Noninterest Income                                     |   | 898,900                               |   | 615,100                              |   | 2,523,800 |   | 2,339,800 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| NONINTEREST  EXPENSE:                                         |   |                                  |   |                                 |   |   |   |   |   |
| Salaries  and Employee Benefits                               |   | 518,200                               |   | 519,300                              |   | 1,547,500 |   | 1,620,000 |   |
| Occupancy  and Equipment Expense                              |   | 93,700                                |   | 86,300                               |   | 270,200 |   | 252,000 |   |
| Professional  Fees                                            |   | 22,200                                |   | 35,400                               |   | 62,600 |   | 104,600 |   |
| Data  Processing                                              |   | 108,700                               |   | 66,300                               |   | 275,900 |   | 194,000 |   |
| FDIC  & State Assessments                                 |   | 4,400                                 |   | 10,900                               |   | 18,600 |   | 24,900 |   |
| Other  Operating Expenses                                     |   | 714,900                               |   | 697,500                              |   | 1,957,600 |   | 1,819,500 |   |
| Income  Tax Expense                                           |   | 58,100                                |   | 4,000                                |   | 135,700 |   | 277,000 |   |
| Total  Noninterest Expense                                    |   | 1,520,200                             |   | 1,419,700                            |   | 4,268,100 |   | 4,292,000 |   |
| NET  INCOME (LOSS)                                            |   | 109,400                               |   | (134,000                             | )      | 304,000 |   | 226,100 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Earnings  Per Common Share                                    |   |                                  |   |                                 |   |   |   |   |   |
| Primary                                                       |   | 0.08                                  |   | (0.10                                | )      | 0.23 |   | 0.17 |   |
| Diluted                                                       |   | 0.07                                  |   | (0.09                                | )      | 0.19 |   | 0.15 |   |

 

3

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NORTHERN CALIFORNIABANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

 
|                                                    |   | **2002**    |   | **2001**    |   |
|---------------------------------------------------------|--------|-------------|--------|-------------|--------|
| NET  INCOME                                             |   | 304,000     |   | 226,100     |   |
|                                                    |   |        |   |        |   |
| Adjustments  to net income:                             |   |        |   |        |   |
| Depreciation  and amortization expense                  |   | 34,600      |   | 91,800      |   |
| Amortization/Accretion  on investments                  |   | (5,100      | )      | 4,300       |   |
| (Gain)  loss on sale of securities                      |   | (51,700     | )      | (68,400     | )      |
| Provision  for possible loan losses                     |   | 77,000      |   | 110,000     |   |
| Amortization  of deferred income                        |   | 0           |   | (1,500      | )      |
| Increase  (decrease) in accrued expenses                |   | 105,500     |   | 306,000     |   |
| (Increase)  decrease in prepaid expenses                |   | 193,000     |   | (724,600    | )      |
| Increase  (decrease) in interest payable                |   | (204,700    | )      | (26,300     | )      |
| (Increase)  decrease in interest receivable             |   | (13,300     | )      | 326,200     |   |
| (Increase)  decrease in loans held for sale             |   | (553,700    | )      | 834,200     |   |
| Total  adjustments to net income                        |   | 418,400     |   | 851,700     |   |
| Net  cash provided (used) by operations                 |   | 114,400     |   | 1,077,800   |   |
|                                                    |   |        |   |        |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES                   |   |        |   |        |   |
| Proceeds  from maturity of investments                  |   | 0           |   | 2,000,000   |   |
| Proceeds  from sale of investments                      |   | 12,814,300  |   | 32,255,100  |   |
| Purchase  of securities                                 |   | (10,435,100 | )      | (16,495,200 | )      |
| Net  (increase) decrease in loans                       |   | (3,354,800  | )      | (8,403,800  | )      |
| Capital  expenditures                                   |   | (169,600    | )      | (105,800    | )      |
| Exercise  of stock options                              |   | 30,300      |   | 0           |   |
| Stock  repurchase                                       |   | (2,300      | )      | (37,800     | )      |
| Net  cash provided (used) in investing activities       |   | (1,117,200  | )      | 9,212,500   |   |
|                                                    |   |        |   |        |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES                   |   |        |   |        |   |
| Net  increase (decrease) in deposit accounts            |   | (2,007,700  | )      | (7,182,600  | )      |
| Net  increase (decrease) in borrowed funds              |   | 2,750,000   |   | (675,000    | )      |
| Net  cash provided (used) by financing activities       |   | 742,300     |   | (7,857,600  | )      |
|                                                    |   |        |   |        |   |
| Net  increase (decrease) in cash & cash equivalents |   | (489,300    | )      | 2,432,700   |   |
| Cash  & cash equivalents - beginning of year        |   | 11,492,900  |   | 17,556,200  |   |
|                                                    |   |        |   |        |   |
| Cash  & cash equivalents - end of period            |   | 11,003,600  |   | 19,988,900  |   |

 

See Note 5 forSupplemental Disclosures

 

4

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|                                                         |   | **SEPTEMBER  30  2002** |   | **DECEMBER  31  2001** |   |
|--------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| (NOTE  1) INVESTMENT SECURITIES:                             |   |                    |   |                   |   |
|                                                         |   |                    |   |                   |   |
| Available  for sale:                                         |   |                    |   |                   |   |
| US  Government Securities                                    |   | 0                       |   | 6,008,000              |   |
| Corporate  Debt Securities                                   |   | 2,226,100               |   | 3,470,400              |   |
| Government  National Mortgage Association Securities         |   | 4,928,000               |   | 0                      |   |
|                                                         |   | 7,154,100               |   | 9,478,400              |   |
|                                                         |   |                    |   |                   |   |
| (NOTE  2) GROSS LOANS:                                       |   |                    |   |                   |   |
|                                                         |   |                    |   |                   |   |
| Commercial  and Industrial                                   |   | 14,721,400              |   | 13,863,200             |   |
| Construction                                                 |   | 2,846,500               |   | 1,896,000              |   |
| Real  Estate - Mortgage                                      |   | 37,595,500              |   | 36,009,500             |   |
| Installment                                                  |   | 743,300                 |   | 702,600                |   |
| Government  Guaranteed Loans Purchased                       |   | 123,500                 |   | 130,100                |   |
| Gross  Loans                                                 |   | 56,030,200              |   | 52,601,400             |   |
|                                                         |   |                    |   |                   |   |
| (NOTE  3) ALLOWANCE FOR POSSIBLE LOAN LOSSES:                |   |                    |   |                   |   |
|                                                         |   |                    |   |                   |   |
| Balance  at Beginning of Period                              |   | 566,300                 |   | 468,500                |   |
| Recoveries                                                   |   | 12,700                  |   | 1,700                  |   |
| Provision  for Possible Loan Losses                          |   | 77,000                  |   | 185,000                |   |
| Loans  Charged Off                                           |   | (59,700                 | )      | (88,900                | )      |
| Balance  at End of Period                                    |   | 596,300                 |   | 566,300                |   |
|                                                         |   |                    |   |                   |   |
| (NOTE  4) DEPOSITS:                                          |   |                    |   |                   |   |
|                                                         |   |                    |   |                   |   |
| Demand                                                       |   | 13,992,600              |   | 14,525,800             |   |
| Interest-Bearing  Transaction                                |   | 12,957,600              |   | 12,014,500             |   |
| Savings                                                      |   | 4,737,900               |   | 3,849,000              |   |
| Time  Under $100,000                                         |   | 19,755,300              |   | 21,434,500             |   |
| Time  Equal to or Greater than $100,000                      |   | 14,881,300              |   | 16,508,600             |   |
|                                                         |   | 66,324,700              |   | 68,332,400             |   |
|                                                         |   |                    |   |                   |   |
| (NOTE  5) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |   |                    |   |                   |   |
|                                                         |   |                    |   |                   |   |
|                                                         |   | **9/30/02**             |   | **9/30/01**            |   |
| Payments  during the period ending:                          |   |                    |   |                   |   |
| Interest                                                     |   | 1,684,700               |   | 1,972,129              |   |
| Income  Taxes                                                |   | 163,100                 |   | 323,900                |   |

 

NOTES TO FINANCIALSTATEMENTS

 

5

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| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION** |
|--------------|------------------------------------------------------------------------------------------------|

 

**OVERVIEW**

 

The following discussion reviews and analyzes theoperating results and financial condition of the Corporation, focusing on theBank.  It should be read in conjunctionwith the financial statements and the other financial data presented elsewhereherein.  The Corporation’ onlyactivities have been investments.

 

For the nine months ended September 30, 2002 netincome was $304,000, an increase of $77,900 when compared to the same period in2001.  The increase in earnings duringthis period resulted from an increase of $184,000 in non-interest income, adecrease of $130,000 in net interest income after provision for loan losses anda decrease of $23,900 in non-interest expense.

 

6

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The following table sets forth certain selectedfinancial ratios of the Corporation at, and for the nine months ended,September 30, 2002 and 2001.

 
|                                                  |   | **For the  nine months  Ended September 30, 2002** |   | **For the  nine months  Ended September 30, 2001** |   |
|-------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                  |   | **(Dollars  in thousands except per share data)**  |   |
| Summary  of Operating Results:                        |   |                                               |   |                                               |   |
| Total  interest income                                |   | 3,612                                              |   | 4,234                                              |   |
| Total  interest expense                               |   | 1,487                                              |   | 1,945                                              |   |
| Net  interest income                                  |   | 2,125                                              |   | 2,288                                              |   |
|                                                  |   |                                               |   |                                               |   |
| Provision  for possible loan losses                   |   | 77                                                 |   | 110                                                |   |
| Net  interest income after provision for loan loss    |   | 2,048                                              |   | 2,178                                              |   |
|                                                  |   |                                               |   |                                               |   |
| Total  other income                                   |   | 2,524                                              |   | 2,340                                              |   |
| Total  other expense                                  |   | 4,133                                              |   | 4,015                                              |   |
|                                                  |   |                                               |   |                                               |   |
| Income  (loss) before taxes                           |   | 440                                                |   | 503                                                |   |
| Provision  for income tax                             |   | 136                                                |   | 277                                                |   |
|                                                  |   |                                               |   |                                               |   |
| Net  income (loss)                                    |   | 304                                                |   | 226                                                |   |
|                                                  |   |                                               |   |                                               |   |
| Per  Common Share Data:                               |   |                                               |   |                                               |   |
|                                                  |   |                                               |   |                                               |   |
| Net  income - Primary(1)                              |   | 0.23                                               |   | 0.17                                               |   |
| Net  income - Diluted(2)                              |   | 0.19                                               |   | 0.15                                               |   |
| Book  value, end of period                            |   | 4.03                                               |   | 4.05                                               |   |
| Avg  shares outstanding(3)                            |   | 1,344,202                                          |   | 1,335,682                                          |   |
|                                                  |   |                                               |   |                                               |   |
| Balance  Sheet Data:                                  |   |                                               |   |                                               |   |
|                                                  |   |                                               |   |                                               |   |
| Total  loans, net of unearned income(4)               |   | 57,113                                             |   | 50,843                                             |   |
| Total  assets                                         |   | 80,665                                             |   | 76,225                                             |   |
| Total  deposits                                       |   | 66,325                                             |   | 65,040                                             |   |
| Stockholders’  equity                            |   | 5,374                                              |   | 4,911                                              |   |
|                                                  |   |                                               |   |                                               |   |
| Selected  Financial Ratios(5):                        |   |                                               |   |                                               |   |
|                                                  |   |                                               |   |                                               |   |
| Return  on average assets(6)                          |   | 0.51                                               | %      | 0.40                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Return  on average stockholders’ equity(6)       |   | 7.74                                               | %      | 6.11                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net  interest spread                                  |   | 3.50                                               | %      | 3.92                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net  interest margin                                  |   | 4.10                                               | %      | 4.76                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Avg  shareholders’ equity to average assets      |   | 6.53                                               | %      | 6.61                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Risked-Based  capital ratios                          |   |                                               |   |                                               |   |
| Tier  1                                               |   | 9.43                                               | %      | 9.41                                               | %      |
| Total                                                 |   | 10.37                                              | %      | 10.33                                              | %      |
| Total  loans to total deposits at end of period       |   | 86.11                                              | %      | 78.17                                              | %      |
|                                                  |   |                                               |   |                                               |   |
| Allowance  to total loans at end of period            |   | 1.01                                               | %      | 1.04                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Non-performing  loans to total loans at end of period |   | 0.09                                               | %      | 0.92                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net  charge-offs to average loans                     |   | 0.08                                               | %      | 0.10                                               | %      |

 

----

(1)               Primary earningsper share amounts were computed on the basis of the weighted average number ofshares of common stock outstanding during the year.  The weighted average number of common shares used for thiscomputation was 1,344,202 and 1,335,682 for September 30, 2002 and 2001,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 1,607,998 and 1,561,415 for September 30, 2002 and 2001,respectively.

(3)             Weighted averagecommon shares.

(4)               Includes loansbeing held for sale.

(5)             Averages are of dailybalances.

(6)               Calculated on anannualized basis.

 

7

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**NETINTEREST INCOME**

 

Net interest income, the difference between (a)interest and fees earned on interest-earning assets and (b) interest paid oninterest-bearing liabilities, is the most significant component of the Bank’searnings.  Changes in net interestincome from period to period result from increases or decreases in the averagebalances of interest-earning assets portfolio, the availability of particularsources of funds and changes in prevailing interest rates.

 

Net interest income for the nine month period endedSeptember 30, 2002 was $2,125,300 compared to $2,288,300 for the same period in2001.  The decrease of $163,000 resultedfrom total interest income decreasing $621,800, while total interest expensedecreased $458,800.  Average interestearning assets increased $1,192,000 (1.80%), while the average rate earneddecreased 173 basis points.  Average interestbearing liabilities increased $3,755,000 (6.80%), while the average rate paiddecreased 131 basis points.

 

The following table shows the components of the Bank’snet interest income, setting forth, for each the nine months ended September30, 2002 and 2001, (i) average assets, liabilities and investments, (ii)interest income earned on interest-earning assets and interest expense paid oninterest-bearing liabilities, (iii) average yields earned on interest-earningassets and average rates paid on interest-bearing liabilities, (iv) the netinterest spread (i.e., the average yield earned on interest-earning assets lessthe average rate paid on interest-bearing liabilities) and (v) the net interestyield on average interest-earning assets (i.e., net interest income divided byaverage interest-earning assets). Yields are computed on a tax-equivalent basis, resulting in anadjustment to interest earned on non-taxable securities of $8,500 for the ninemonths ended September 30, 2001. Non-accrual loans and overdrafts are included in average loanbalances.  Average loans are presented netof unearned income.

 

8

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**INTEREST SPREAD ANALYSIS:**

 
|                                  |   | **The Nine  Months  Ended September 30,** |   | **The Twelve  Months  Ended December 31,** |   |
|---------------------------------------|--------|-------------------------------------------|--------|--------------------------------------------|--------|
|                                  |   | **2002**                                  |   | **2001**                                   |   | **2001** |   |
|                                  |   | **Avg  Bal**                              |   | **Int  Earn  Paid**                        |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   |
|                                  |   | **(Dollars in thousands)**                |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Earning Assets:             |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 100                                       |   | 2                                          |   | 3.12 |   | 200 |   | 11 |   | 7.30 |   | 178 |   | 12 |   | 6.99 |   |
| Invest  securities - Taxable          |   | 7,288                                     |   | 291                                        |   | 5.33 |   | 9,106 |   | 430 |   | 6.30 |   | 7,444 |   | 469 |   | 6.30 |   |
| Invest  securities - Non-Taxable      |   | 0                                         |   | 0                                          |   | N/A |   | 504 |   | 25 |   | 6.63 |   | 377 |   | 25 |   | 6.65 |   |
| Federal  funds sold                   |   | 7,382                                     |   | 93                                         |   | 1.67 |   | 9,714 |   | 303 |   | 4.16 |   | 10,310 |   | 363 |   | 3.52 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  investments                    |   | 14,770                                    |   | 386                                        |   | 3.49 |   | 19,523 |   | 769 |   | 5.25 |   | 18,308 |   | 870 |   | 4.75 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 2,288                                     |   | 195                                        |   | 11.37 |   | 2,406 |   | 189 |   | 10.46 |   | 2,209 |   | 227 |   | 10.29 |   |
| Real  estate                          |   | 37,153                                    |   | 2,092                                      |   | 7.51 |   | 29,670 |   | 2,390 |   | 10.74 |   | 31,258 |   | 2,805 |   | 8.97 |   |
| Installment                           |   | 734                                       |   | 47                                         |   | 8.45 |   | 739 |   | 60 |   | 10.83 |   | 767 |   | 90 |   | 11.67 |   |
| Commercial                            |   | 15,839                                    |   | 892                                        |   | 7.51 |   | 13,945 |   | 835 |   | 7.99 |   | 14,335 |   | 1,454 |   | 10.15 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  loans                          |   | 56,013                                    |   | 3,226                                      |   | 7.68 |   | 46,759 |   | 3,474 |   | 9.91 |   | 48,570 |   | 4,576 |   | 9.42 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Interest earning assets        |   | 70,783                                    |   | 3,612                                      |   | 6.80 |   | 66,282 |   | 4,242 |   | 8.53 |   | 66,878 |   | 5,446 |   | 8.14 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Liabilities:        |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 10,857                                    |   | 66                                         |   | 0.82 |   | 9,357 |   | 71 |   | 1.01 |   | 9,422 |   | 93 |   | 0.99 |   |
| Money  market savings                 |   | 1,976                                     |   | 15                                         |   | 1.03 |   | 1,332 |   | 19 |   | 1.86 |   | 1,328 |   | 22 |   | 1.66 |   |
| Savings  deposits                     |   | 4,063                                     |   | 43                                         |   | 1.40 |   | 3,970 |   | 57 |   | 1.91 |   | 3,885 |   | 71 |   | 1.82 |   |
| Time  deposits >$100M              |   | 16,373                                    |   | 473                                        |   | 3.86 |   | 15,074 |   | 644 |   | 5.69 |   | 15,216 |   | 833 |   | 5.47 |   |
| Time  deposits <$100M              |   | 20,681                                    |   | 640                                        |   | 4.13 |   | 19,857 |   | 859 |   | 5.77 |   | 20,263 |   | 1,126 |   | 5.56 |   |
| Other  Borrowing                      |   | 4,010                                     |   | 197                                        |   | 6.56 |   | 4,615 |   | 227 |   | 6.55 |   | 4,460 |   | 293 |   | 6.56 |   |
| Total  interest bearing liabilities   |   | 57,961                                    |   | 1,436                                      |   | 3.30 |   | 54,206 |   | 1,876 |   | 4.61 |   | 54,574 |   | 2,437 |   | 4.47 |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest income                  |   |                                      |   | 2,177                                      |   |   |   |   |   | 2,366 |   |   |   |   |   | 3,009 |   |   |   |
|                                  |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest spread                  |   |                                      |   |                                       |   | 3.50 |   |   |   |   |   | 3.92 |   |   |   |   |   | 3.68 |   |
| Net  yield on interest earning assets |   |                                      |   |                                       |   | 4.10 |   |   |   |   |   | 4.76 |   |   |   |   |   | 4.50 |   |

 

9

----

 
|                                 |   | **Nine  Months  Ended September 30,  2002 vs 2001** |   | **Twelve  Months  Ended December 31,  2001 vs 2000** |   |
|--------------------------------------|--------|-----------------------------------------------------|--------|------------------------------------------------------|--------|
|                                 |   | **Increase(Decrease)  Due to changes**              |   | **Increase(Decrease)  Due to changes**               |   |
|                                 |   | **Avg  Volume**                                     |   | **Avg  Rate**                                        |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                                 |   | **(Dollars in thousands)**                          |   |
| Interest  Earning Assets:            |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks |   | (5                                                  | )      | (3                                                   | )      | (9 | ) | 1 |   | 1 |   | 2 |   |
| Invest  securities - Taxable         |   | (86                                                 | )      | (53                                                  | )      | (139 | ) | 135 |   | (61 | ) | 74 |   |
| Invest  securities - Non-Taxable     |   | (25                                                 | )      | 0                                                    |   | (25 | ) | (716 | ) | (5 | ) | (721 | ) |
| Federal  funds sold                  |   | (73                                                 | )      | (137                                                 | )      | (210 | ) | 352 |   | (291 | ) | 60 |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Total  investments                   |   | (189                                                | )      | (193                                                 | )      | (382 | ) | (229 | ) | (357 | ) | (586 | ) |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Construction                         |   | (9                                                  | )      | 16                                                   |   | 6 |   | (98 | ) | (4 | ) | (102 | ) |
| Real  estate                         |   | 603                                                 |   | (900                                                 | )      | (298 | ) | 588 |   | (234 | ) | 354 |   |
| Installment                          |   | (0                                                  | )      | (13                                                  | )      | (14 | ) | 34 |   | (12 | ) | 22 |   |
| Commercial                           |   | 113                                                 |   | (57                                                  | )      | 57 |   | 194 |   | (191 | ) | 4 |   |
| Total  loans                         |   | 707                                                 |   | (955                                                 | )      | (248 | ) | 718 |   | (441 | ) | 277 |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Total  Interest Earning Assets       |   | 518                                                 |   | (1,148                                               | )      | (630 | ) | 520 |   | (829 | ) | (308 | ) |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Interest  Bearing Deposits:          |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                  |   | 11                                                  |   | (16                                                  | )      | (5 | ) | 5 |   | (1 | ) | 4 |   |
| Money  market savings                |   | 9                                                   |   | (12                                                  | )      | (3 | ) | (2 | ) | (2 | ) | (4 | ) |
| Savings  deposits                    |   | 2                                                   |   | (16                                                  | )      | (14 | ) | 14 |   | (6 | ) | 7 |   |
| Time  deposits >$100M             |   | 56                                                  |   | (226                                                 | )      | (170 | ) | 129 |   | (60 | ) | 69 |   |
| Time  deposits <$100M             |   | 36                                                  |   | (254                                                 | )      | (218 | ) | 70 |   | (50 | ) | 20 |   |
| Other  Borrowing                     |   | (30                                                 | )      | 0                                                    |   | (30 | ) | 4 |   | 9 |   | 13 |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Total  interest bearing deposits     |   | 130                                                 |   | (571                                                 | )      | (441 | ) | 220 |   | (111 | ) | 109 |   |
|                                 |   |                                                |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net  change in net interest          |   | 388                                                 |   | (578                                                 | )      | (190 | ) | 301 |   | (718 | ) | (417 | ) |

 

10

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**Provisionand Allowance for Loan Losses**

 

The provision for loan losses is an expense chargedagainst operating income and added to the allowance for loan losses.  The allowance for loan losses representsamounts which have been set aside for the specific purpose of absorbing losseswhich 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 sum ofthe 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%         |   | 0.50          | %      |
| Real  Estate - Construction                   |   | 0.15          | %      |
| Loans  to Individuals                         |   | 3.00          | %      |
| Commercial                                    |   | 2.00          | %      |
| SBA  Loans – Unguaranteed portion        |   | 2.00          | %      |
| Unfunded  Loan Commitments                    |   | .25           | %      |
| Concentration  Risk Factor – Real Estate |   | .10           | %      |
| Economic  Risk Factor                         |   | .25           | %      |
| SBA  Loans - Guaranteed portion               |   | 0.00          | %      |
| Cash  Secured Loans                           |   | 0.00          | %      |

 

Although no assurance can be given that actual losseswill not exceed the amount provided for in the allowance, management believes thatthe allowance is adequate to provide for all estimated credit losses in lightof all known relevant factors. At September 30, 2002 and 2001 the Bank’sallowance stood at 1.01 percent and 1.04 percent of gross loans, respectively.  A provision of $77,000 was made to theallowance during the nine months ended September 30, 2002, compared to aprovision of $110,000 in the same period in 2001.  Charged off loans during the nine months ended September 30, 2002and 2001 totaled $59,700 and $48,700 respectively.  Recoveries for the same periods were $12,700 and $1,800,respectively.

 

11

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The Bank’s non-performing (delinquent 90 days or moreand non-accrual) loans as a percentage of total loans was 0.09 percent atSeptember 30, 2002 compared with 0. 92 percent at September 30, 2001.

 

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, noassurance can be given that the Bank’s loan portfolio will continue to measurewell against its peers on these ratios and quality measures, or that losseswill not otherwise occur in the future.

 

**Non-InterestIncome**

 

Total non-interest income for the nine months ended September30, 2002 was $2,523,800, compared with $2,339,800 for the same period in2001.  The increase of  $184,000 was the result of a increases of$4,300 in service charges on deposit accounts and $189,300 in income from otherservice charges, commissions and fees; while income from SBA loan sales andservicing decreased $9,600.

 

The sale of Small Business Administration (SBA)guaranteed loans is a significant contributor to the Bank’s income.  SBA guaranteed loans yield up to 3 3/4% overthe New York prime rate, and the guaranteed portions can be sold at premiumswhich vary with market conditions.  SBAloans are guaranteed by the full faith of the United States Government from 75to 80 percent of the principal amount. The guaranteed portion has risks comparable for an investor to a U. S.Government security and can usually be sold in the secondary financial market,either at a premium or at a yield which allows the Bank to maintain asignificant spread for itself.

 

There can be no assurance that the gains on sale willcontinue at, or above, the levels realized in the past three years.  In addition, increasing competition amonglenders for qualified SBA borrowers makes it difficult for the Bank tocontinually expand its program in this area, and may limit the level of premiumthat can be earned with regard thereto. Furthermore, the SBA recently began requiring lenders to share a portionof premiums in excess of 10% earned on the sale of the guaranteed portions, andto pay 50 basis points on the outstanding guaranteed balance.  Management cannot predict that the impact ofthese changes will not have a significant impact on SBA income.

 

**Non-InterestExpense**

 

Salary and benefits expense for the nine months endedSeptember 30, 2002 increased $72,500 compared with the same period in2001.  The decrease was primarily duethe Bank not replacing the President when he left in February 2002 and lowerbonus accruals.

 

12

----

 

Occupancy and equipment expense increased $18,200 comparedwith the same period in 2001.  Occupancyexpense increased $7,800 and equipment expense increased $10,400.

 

Data processing expense for the nine months endedSeptember 30, 2002 increased $81,900 compared to the same period in 2001.  The increase was due primarily to costassociated with converting to an image item processing system, development ofan Internet site and the addition of a management reporting system.

 

For the ninemonths ended September 30, 2002 professional fees decreased $42,000 compared tothe same period in 2001.  The decreasewas due to decreases in audit/accounting fees of $12,600 and in legal fees of$29,400.

 

Other expenses for the nine months ended September 30,2002 totaled $1,957,600 compared with $1,819,500 for the same period in2001.  Significant changes occurred inthe following categories with increases in merchant processing expense$160,400, insurance expense $24,500, messenger and freight $18,400, tellers’differences $7,900 and prepaid card program expense $5,200; decreases occurredin miscellaneous expense $19,600, collection expense $16,500, postage $12,000,bank security $11,300, donations $10,300, auto expense $6,900 and loan expense$5,700.

 

Income tax expense for the nine months ended September30, 2002 was $135,700 compared with $277,000 for the same period in 2001.  The $141,300 decrease was due to a $63,400decline in pretax income and $237,000 in losses, for tax purposes, on securitysales in the company’s trading account.

 

**LOANS**

 

Loans represented 83.01% of average earning assets,and 70.28% of average total assets for the nine months ended September 30,2002, compared with 70.55% and 62.98%, respectively during 2001.  For the nine months ended September 30, 2002average loans increased 19.79% from $46,759,000 for the same period in 2001 to$56,013,000. Average real estate increased $7,365,000 (22.96%) and averagecommercial loans increased $1,894,000 (13.58%).

 

The Bank’s commercial and industrial loans aregenerally made for the purpose of providing working capital, financing thepurchase of equipment or inventory, and other business purposes. Such loansgenerally have maturities ranging from one year to several years.  Short-term business loans are generallyintended to finance current transactions and typically provide for monthlyinterest payments with principal being payable at maturity or at 90-dayintervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

 

13

----

 

The Bank is the recognized leader for Small BusinessAdministration lending in Monterey County, and holds SBA’s coveted PreferredLender Status.  Generally, SBA loans areguaranteed by the SBA for 75 to 80 percent of their principal amount, which canbe retained in portfolio or sold to investors. Such loans are made at floating interest rates, but generally for longerterms (up to 25 years) than are available on a conventional basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventionalcommercial loans because they may be based upon credit standards the Bank wouldnot otherwise apply, such as lower cash flow coverage, or longer repaymentterms.

 

The Bank’s real estate loan portfolio consists both ofreal estate construction loans and real estate mortgage loans.  The Bank has initiated a program to generatemore commercial and industrial real estate loans, which generally yield higherreturns than normal commercial loans. The Bank has also developed a broker program for generating residentialreal estate loans.  The Bank does notmake real estate development loans.  Real estate construction loans aremade for a much shorter term, and often at higher interest rates, thanconventional single-family residential real estate loans.  The cost of administering such loans isoften higher than for other real estate loans, as principal is drawn onperiodically as construction progresses.

 

The Bank also makes real estate loans secured by afirst deed of trust on single family residential properties and commercial andindustrial real estate.  California commercialbanks are permitted, depending on the type and maturity of the loan, to lend upto 90 percent of the fair market value of real property (or more if the loan isinsured either by private mortgage insurers or governmental agencies).  In certain instances, the appraised valuemay exceed the actual amount that could be realized on foreclosure, or declinesin market value subsequent to making the loan can impair the Bank’s security.

 

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

 

14

----

 

**Non-performingand Non-accrual Loans**

 

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

 

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

 
|                                                           |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                           |   | **2002**                              |   | **2001** |   |
|                                                           |   | **(Dollars in thousands)**            |   |
|                                                           |   |                                  |   |   |   |
| Accruing,past due 90 days or more:                             |   |                                  |   |   |   |
|                                                           |   |                                  |   |   |   |
| Real  Estate                                                   |   | 0                                     |   | 0 |   |
| Commercial                                                     |   | 0                                     |   | 0 |   |
| Installment                                                    |   | 0                                     |   | 0 |   |
| Other                                                          |   | 0                                     |   | 0 |   |
|                                                           |   | 0                                     |   | 0 |   |
|                                                           |   |                                  |   |   |   |
| Nonaccrual  Loans:                                             |   |                                  |   |   |   |
|                                                           |   |                                  |   |   |   |
| Real  Estate                                                   |   | 0                                     |   | 320 |   |
| Commercial                                                     |   | 50                                    |   | 150 |   |
| Installment                                                    |   | 0                                     |   | 0 |   |
| Other                                                          |   | 0                                     |   | 0 |   |
| Total  non-accrual                                             |   | 50                                    |   | 470 |   |
|                                                           |   |                                  |   |   |   |
| Total  non-performing                                          |   | 50                                    |   | 470 |   |
|                                                           |   |                                  |   |   |   |
| Total  loans end of period                                     |   | 57,190                                |   | 50,911 |   |
|                                                           |   |                                  |   |   |   |
| Ratio  of non-performing loans to total loans at end of period |   | 0.09                                  | %      | 0.92 | % |

 

15

----

 

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

 

**Summary of Loan Loss Experience**

 
|                                                                           |   | **Nine  Months Ended  September 30, 2002** |   | **Nine  Months Ended  September 30, 2001** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**                |   |
| Average  loans outstanding                                                     |   | 56,013                                     |   | 46,759                                     |   |
|                                                                           |   |                                       |   |                                       |   |
| Allowance,  beginning of period                                                |   | 566                                        |   | 468                                        |   |
|                                                                           |   |                                       |   |                                       |   |
| Loans  charged off during period:                                              |   |                                       |   |                                       |   |
| Commercial                                                                     |   | 58                                         |   | 41                                         |   |
| Installment                                                                    |   | 1                                          |   | 8                                          |   |
| Real  Estate                                                                   |   | 1                                          |   | 0                                          |   |
| Other                                                                          |   | 0                                          |   | 0                                          |   |
| Total  charge offs                                                             |   | 60                                         |   | 49                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Recoveries  during period:                                                     |   |                                       |   |                                       |   |
| Commercial                                                                     |   | 13                                         |   | 1                                          |   |
| Installment                                                                    |   | 0                                          |   | 1                                          |   |
| Other                                                                          |   | 0                                          |   | 0                                          |   |
| Total  recoveries                                                              |   | 13                                         |   | 2                                          |   |
|                                                                           |   |                                       |   |                                       |   |
| Net  Loans charged off during the period                                       |   | 47                                         |   | 47                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Additions  to allowance for possible loan losses                               |   | 77                                         |   | 110                                        |   |
|                                                                           |   |                                       |   |                                       |   |
| Allowance,  end of period                                                      |   | 596                                        |   | 531                                        |   |
|                                                                           |   |                                       |   |                                       |   |
| Ratio  of net loans charged off to average Loans outstanding during the period |   | 0.08                                       | %      | 0.10                                       | %      |
|                                                                           |   |                                       |   |                                       |   |
| Ratio  of allowance to total loans at end of period                            |   | 1.01                                       | %      | 1.04                                       | %      |

 

16

----

 

**Funding Sources**

 

Average deposits for the nine months ended September30, 2002 were $68,779,000 an increase of 8.67% compared with the averagebalance for 2001.  Average certificatesof deposit represented 53.87% of average deposits for the nine months endedSeptember 30, 2002.  Average interestchecking accounts, money market and savings accounts as a group was 24.57% ofaverage deposits.  Average demanddeposits represented 21.56% of average deposits.

 

The Company has a$1,000,000 term loan with United Security Bank with a maturity of July 5.2011.  The interest rate is a floatingrate based on United Security Bank’s reference rate plus seventy five (75)basis points.  Interest is payablemonthly, with quarterly principal payments of $27,777 beginning October 5, 2002.

 

The Company has a $200,000 revolving line of creditwith the Pacific Coast Bankers’ Bank which matures in July 2003.  The interest rate is a floating rate basedon the prime lending rate plus one (1) percentage point with a minimum rate of6.50%.  At September 30, 2002 the lineof credit was fully advanced.

 

The Bank has a line of credit from the Federal HomeLoan Bank of San Francisco with a maximum borrowing limit on September 30, 2002of approximately $11,800,000.  Certainof the Bank’s real estate secured loans and investment securities secure theline of credit.  At September 30, 2002the Bank had four $1,000,000 advances which bear interest at 4.83%, 6.81%,6.86% and 7.71%, respectively and a $2,750,000 advance with an interest rate of3.44%.  The advances mature in October2003, June 2004, August 2005, June 2030 and September 2007, respectively.  The Bank did not utilize any short-termborrowings in 2002, 2001 or 2000.

 

The Bank has a $105,000 letter of credit issued by theFederal Home Loan Bank of San Francisco to secure the uninsured portion oflocal agency deposits maintained with the Bank.  The letter of credit matures April 17, 2006.

 

**CapitalResources**

 

The Company maintains capital to comply with legalrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to paydividends.  At September 30, 2002,stockholders’ equity was $5,374,000 versus $5,086,900 at December 31,2001.  The Company paid a ten (10%) percentstock dividend in 2001, 2000 and 1999. The Bank paid cash dividends to the Corporation totaling $75,000 duringthe nine months ended September 30, 2002, $200,000 in 2001 and $100,000 in2000.

 

The FDIC and Federal Reserve Board have adoptedcapital adequacy guidelines for use in their examination and regulation ofbanks and bank holding companies.  Ifthe capital of a bank or bank holding company falls below the minimum levelsestablished by these guidelines, it may be denied approval to acquire or establishadditional banks or

 

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non-bank businesses, or the FDIC or Federal Reserve Board may takeother administrative actions.  Theguidelines employ two measures of capital: (1) risk-based capital and (2) leverage capital.

 

Under current rules, all banks were required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets. The Bank had a Tier 1 risk-based capital ratio of 9.43%and a total risk-based capital ratio of 10.37% at September 30, 2002, wellabove the minimum regulatory requirements.

 

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Bank had a leveragecapital ratio of 7.38% at September 30, 2002.

 

**Liquidity**

 

Liquidity represents a bank’s ability to providesufficient cash flows or cash resources in a manner that enables it to meetobligations in a timely fashion and adequately provides for anticipated futurecash needs.  For the Bank, liquidityconsiderations involve the capacity to meet expected and potential requirementsof depositors seeking access to balances and to provide for the credit demandsof borrowing customers.  In the ordinarycourse of the Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. The Bank has a line of credit fromthe Federal Home Loan Bank of San Francisco of approximately $11,800,000, and a$2,500,000 unsecured Federal Funds Purchased line of credit with the PacificCoast Bankers’ Bank, to meet temporary liquidity requirements.

 

As a matter of policy, the Bank seeks to maintain alevel of liquid assets, including marketable investment securities, equal to atleast 10 percent of total assets (“primary liquidity”), while maintainingsources of secondary liquidity (borrowing lines from other institutions) equalto at least an additional 10 percent of assets.  In addition, it seeks to generally limit loans to not more than90 percent of deposits.  Within these ratios, the Bank generally hasexcess funds available to sell as federal funds on a daily basis, and is ableto fund its own liquidity needs without the need of short-term borrowing.  The Bank’s primary liquidity at September30, 2002 was 21.06 percent, while its average loan to deposit ratio for thenine months ended September 30, 2002 was 81.44 percent.

 

## **Interest Rate Risk**

 

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

 

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The purpose for asset/liability management is toprovide stable net interest income growth by protecting the Bank’s earningsfrom undue interest rate risk.  The Bankexpects to generate earnings from increasing loan volume, appropriate loanpricing and expense control and not from trying to accurately forecast interestrates.  Another important function ofasset/liability management is managing the risk/return relationships betweeninterest rate risk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidityconcerns followed by capital adequacy, then interest rate risk and market riskin the investment portfolio.  The policyof the Bank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain atotally earnings neutral position. Further, the actual timing of repricing of assets and liabilities doesnot always correspond to the timing assumed by the Bank for analyticalpurposes.  Therefore, changes in marketrates of interest will generally impact on the Bank’s net interest income andnet interest margin for long or short periods of time.

 

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  At September 30,2002 the affect of a 2% increase in the federal funds sold rate would result ina 4.8% increase in equity, while a 2% decrease in the federal funds sold ratewould result in a 4.8% decrease in equity.

 

**InvestmentSecurities**

 

At September 30, 2002 the Company, in addition to itsinvestment in Monterey County Bank, held investments of $78,200 in TradingAccount Securities, $25,000 in Mission Valley Bank and $200,000 in LenderServices Acquisition Corporation.

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at September 30, 2002:

 

INVESTMENT PORTFOLIO MIX

 
|                                 |   | **Book  Value**             |   | **Market  value** |   |
|--------------------------------------|--------|-----------------------------|--------|-------------------|--------|
|                                 |   | **(Dollars  in thousands)** |   |
| Available  for sale:                 |   |                        |   |              |   |
| Government  National Mortgage Assoc. |   | 4,979                       |   | 4,928             |   |
| Corporate  Debt Securities           |   | 2,266                       |   | 2,226             |   |
|                                 |   |                        |   |              |   |
| Total                                |   | 7,245                       |   | 7,154             |   |

 

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The following table summarizes the maturity of theBank’s investment securities at September 30, 2002:

 

INVESTMENT PORTFOLIOMATURITIES

(Dollars in thousands)

 
|                                     |   | **1 year  or less** |   | **over 1  through  3 years** |   | **over 3  through  5 years** |   | **over 5  through  15 years** |   | **over  15 years** |   |
|------------------------------------------|--------|---------------------|--------|------------------------------|--------|------------------------------|--------|-------------------------------|--------|--------------------|--------|
| Government National Mortgage Association |   | —              |   | —                       |   | —                       |   | —                        |   | 4,928              |   |
| Corporate  Debt Securities               |   | —              |   | —                       |   | 1,474                        |   | 752                           |   | —             |   |
|                                     |   |                |   |                         |   |                         |   |                          |   |               |   |
| Total                                    |   | —              |   | —                       |   | 1,474                        |   | 752                           |   | 4,928              |   |

 

**PART II-OTHER INFORMATION**

 

**Item 1.    LegalProceedings.**

 

None

 

**Item 4.    Submission of Matters to a vote of SecurityHolders.**

 

None

 

**Item 5.    OtherInformation.**

 

None

 

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

** **

A.            EXHIBITS

 
| **Item** |   | **Description**                                                                                                                                                                                                                                              |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2        |   | Plan of Merger and  Merger Agreement, Monterey County Bank with Monterey County Merger  Corporation un the Charter of Monterey County Bank under the Title of  Monterey County Bank, joined in by Northern California Bancorp, Inc. dated  November 1, 1995. |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                     |
| 3 (i)    |   | Articles of  Incorporation                                                                                                                                                                                                                                   |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                     |
| 3 (ii)   |   | Bylaws                                                                                                                                                                                                                                                       |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                     |
| 10 (i) D |   | Lease agreement Carmel  Branch Office                                                                                                                                                                                                                        |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                     |
| 10 (ii)  |   |                                                                                                                                                                                                                                                         |
| A        |   | (1)  Employment Contract of Charles T. Chrietzberg,  Jr., dated January 1, 2000                                                                                                                                                                         |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1999.                                                                                                                                                                                                     |
|     |   | (2)  Deferred Compensation Agreement, dated  December 31, 1993                                                                                                                                                                                          |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                     |
|     |   | (3)  Northern California Bancorp, Inc. 1998  Stock Option Plan and Stock Option Agreements                                                                                                                                                              |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1998.                                                                                                                                                                                                     |
|     |   | (4)  Amendment to the Salary Continuation  Agreement Dated December 31, 1993                                                                                                                                                                            |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1999.                                                                                                                                                                                                     |
|     |   | (5)  Life Insurance Endorsement Method Split  Dollar Plan Agreement                                                                                                                                                                                     |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 1999.                                                                                                                                                                                                     |
|     |   | (6)  Amendment to the Life Insurance  Endorsement Method Split Dollar Plan Agreement Dated January 6, 2000                                                                                                                                              |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 2001                                                                                                                                                                                                      |
|     |   | (7)  Amendment to the Life Insurance  Endorsement Method Split Dollar Plan Agreement                                                                                                                                                                    |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 2001                                                                                                                                                                                                      |
|     |   | (8)  Amendment to the Salary Continuation  Agreement dated December 31, 1993                                                                                                                                                                            |
|     |   | Filed as exhibit to  Form 10KSB dated December 31, 2001                                                                                                                                                                                                      |

 

B.            Reports on Form 8-K

None

 

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In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                         |   | NORTHERN CALIFORNIA  BANCORP, INC. |                                                       |
|------------------------------|--------|------------------------------------|------------------------------------------------------------|
|                         |   |                               |                                                       |
| Date:  November 8, 2002 |   | By:                           | s/ Charles T.  Chrietzberg, Jr.                            |   |   |
|                         |   |                               | Charles T. Chrietzberg,  Jr.                               |   |
|                         |   |                               | Chairman of the Board  &  Chief Executive Officer      |   |
|                         |   |                               |                                                       |
|                         |   |                               |                                                       |
| Date: November 8, 2002       |   | By:                           | /s/ Bruce N. Warner                                        |   |   |
|                         |   |                               | Bruce N. Warner                                            |   |
|                         |   |                               | Chief Financial Officer  and  Principal Accounting Officer |   |
|                              |        |                                    |                                                            |  |  |  |  |  |

 

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CERTIFICATIONS

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

1. I haveread this quarterly report on Form 10-QSB of Northern California Bancorp, Inc.;

2. To myknowledge, the information in this report is true in all important respects asof September 30, 2002; and

3. Thisreport contains all information about the company of which I am aware that Ibelieve is important to a reasonable investor, in light of the subjectsrequired to be addressed in this report, as of September 30, 2002.

Forpurposes of this certification, information is “important to a reasonableinvestor” if:

(a) Thereis a substantial likelihood that a reasonable investor would view theinformation as significantly altering the total mix of information in thereport; and

(b) Thereport would be misleading to a reasonable investor if the information was omittedfrom the report.

Date:November 8, 2002
| s/ Charles T. Chrietzberg, Jr. |
|--------------------------------|
| Charles T. Chrietzberg, Jr.    |
| Chairman of the Board &    |
| Chief Executive Officer        |

 

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I, BruceN. Warner certify that:

1. I haveread this quarterly report on Form 10-QSB of Northern California Bancorp, Inc.;

2. To myknowledge, the information in this report is true in all important respects asof September 30, 2002; and

3. Thisreport contains all information about the company of which I am aware that Ibelieve is important to a reasonable investor, in light of the subjectsrequired to be addressed in this report, as of September 30, 2002.

Forpurposes of this certification, information is “important to a reasonableinvestor” if:

(a) Thereis a substantial likelihood that a reasonable investor would view theinformation as significantly altering the total mix of information in thereport; and

(b) Thereport would be misleading to a reasonable investor if the information wasomitted from the report.

Date:November 8, 2002

 
| /s/ Bruce N. Warner                                       |
|-----------------------------------------------------------|
| Bruce N. Warner                                           |
| Chief  Financial Officer and Principal Accounting Officer |

 

 

 

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