** **

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

**Washington,D.C.  20549**

 

**FORM 10-QSB**

 

**x****      Quarterly report under Section 13 or15(d) of the Securities Exchange Act of 1934 for the quarterly periodended March 31, 2008**

** **

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

 

**Commission File Number 0-27666**

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of Small Business Issuer in its Charter)

 

**Incorporated in the State of California**

**IRS Employer Identification Number 77-0421107**

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

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

 

Check whether theissuer: (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.
|   | Yes | x |   | No  o |
|--------|-----|---|--------|-----------------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

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

 

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

 

As of May 5,2008, the Corporation had 1,849,918 shares of common stock outstanding.

 

Transitional Small BusinessDisclosure Format (check one):      Yes  o   No  x

 

 

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TABLE OF CONTENTS

 
| **Facing Page**       |                                                                                        | 1      |
|-----------------------|---------------------------------------------------------------------------------------------|--------|
| **Table of Contents** |                                                                                        | 2      |
| ** **            |                                                                                        |   |
| **PART I**       | Financial Information                                                                       | 3-6    |
| Item 1                | Financial Statements                                                                        |   |
|                  | Consolidated Balance Sheets                                                                 | 3      |
|                  | Consolidated Statements of  Operations                                                      | 4      |
|                  | Consolidated****Statements****of  Changes in Shareholders’ Equity                      | 5      |
|                  | Consolidated Statements of  Cash Flows                                                      | 6      |
|                  | Summary of Accounting  Policies                                                             | 7-11   |
| Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11-28  |
| Item 3                | Controls and Procedures                                                                     | 28     |
|                  |                                                                                        |
| **PART II**      | Other Information                                                                           |   |
| Item 1                | Legal Proceedings                                                                           | 29     |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 29     |
| Item 3                | Defaults  Upon Senior Securities                                                            | 29     |
| Item 4                | Submission  of Matters to a Vote of Security Holders                                        | 29     |
| Item 5                | Other Information                                                                           | 29     |
| Item 6                | Exhibits and  Reports on Form 8-K                                                      | 29     |
| Signatures            | 30                                                                                          |
| Certifications        |                                                                                        |   |
|                       |                                                                                             |        |  |  |

 

2

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**PART I-FINANCIALINFORMATION**

 

### Item 1.              FINANCIAL STATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                                                          | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| **(in thousands except share data)**                                                            | ** ** | **2008**          | ** ** | **2007**             | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**   | ** ** | **(Audited)**        | ** ** |
| ASSETS:                                                                                                             |       |              |       |                 |       |
| Cash and Due  From Banks                                                                                            |       | $                 | 4,958      |                 | $          | 8,063 |   |
| Federal Funds  Sold                                                                                                 |       | 11,065            |       | 12,090               |       |
| Total Cash and  Cash Equivalents                                                                                    |       | 16,023            |       | 20,153               |       |
| Trading Assets                                                                                                      |       | 986               |       | 1,224                |       |
| Investment  Securities, available for sale (Note 5)                                                                 |       | 62,966            |       | 36,801               |       |
| Investment  Securities, held to maturity at cost (fair value approximates $8,112 in 2008;  $8,105 in 2007) (Note 5) |       | 7,866             |       | 7,869                |       |
| Other  Investments (Note 6)                                                                                         |       | 3,444             |       | 2,824                |       |
| Loans Held for  Sale, at lower of cost or market                                                                    |       | 117               |       | 1,887                |       |
| Loans, net of  allowance for loan losses of $2,029 in 2008; $2,028 in 2007 (Note 7)                                 |       | 167,456           |       | 166,861              |       |
| Bank Premises  and Equipment, Net                                                                                   |       | 4,944             |       | 4,874                |       |
| Cash Surrender  Value of Life Insurance                                                                             |       | 3,875             |       | 3,845                |       |
| Interest  Receivable and Other Assets                                                                               |       | 3,305             |       | 7,527                |       |
| Total Assets                                                                                                        |       | $                 | 270,982    |                 | $          | 253,865 |   |
|                                                                                                                |       |              |       |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                         |       |              |       |                 |       |
|                                                                                                                |       |              |       |                 |       |
| Non interest  bearing demand                                                                                        |       | $                 | 28,600     |                 | $          | 24,814 |   |
| Interest-bearing  demand                                                                                            |       | 15,911            |       | 15,600               |       |
| Savings                                                                                                             |       | 5,811             |       | 5,487                |       |
| Time less than  $100,000                                                                                            |       | 72,261            |       | 58,812               |       |
| Time in  denominations of $100,000 or more                                                                          |       | 61,330            |       | 62,620               |       |
| Total Deposits                                                                                                      |       | 183,913           |       | 167,333              |       |
|                                                                                                                |       |              |       |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                              |       | 56,500            |       | 52,500               |       |
| Junior  Subordinated Debt Securities                                                                                |       | 8,248             |       | 8,248                |       |
| Payable for  investment securities purchased                                                                        |       | 1,511             |       | 5,225                |       |
| Interest Payable  and Other Liabilities                                                                             |       | 6,063             |       | 6,125                |       |
| Total  Liabilities                                                                                                  |       | 256,235           |       | 239,431              |       |
|                                                                                                                |       |              |       |                 |       |
| Shareholders’  Equity:                                                                                         |       |              |       |                 |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,849,918 in 2008 and  1,845,918 in 2007             |       | 5,514             |       | 5,502                |       |
| Retained  Earnings                                                                                                  |       | 9,388             |       | 8,831                |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 8)                                                             |       | (155              | )          | 101                  |       |
| Total  Shareholders’ Equity                                                                                    |       | 14,747            |       | 14,434               |       |
| Total  Liabilities & Shareholders’ Equity                                                             |       | $                 | 270,982    |                 | $          | 253,865 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH PERIOD ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                              | ** ** | **March 31**                       | ** ** |
| **(in thousands except share data)**                | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| INTEREST INCOME:                                                        |       |                                    |       |   |   |
| Loans                                                                   |       | $                                       | 3,748      |   | $ | 3,290 |   |
| Time deposits  with other financial institutions                        |       | 12                                      |       | 14 |   |
| Investment  securities                                                  |       | 757                                     |       | 400 |   |
| Federal funds  sold                                                     |       | 104                                     |       | 123 |   |
| Total Interest  Income                                                  |       | 4,621                                   |       | 3,827 |   |
|                                                                    |       |                                    |       |   |   |
| INTEREST  EXPENSE:                                                      |       |                                    |       |   |   |
| Interest-bearing  transaction accounts                                  |       | 12                                      |       | 13 |   |
| Savings and time  deposit accounts                                      |       | 842                                     |       | 530 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 771                                     |       | 473 |   |
| Notes payable  and other                                                |       | 864                                     |       | 624 |   |
| Total Interest  Expense                                                 |       | 2,489                                   |       | 1,640 |   |
|                                                                    |       |                                    |       |   |   |
| Net Interest  Income                                                    |       | 2,132                                   |       | 2,187 |   |
| Provision for  loan losses                                              |       | —                                  |       | — |   |
| Net interest  income, after provision for loan losses                   |       | 2,132                                   |       | 2,187 |   |
|                                                                    |       |                                    |       |   |   |
| NON-INTEREST  INCOME:                                                   |       |                                    |       |   |   |
| Service charges  on deposit accounts                                    |       | 163                                     |       | 166 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 165                                     |       | 182 |   |
| Other income                                                            |       | 1,461                                   |       | 978 |   |
| Total  non-interest income                                              |       | 1,789                                   |       | 1,326 |   |
|                                                                    |       |                                    |       |   |   |
| NON-INTEREST  EXPENSE:                                                  |       |                                    |       |   |   |
| Salaries and  Employee Benefits                                         |       | 1,105                                   |       | 1,077 |   |
| Occupancy and  Equipment Expense                                        |       | 238                                     |       | 206 |   |
| Professional  Fees                                                      |       | 44                                      |       | 38 |   |
| Data Processing                                                         |       | 101                                     |       | 88 |   |
| Other general  and administrative                                       |       | 738                                     |       | 794 |   |
| Total  non-interest expense                                             |       | 2,226                                   |       | 2,203 |   |
|                                                                    |       |                                    |       |   |   |
| Income before  tax provision                                            |       | 1,695                                   |       | 1,310 |   |
| Income tax  provision                                                   |       | 776                                     |       | 501 |   |
| Net income                                                              |       | $                                       | 919        |   | $ | 809 |   |
|                                                                    |       |                                    |       |   |   |
| Earnings per  common share                                              |       |                                    |       |   |   |
| Basic                                                                   |       | $                                       | 0.498      |   | $ | 0.468 |   |
| Diluted                                                                 |       | $                                       | 0.496      |   | $ | 0.435 |   |

 

4

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NORTHERN CALIFORNIA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

** **
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Compre-**      | ** ** | ** ** | ** ** |
| ** **                                                                                                        | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **hensive ****Income** | ** ** | ** ** | ** ** |
| **(in thousands except share data)**                                                          | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**                  | ** ** | **Total**  | ** ** |
| ** **                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Balance at  December 31, 2006                                                                                |       | 1,721,715          |       | $          | 5,060      |         | $          | 7,363                       |       | $          | (21        | ) | $ | 12,402 |   |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
| Comprehensive  income:                                                                                            |       |               |       |       |       |         |       |                        |       |       |       |
| Net income                                                                                                        |       | —             |       | —     |       | 1,929        |       | —                      |       | 1,929      |       |
| Change in net  unrealized gain on securities and other assets net of reclassification  adjustment and tax effects |       | —             |       | —     |       | —       |       | 122                         |       | 122        |       |
| Total  comprehensive income                                                                                       |       |               |       |       |       |         |       |                        |       | 2,051      |       |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
| $0.25 per share dividend                                                                                          |       | —             |       | —     |       | (461         | )          | —                      |       | (461       | )          |
| Exercise of  stock options, net of tax benefit                                                                    |       | 124,203            |       | 442        |       | —       |       | —                      |       | 442        |       |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
| Balance at  December 31, 2007 (audited)                                                                      |       | 1,845,918          |       | 5,502      |       | 8,831        |       | 101                         |       | 14,434     |       |
| Cumulative  effect – application of new accounting standard EITF 06-4 and EITF 06-10                         |       | —             |       | —     |       | (362         | )          | —                      |       | (362       | )          |
|                                                                                                              |       | 1,845,918          |       | 5,502      |       | 8,469        |       | 101                         |       | 14,072     |       |
| Comprehensive  income:                                                                                            |       |               |       |       |       |         |       |                        |       |       |       |
| Net income                                                                                                        |       | —             |       | —     |       | 919          |       | —                      |       | 919        |       |
| Change in net  unrealized gain on securities and other assets net of reclassification  adjustment and tax effects |       | —             |       | —     |       | —       |       | (256                        | )          | (256       | )          |
| Total  comprehensive income                                                                                       |       |               |       |       |       |         |       |                        |       | 663        |       |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
| Exercise of  stock options, net of tax benefit                                                                    |       | 4,000              |       | 12         |       | —       |       | —                      |       | 12         |       |
|                                                                                                              |       |               |       |       |       |         |       |                        |       |       |       |
| Balance at  March 31, 2008 (unaudited)                                                                       |       | 1,849,918          |       | $          | 5,514      |         | $          | 9,388                       |       | $          | (155       | ) | $ | 14,747 |   |

 

5

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NO0RTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDEDMARCH 31, 2008 AND 2007

 
| **(in thousands except share data)**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |     |       |     |       |
| Net income                                                                         |       | $        | 919        |     | $          | 809 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation and  amortization expense                                             |       | 76       |       | 69       |       |
| Realized (gain)  loss on sales of available-for-sale securities, net               |       | (229     | )          | —   |       |
| Amortization of  deferred loan costs                                               |       | 85       |       | 71       |       |
| Amortization  (accretion) of discounts and premiums on investment securities, net  |       | (31      | )          | —   |       |
| (Gain) loss on  sale of equipment                                                  |       | —   |       | (1       | )          |
| Increase in cash  surrender value of life insurance                                |       | (30      | )          | (31      | )          |
| (Increase)  decrease in assets:                                                    |       |     |       |     |       |
| Trading assets                                                                     |       | 238      |       | (163     | )          |
| Loans held for  sale                                                               |       | 1,770    |       | (853     | )          |
| Interest  receivable                                                               |       | 73       |       | (59      | )          |
| Other assets                                                                       |       | 4,168    |       | 165      |       |
| Increase  (decrease) in liabilities:                                               |       |     |       |     |       |
| Interest payable                                                                   |       | (161     | )          | 219      |       |
| Other  liabilities                                                                 |       | (263     | )          | 122      |       |
| Net cash  provided by operating activities                                         |       | 6,615    |       | 348      |       |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |     |       |     |       |
| Proceeds from  maturity/sale of available for sale investment securities           |       | 31,909   |       | 1,081    |       |
| Purchase of  investments                                                           |       | (62,426  | )          | (7,042   | )          |
| Net increase in  loans                                                             |       | (8,799   | )          | (9,634   | )          |
| Loan purchases                                                                     |       | —   |       | (1,750   | )          |
| Loan sales                                                                         |       | 8,122    |       | 9,474    |       |
| Proceeds from  sale of equipment                                                   |       | —   |       | 1        |       |
| Additions to  bank premises and equipment                                          |       | (143     | )          | (291     | )          |
| Net cash used by  investing activities                                             |       | (31,337  | )          | (8,161   | )          |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |     |       |     |       |
| Net increase in  deposits                                                          |       | 16,580   |       | 1,659    |       |
| Proceeds from  borrowings                                                          |       | 4,000    |       | —   |       |
| Proceeds from  exercise of stock options                                           |       | 12       |       | 269      |       |
| Net cash  provided by financing activities                                         |       | 20,592   |       | 1,928    |       |
|                                                                               |       |     |       |     |       |
| Net decrease in  cash and cash equivalents                                         |       | (4,130   | )          | (5,885   | )          |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 20,153   |       | 22,434   |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, ENDING**                                             |       | $        | 16,023     |     | $          | 16,549 |   |

 

See Note 9 for supplemental disclosures

 

6

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**SUMMARY OF ACCOUNTING POLICIES**

 

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

 

*Nature of Business*

 

Northern CaliforniaBancorp, Inc. (the “Corporation”) was incorporated on August 29,1995, as a for-profit corporation under the California Corporate laws for theprincipal purpose of engaging in banking and non-banking activities as allowedfor a bank holding company.  TheCorporation owns 100% of Monterey County Bank (the “Bank”).  The Corporation’s sources of revenues at thistime are dividends on investments, gains on securities transactions andpotential dividends, management fees and tax equalization payments, if any,from the Bank.

 

*Basisof Presentation*

 

Theinterim condensed financial statements of Northern California Bancorp, Inc.and subsidiary (“Corporation”) are unaudited and reflect all adjustments(consisting only of normal recurring adjustments), which are, in the opinion ofmanagement, necessary for a fair presentation, in all material respects, of thefinancial position and operating results of the Corporation for the interimperiods.  The results of operations for the three months ended March 31,2008 are not necessarily indicative of the results to be expected for theentire fiscal year ending December 31, 2008.  The year-endbalance sheet data at December 31, 2007 was derived from the auditedfinancial statements.

 

Thisfinancial information should be read in conjunction with the audited financialstatements and notes thereto included in the Corporation’s Form 10-KSB forthe fiscal year ended December 31, 2007.

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard (SFAS) No. 157, *Fair Value Measurements,* which defines fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. SFAS No. 157 does not requireany new fair value measurements, but applies under other existing accountingpronouncements that require or permit fair value measurements. SFAS No. 157emphasizes that fair value is a market-based measurement, not anentity-specific measurement and, therefore, should be determined based on theassumptions that market participants would use in pricing that asset or liability.SFAS No. 157 also establishes a fair value hierarchy that distinguishesbetween market participant assumptions developed based on market data obtainedfrom independent sources and the Corporation’s own assumptions about marketparticipant assumptions based on the best information available. SFAS No. 157is effective for financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years with earlier adoptionpermitted.  The adoption of SFAS No. 157 did not have an impact onthe Corporation’s consolidated financial statements and results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities – including an amendment of FASB Statement No. 115*which is effective for financial statements issued for fiscal years beginningafter November 15, 2007.

 

7

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Theadoption of SFAS No. 159 did not have an impact on the Corporation’sconsolidated financial statements and results of operations.

 

OnSeptember 7, 2006, the Task Force reached a consensus on EITF Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects ofEndorsement Split-Dollar Life Insurance Arrangements (“EITF 06-4”) and on March 15,2007, the Task Force reached a consensus on EITF Issue No. 06-10,Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements(“EITF06-10”). The scope of these two issues relates to the recognition of aliability and related compensation costs for endorsement split-dollar lifeinsurance arrangements and for collateral assignment split-dollar lifeinsurance arrangements, respectively. EITF 06-4 and EITF 06-10 are both effective for fiscal years beginningafter December 15, 2007, although early adoption is permitted.  The Corporation adopted EITF 06-4 and EITF06-10 effective as of January 1, 2008 as a change in accounting principlethrough a $362,000 cumulative-effect adjustment to retained earnings. BeginningJanuary 1, 2008, a monthly charge to expense of approximately $9,143 ismade to recognize the liability for future benefits.

 

(NOTE3) STOCK BASED COMPENSATION

 

TheCorporation records compensation expense associated with stock-based awards inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107.SFAS No. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123).  However, SFAS No. 123R requires all stock-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values at the date ofgrant. No stock-based compensation expense was recorded for the three monthsended March 31, 2008 and 2007, respectively.  The Corporation selectedto use the modified prospective method of adopting SFAS 123R.  Thus, stockoption expense is recognized only for options that vested after January 1,2006.  Future compensation expense may be greater if additional stockoptions are granted by the Corporation.

 

Underthe Corporation’s 1998 Stock Option Plan, the Corporation may grant incentivestock options and non-qualified stock options to directors, officers, andemployees of the Corporation and its subsidiary, so long as the Corporationowns a majority of the equity interest of such subsidiary.  Incentive stock options are granted at fairvalue of the common stock on the date of grant. However, an incentive stock option granted to an individual owning 10%or more of the Corporation’s stock after such grant must have an exercise priceof at least 110%****of such fair market value and anexercise period of not more than five years. Non-qualified stock options may be granted at prices not lower than 85%of the fair market value of the common stock on the date of grant.  The Board of Directors is authorized todetermine when options become exercisable within a period not exceeding 10years from the date of grant.  Under thePlan, 211,081 shares of common stock have been reserved for the granting ofthese options.  At March 31, 2008,64,661 options were outstanding.  During2008, no options were granted, and 4,000 options were exercised by officers,employees, and board members.  As of March 31,2008, all options have been vested.

 

Underthe Corporation’s 2007 Stock Option Plan, the Corporation may grant incentivestock options and non-qualified stock options to directors, officers, andemployees of the Corporation 

 

8

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andits subsidiary, so long as the Corporation owns a majority of the equityinterest of such subsidiary.  Incentivestock options are granted at fair value of the common stock on the date ofgrant.  However, an incentive stockoption granted to an individual owning 10% or more of the Corporation’s stockafter such grant must have an exercise price of at least 110%****of such fair market value and an exercise period of notmore than five years.  The Board ofDirectors is authorized to determine when options become exercisable within aperiod not exceeding 10 years from the date of grant.  Under the Plan, 300,000 shares of commonstock have been reserved for the granting of these options.  At March 31, 2008, no options wereissued or outstanding.

 

**Pre-tax stock-basedcompensation expense was $0 for the three months ended March 31, 2008 and2007, respectively. There were no options granted during the three months endedMarch 31, 2008 or 2007.**

** **

(NOTE 4) EARNINGS PER SHARE

 

**Basicearnings per share represents income available to common stockholders divided bythe weighted-average number of common shares outstanding during theperiod.  Diluted earnings per sharereflects additional common shares that would have been outstanding, ifpotential dilutive common shares had been issued, as well as any adjustment to incomethat would result from the assumed issuance. Potential common shares that may be issued by the Bank relate tooutstanding stock options and warrants and are determined using the treasurystock method.**

** **

**Theweighted-average number of shares used in computing basic and diluted earningsper share is as follows:**

** **
| ** **                                                         | ** ** | **Earnings per share Calculation**                     | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the three months ended March 31** | ** ** |
| ** **                                                         | ** ** | **2008**                                                              | ** ** | **2007** | ** ** |
| ** **                                                         | ** ** | ** **                                                            | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                               | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                            | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                     | 919        |   | 1,846,885 |   | $ | 0.498 |   | $ | 809 |   | 1,728,657 |   | $ | 0.468 |   |
|                                                               |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                                |       | 5,119 |   | (0.002 | ) | — |   | 133,486 |   | (0.033 | ) |
|                                                               |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                        |       | $                                                                     | 919        |   | 1,852,004 |   | $ | 0.496 |   | $ | 809 |   | 1,862,143 |   | $ | 0.435 |   |

 

9

----

 
| ** **                                       | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2008**          | ** ** | **2007**             | ** ** |
| ** **                                       | ** ** | **(Unaudited)**   | ** ** | **(Audited)**        | ** ** |
| (NOTE 5)  INVESTMENT SECURITIES:                 |       |              |       |                 |       |
| Available for  sale:                             |       |              |       |                 |       |
| Government  National Mortgage Association        |       | $                 | —     |                 | $          | 385 |   |
| State/Local  Agency                              |       | 8,686             |       | 225                  |       |
| U.S. Government  Agencies                        |       | 54,280            |       | 36,191               |       |
|                                             |       | $                 | 62,966     |                 | $          | 36,801 |   |
|                                             |       |              |       |                 |       |
| Held to  maturity:                               |       |              |       |                 |       |
| State/Local  Agency                              |       | $                 | 7,866      |                 | $          | 7,869 |   |
|                                             |       |              |       |                 |       |
| (NOTE 6) OTHER  INVESTMENTS                      |       |              |       |                 |       |
| AT Services LLC                                  |       | $                 | 20         |                 | $          | 20 |   |
| Federal Home  Loan Bank stock, restricted        |       | 2,689             |       | 2,495                |       |
| Independent  Bankers Financial Corporation       |       | 51                |       | 51                   |       |
| Metrocities  Mortgage, LLC                       |       | 10                |       | 10                   |       |
| Northern California  Bancorp, Inc. Trust I  |       | 93                |       | 93                   |       |
| Northern  California Bancorp, Inc. Trust II |       | 155               |       | 155                  |       |
| Visa, Inc.                                  |       | 426               |       | —               |       |
|                                             |       | $                 | 3,444      |                 | $          | 2,824 |   |

 
| (NOTE 7) LOANS  AND ALLOWANCE FOR POSSIBLE LOAN LOSSES: |   |    |    |    |   |
|---------------------------------------------------------|--------|---------|---------|---------|--------|
|                                                    |   |    |    |    |   |
| Commercial and  Industrial                              |   | $       | 30,657  |    | $      | 28,310 |   |
| Construction                                            |   | 23,230  |    | 23,396  |   |
| Real Estate -  Mortgage                                 |   | 115,021 |    | 116,625 |   |
| Installment                                             |   | 910     |    | 876     |   |
| Government  Guaranteed Loans Purchased                  |   | 30      |    | 32      |   |
|                                                    |   | 169,848 |    | 169,239 |   |
| Allowance for  loan losses                              |   | (2,029  | )       | (2,028  | )      |
| Deferred  origination fees, net                         |   | (363    | )       | (350    | )      |
| Net Loans                                               |   | $       | 167,456 |    | $      | 166,861 |   |
|                                                    |   |    |    |    |   |
| Balance at  Beginning of Period                         |   | $       | 2,028   |    | $      | 1,409 |   |
| Recoveries                                              |   | 1       |    | 4       |   |
| Provision for  Possible Loan Losses                     |   | —  |    | 865     |   |
| Loans Charged  Off                                      |   | —  |    | (250    | )      |
| Balance at End  of Period                               |   | $       | 2,029   |    | $      | 2,028 |   |

 

10

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(NOTE 8) COMPREHENSIVE INCOME (LOSS):

 

The components of other comprehensive income and related tax effects forthe three month period ended March 31, 2008 and the year ended December 31,2007 are as follows:

 
| ** **                                                                                | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                | ** ** | **2008**          | ** ** | **2007**             | ** ** |
| ** **                                                                                | ** ** | **(Unaudited)**   | ** ** | **(Audited)**        | ** ** |
| Unrealized  holding gains (losses) on available for sale securities and other assets, net |       | $                 | (237       | )                    | $          | 438 |   |
| Reclassification  for gains realized in income                                            |       | (229              | )          | (216                 | )          |
| Net unrealized  gains (losses)                                                            |       | (466              | )          | 222                  |       |
| Tax effect                                                                                |       | 210               |       | (100                 | )          |
|                                                                                      |       |              |       |                 |       |
| Net-of-tax  amount                                                                        |       | $                 | (256       | )                    | $          | 122 |   |

 

The components of accumulatedother comprehensive income (loss) and related tax effects are as follows:

 
| ** **                                                             | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **2008**          | ** ** | **2007**             | ** ** |
| ** **                                                             | ** ** | **(Unaudited)**   | ** ** | **(Audited)**        | ** ** |
| Unrealized  holding gains (losses) on available for sale securities    |       | $                 | (326       | )                    | $          | 163 |   |
| Unrealized  holding gains on available for sale asset strip receivable |       | 44                |       | 21                   |       |
| Tax effect                                                             |       | 127               |       | (83                  | )          |
|                                                                   |       |              |       |                 |       |
| Net-of-tax amount                                                      |       | $                 | (155       | )                    | $          | 101 |   |

 

(NOTE 9)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| ** **                          | ** ** | **March 31** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2008**          | ** ** | **2007** | ** ** |
| Payments during  the period ending: |       |              |       |   |   |
| Interest                            |       | $                 | 2,600      |   | $ | 1,295 |   |
| Income Taxes                        |       | $                 | 846        |   | $ | 279 |   |

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

 

**StatementsRegarding Forward-Looking Information**

** **

**Except for historicalinformation contained herein, the matters discussed or incorporated byreference in this report contain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Section 21E of the Securities Exchange Act of 1934 (the “ExchangeAct”), that involve substantial risks and uncertainties.  When used inthis report, or in the documents incorporated by reference herein, the words “anticipate,”“believe,” “estimate,” “may,” “intend,” “expect,” and similar expressionsidentify certain of such forward-looking statements.  Actual results of**

 

11

----

 

**Monterey County Bank coulddiffer materially from such forward-looking statements contained herein. Factors that could cause future results to vary from current expectationsinclude, but are not limited to, the following: changes in economic conditions(both generally and more specifically in the markets in which the Bankoperates); changes in interest rates, deposit flows, loan demand, real estatevalues and competition; changes in accounting principles, policies orguidelines and in government legislation and regulation (which change from timeto time and over which the Bank has no control); other factors affecting theBank’s operations, markets, products and services; and other risks detailed inthis Form 10-QSB and in the Bank’s other reports filed with the FederalDeposit Insurance Corporation and pursuant to the rules and regulations ofthe Securities and Exchange Commission.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof.  The Corporation undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances that arise after the date thereof.**

** **

**CRITICALACCOUNTING POLICIES**

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make a number of judgments,estimates and assumptions that affect the reported amount of assets,liabilities, income and expenses in the Corporation’s financial statements andaccompanying notes.  Management believesthat the judgments, estimates and assumptions used in preparation of theCorporation’s financial statements are appropriate given the factualcircumstances as of March 31, 2008.

 

Various elements of the Corporation’s accounting policies, by theirnature, are inherently subject to estimation techniques, valuation assumptionsand other subjective assessments. Critical accounting policies are those that involve the most complex andsubjective decisions and assessments and have the greatest potential impact onthe Corporation’s results of operation. In particular, management has identified one accounting policy that, dueto judgments, estimates and assumptions inherent in this policy, and thesensitivity of the Corporation’s financial statements to those judgments,estimates and assumptions, is critical to an understanding of the Corporation’sfinancial statements.  This policyrelates to the methodology that determines the Corporation’s allowance for loanlosses.  Management has discussed thedevelopment and selection of this critical accounting policy with theCorporation’s Audit Committee of the Board of Directors.  Although Management believes the level of theallowance at March 31, 2008 is adequate to absorb losses inherent in theloan portfolio, a decline in the regional economy may result in increasinglosses that cannot reasonably be predicted at this time.  For further information regarding theallowance for loan losses see “Provision and Allowance for Loan Losses”included elsewhere herein.

 

**OVERVIEW**

 

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

 

For the threemonths ended March 31, 2008 net income was $919,000, compared to $809,000for the same period in 2007.  For thethree months ended March 31, 2008 net interest income after provision forloan losses decreased $55,000, total non-interest income increased 

 

12

----

 

$463,000, non-interest expense increased $23,000 and the income taxprovision increased $275,000.

 

The followingtable sets forth certain selected financial ratios of the Corporation for thethree months ended March 31, 2008 and 2007.

 
| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Summary of  Operating Results:                       |       |                                                |       |   |   |
|                                                 |       |                                                |       |   |   |
| Total interest  income                               |       | $                                                   | 4,621      |   | $ | 3,827 |   |
| Total interest  expense                              |       | 2,489                                               |       | 1,640 |   |
| Net interest  income                                 |       | 2,132                                               |       | 2,187 |   |
|                                                 |       |                                                |       |   |   |
| Provision for  possible loan losses                  |       | —                                              |       | — |   |
| Net interest  income after provision for loan losses |       | 2,132                                               |       | 2,187 |   |
|                                                 |       |                                                |       |   |   |
| Total  non-interest income                           |       | 1,789                                               |       | 1,326 |   |
| Total  non-interest expense                          |       | 2,226                                               |       | 2,203 |   |
|                                                 |       |                                                |       |   |   |
| Income before  taxes                                 |       | 1,695                                               |       | 1,310 |   |
| Provision for  income taxes                          |       | 776                                                 |       | 501 |   |
|                                                 |       |                                                |       |   |   |
| Net income                                           |       | $                                                   | 919        |   | $ | 809 |   |
|                                                 |       |                                                |       |   |   |
| Per Common Share  Data:                              |       |                                                |       |   |   |
|                                                 |       |                                                |       |   |   |
| Net income -  Primary (1)                            |       | $                                                   | 0.498      |   | $ | 0.468 |   |
| Net income -  Diluted (2)                            |       | 0.496                                               |       | 0.435 |   |
| Book value, end  of period                           |       | 7.97                                                |       | 7.53 |   |
| Avg shares  outstanding (3)                          |       | 1,846,885                                           |       | 1,728,657 |   |
| Balance Sheet  Data:                                 |       |                                                |       |   |   |
| Total loans, net  of unearned income (4)             |       | $                                                   | 167,573    |   | $ | 132,742 |   |
| Total assets                                         |       | 270,982                                             |       | 193,671 |   |
| Total deposits                                       |       | 183,913                                             |       | 133,287 |   |
| Stockholders’  equity                           |       | 14,747                                              |       | 13,502 |   |

 

13

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| ** **                                                     | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **Selected  Financial Ratios:**                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Return on  average assets (5) (6)                         |       | 1.41                                                | %          | 1.73 | % |
| Return on  average stockholders’ equity (5) (6)      |       | 24.83                                               | %          | 25.09 | % |
| Net interest  spread                                           |       | 2.94                                                | %          | 4.47 | % |
| Net yield on  interest earning assets (5)                      |       | 3.51                                                | %          | 5.14 | % |
| Avg  shareholders’ equity to average assets (5)           |       | 5.67                                                | %          | 6.88 | % |
| Risked-Based  capital ratios                                   |       |                                                |       |   |   |
| Tier 1                                                         |       | 9.68                                                | %          | 10.76 | % |
| Total                                                          |       | 13.14                                               | %          | 14.71 | % |
| Total loans to  total deposits at end of period (4)            |       | 91.11                                               | %          | 99.59 | % |
| Allowance for  loan losses to total loans at end of period (4) |       | 1.19                                                | %          | 1.05 | % |
| Nonperforming  loans to total loans at end of period (4)       |       | 2.08                                                | %          | 0.12 | % |
| Net charge-offs  to average loans (4)                          |       | 0.00                                                | %          | 0.00 | % |

 

----

(1)   Basic earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of common shares used for this computationwas 1,846,885 and 1,728,657 for March 31, 2008 and 2007, respectively.

 

(2)          Dilutedearnings per share amounts were computed on the basis of the weighted average numberof shares 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 1,852,004 and 1,862,143 for March 31, 2008 and 2007,respectively.

 

(3)   Weighted average common shares.

 

(4)   Includes loans being held for sale.

 

(5)   Averages are of daily balances.

 

(6)   March 31, 2008 calculated on anannualized basis.

 

**NETINTEREST INCOME**

 

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

 

Net interest income for the three monthsended March 31, 2008 was $2,132,000 compared to $2,187,000 for the sameperiod in 2007.  The decrease of $55,000resulted 

 

14

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primarilyfrom the decline in loan rates as shown on page 16 in the rate and volumeanalysis table.

 

The following tables show the componentsof the Bank’s net interest income, setting forth, for each of the three monthsended March 31, 2008 and 2007, (i) average assets, liabilities andinvestments, (ii) interest income earned on interest-earning assets andinterest expense paid on interest-bearing liabilities, (iii) averageyields earned on interest-earning assets and average rates paid oninterest-bearing liabilities, (iv) the net interest spread (i.e., theaverage yield earned on interest-earning assets less the average rate paid on interest-bearingliabilities) and (v) the net interest yield on average interest-earningassets (i.e., net interest income divided by average interest-earningassets).  Yields are computed on atax-equivalent basis, resulting in adjustments to interest earned on municipalbonds of $59,000 and $37,000 for the three months ended March 31, 2008 and2007, respectively.  Non-accrual loansand overdrafts are included in average loan balances.  Average loans are presented net of unearnedincome.

 

**DISTRIBUTION,RATE AND YIELD ANALYSIS OF NET INTEREST INCOME:**

 

The following table showsthe consolidated average balances of earning assets, and interest-bearingliabilities; the amount of interest income and interest expense; the averageyield or rate for each category of average interest-earning assets and averageinterest-bearing liabilities; and the net interest income and the net interestspread for the periods indicated:

 

15

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| ** **                                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                             | ** ** | **2007**                                             | ** ** |
| ** **                                                  | ** ** | **Average**                                          | ** ** | ** **                                           | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                          | ** ** | **Interest**                                         | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                    | 172,284    |                                                 | $          | 3,698 |   | 8.59 | % | $ | 130,718 |   | $ | 3,290 |   | 10.07 | % |
| Time deposits -  in other banks                             |       | 1,478                                                |       | 12                                                   |       | 3.34 | % | 1,144 |   | 14 |   | 4.79 | % |
| Invest  securities - taxable                                |       | 45,867                                               |       | 626                                                  |       | 5.46 | % | 23,118 |   | 295 |   | 5.10 | % |
| Invest  securities - nontaxable                             |       | 11,060                                               |       | 189                                                  |       | 6.84 | % | 7,011 |   | 118 |   | 6.72 | % |
| Federal funds  sold                                         |       | 12,879                                               |       | 104                                                  |       | 3.23 | % | 9,190 |   | 123 |   | 5.37 | % |
| Total  interest-earning assets                              |       | 243,568                                              |       | 4,629                                                |       | 7.60 | % | 171,181 |   | 3,840 |   | 8.97 | % |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (2,029                                               | )          |                                                 |       |   |   | (1,409 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 7,374                                                |       |                                                 |       |   |   | 6,491 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,897                                                |       |                                                 |       |   |   | 4,728 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,174                                                |       |                                                 |       |   |   | 1,016 |   |   |   |   |   |
| Other assets                                                |       | 5,970                                                |       |                                                 |       |   |   | 5,560 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                    | 260,954    |                                                 |       |   |   |   | $ | 187,567 |   |   |   |   |   |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                    | 13,586     |                                                 | $          | 9 |   | 0.26 | % | $ | 14,434 |   | $ | 9 |   | 0.25 | % |
| Money market  savings                                       |       | 1,695                                                |       | 3                                                    |       | 0.73 | % | 2,000 |   | 4 |   | 0.72 | % |
| Savings deposits                                            |       | 6,276                                                |       | 17                                                   |       | 1.06 | % | 4,724 |   | 12 |   | 0.99 | % |
| Time deposits  >$100M                                    |       | 61,693                                               |       | 771                                                  |       | 5.00 | % | 37,724 |   | 473 |   | 5.01 | % |
| Time deposits  <$100M                                    |       | 66,884                                               |       | 826                                                  |       | 4.94 | % | 43,927 |   | 519 |   | 4.73 | % |
| Other Borrowing                                             |       | 63,737                                               |       | 864                                                  |       | 5.43 | % | 42,998 |   | 624 |   | 5.81 | % |
| Total interest-bearing  liabilities                         |       | 213,871                                              |       | 2,490                                                |       | 4.66 | % | 145,807 |   | 1,641 |   | 4.50 | % |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 26,197                                               |       |                                                 |       |   |   | 25,273 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 2,022                                                |       |                                                 |       |   |   | 1,375 |   |   |   |   |   |
| Other  liabilities                                          |       | 4,059                                                |       |                                                 |       |   |   | 2,211 |   |   |   |   |   |
| Total  Liabilities                                          |       | 246,149                                              |       |                                                 |       |   |   | 174,666 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 14,805                                               |       |                                                 |       |   |   | 12,901 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                    | 260,954    |                                                 |       |   |   |   | $ | 187,567 |   |   |   |   |   |
| Net interest  income                                        |       |                                                 |       | $                                                    | 2,139      |   |   |   |   |   | $ | 2,199 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                 |       |                                                 |       | 7.60 | % |   |   |   |   | 8.97 | % |
| Interest expense  as a percentage of average earning assets |       |                                                 |       |                                                 |       | 4.09 | % |   |   |   |   | 3.83 | % |
| Net yield on  interest earning assets                       |       |                                                 |       |                                                 |       | 3.51 | % |   |   |   |   | 5.14 | % |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Net interest  spread                                        |       |                                                 |       |                                                 |       | 2.94 | % |   |   |   |   | 4.47 | % |

 

16

----

 

**Rate and Volume Analysis:**

 

The following tables show the increase or decrease in interest income,interest expense and net interest income, resulting from changes in rates andvolumes, for the three months ended March 31, 2008 compared with the sameperiod in 2007.

 
| ** **                                   | ** ** | **Increase (decrease) in the three months ended**    | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **March 31, 2008 compared with March 31, 2007** | ** ** |
| ** **                                   | ** ** | **Volume**                                                                         | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:     |       |                                                                               |       |   |   |   |   |
| Loans                                        |       | $                                                                                  | 1,046      |   | $ | (638 | ) | $ | 408 |   |
| Time deposits -  in other banks              |       | 3                                                                                  |       | (5 | ) | (2 | ) |
| Invest  securities - taxable                 |       | 289                                                                                |       | 42 |   | 331 |   |
| Invest  securities - nontaxable              |       | 68                                                                                 |       | 3 |   | 71 |   |
| Federal funds  sold                          |       | 50                                                                                 |       | (69 | ) | (19 | ) |
|                                         |       | 1,456                                                                              |       | (667 | ) | 789 |   |
|                                         |       |                                                                               |       |   |   |   |   |
| Increase  (decrease) in interest expense:    |       |                                                                               |       |   |   |   |   |
| Money market  savings                        |       | (1                                                                                 | )          | 0 |   | (1 | ) |
| Savings deposits                             |       | 4                                                                                  |       | 1 |   | 5 |   |
| Time deposits  >$100M                     |       | 300                                                                                |       | (2 | ) | 298 |   |
| Time deposits  <$100M                     |       | 271                                                                                |       | 36 |   | 307 |   |
| Other Borrowing                              |       | 301                                                                                |       | (61 | ) | 240 |   |
|                                         |       | 875                                                                                |       | (26 | ) | 849 |   |
| Increase  (decrease) in net interest income: |       | $                                                                                  | 581        |   | $ | (641 | ) | $ | (60 | ) |

 

**Provisionand Allowance for Loan Losses**

 

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

 

The allowance forloan losses reflects management’s ongoing evaluation of the risks inherent inthe loan portfolio both generally and with respect to specific loans, the stateof the economy, and the level of net loan losses experienced in the past.  Management and the Board of Directors reviewthe results of the State Banking Department and FDIC examinations, independentaccountants’ observations, and the Bank’s internal review as additionalindicators to determine if the amount in the allowance for loan losses isadequate to protect against estimated future losses.  It is the Bank’s current practice, whichcould change in accordance with the factors mentioned above, to maintain anallowance which is at least equal to the sum of the following percentage ofloan balances by loan category. Additionally, specific loss allocations are made for classified loans.

 

17

----

 

 
| **Loan Category**                        | ** ** | **Reserve %** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|
|                                          |       |               |       |
| Classified  Loans:                            |       |               |       |
| Loans classified  loss                        |       | 100.00             | %          |
| Loans classified  doubtful                    |       | 50.00              | %          |
| Loans classified  substandard                 |       | 5.00-20.00         | %          |
|                                          |       |               |       |
| Unclassified  Loans:                          |       |               |       |
| Real Estate -  Loan to value 80% or less      |       | 0.10               | %          |
| Real Estate -  Loan to value over 80%         |       | 0.70               | %          |
| Real Estate -  Construction                   |       | 0.25               | %          |
| Loans to  Individuals                         |       | 3.00               | %          |
| Commercial                                    |       | 2.00               | %          |
| SBA Loans –  Unguaranteed portion        |       | 2.00               | %          |
| Unfunded Loan  Commitments                    |       | .10                | %          |
| Concentration  Risk Factor – Real Estate |       | .10                | %          |
| Economic Risk  Factor                         |       | .20                | %          |
| SBA Loans -  Guaranteed portion               |       | 0.00               | %          |
| Cash Secured  Loans                           |       | 0.00               | %          |

 

Although noassurance can be given that actual losses will not exceed the amount providedfor in the allowance, Management believes that the allowance is adequate toprovide for all estimated credit losses in light of all known relevant factors.At March 31, 2008and 2007 the Bank’s allowance stood at 1.19 percent and 1.05 percent,respectively.

 

No provisions weremade to the allowance during the three months ended March 31, 2008 or2007.  No loans were charged off duringthe three months ended March 31, 2008 and March 31, 2007.  Recoveries for the same periods were $1,000and $0, respectively.

 

TheBank’s non-performing (delinquent 90 days or more and on non-accrual) loans asa percentage of total loans were 2.01 percent and 0.12 percent as of the end ofMarch 31, 2008 2007, respectively. The significant increase in non-accrual loans consisted of a single$3,200,000 real estate loan participation purchased.  The property securing the loan was acquiredthrough a foreclosure sale April 29, 2008. We do not at this time anticipate any material loss due to expressionsof interest by two entities in purchasing the property.

 

**Non-InterestIncome**

 

Total non-interestincome for the three months ended March 31, 2008 was $1,789,000 compared with $1,326,000 forthe same period in 2007.  The increase of$463,000 primarily resulted from income of $694,000 related to the Visa, Inc.initial public stock offering and increases in merchant credit card income of$26,000, sales and servicing of Small Business Administration Loans of $66,000and gains on sale of securities of $229,000; partially offset by a mark tomarket loss of $294,000 in the trading assets compared with a $110,000 gainduring the same period in 2007 and a decrease in discount accretion on SmallBusiness Administration loans sold of $106,000.

 

18

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The sale of SmallBusiness Administration (SBA) guaranteed loans is a significant contributor tothe Bank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums, which vary with market conditions.  SBA loans are guaranteed by the full faith ofthe United States Government from 75 to 85 percent of the principal amount.

 

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

 

**Non-InterestExpense**

 

Salary andbenefits expense for the three months ended March 31, 2008 increased $28,000compared with the same period in 2007. The increase was due to meritpay increases and the addition, inMarch, of four employees to staff the Salinas branch office scheduled to openduring the second quarter.

 

Total occupancyand equipment expense for the three months ended March 31, 2008 was $238,000compared to $206,000 for the same period in 2007.  The increase was primarily due to rentalexpense for the Salinas branch office.

 

Professional feesfor the three months ended March 31,2008 were $44,000 compared to $38,000 for the same period in 2007.

 

Data processingexpense for the three months ended March 31, 2008 was $101,000 compared to $88,000 for thesame period in 2007.  The increase of$23,000 was due to one time charges for the implementation of branch imagecapture of items, image cash letter processing and communication network designfor the Salinas branch office.

 

Other general andadministrative expenses for the three months ended March 31, 2008 totaled $738,000compared with $794,000 for the same period in 2007, which is a decrease of$56,000.  Significant changes occurred inthe following categories; increasesoccurred in merchant credit card processing expense of $45,000, FDICinsurance premiums of $26,000 and business development of $11,000;while decreases occurred in director fees of $17,000, advertising expense of$15,000, donations of $25,000 and other losses of $11,000. Included in the Visa, Inc. initial public offeringtransaction was the reversal of a litigation reserve, established in 2007, of$110,000 representing the Bank’s share of the liability associated with thesettlement by VISA of litigation brought by American Express and Discover.

 

**Provisionfor Income Taxes**

 

Thetax provision was $776,000 for the first quarter ended March 31, 2008compared to tax provision of $501,000 for the first quarter ended March 31,2007, representing 45.78% and 38.21% of pre-tax income for those periods.  The amount of the tax provision is determinedby applying the Corporation’s statutory income tax rates to pre-tax book income,adjusted for permanent differences between pre-tax book income and actualtaxable income. Such permanent differences include but are not limited totax-exempt interest income; increases in the cash surrender value of bank-ownedlife insurance, certain other expenses that are not allowed as tax deductions,and tax credits.

 

19

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**LOANS**

 

Loans represented70.73% of average earning assets, and 66.02% of average total assets for thethree months ended March 31,2008 compared with 76.36% and 69.69%, respectively during 2007. For thethree months ended March 31, 2008,average loans increased 31.80% from $130,718,000 for the same period in 2007 to$172,284,000.  Average real estate loansincreased $28,680,000 (33.47%), average construction loans increased $5,444,000(30.01%), average commercial loans increased $7,132,000 (27.11%), and averageinstallment loans increased $310,000 (54.11%).

 

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

 

The Bank is arecognized leader for Small Business Administration lending in Monterey County,and holds SBA’s coveted Preferred Lender Status.  Generally, SBA loans are guaranteed, by theSBA, for 75 to 85 percent of their principal amount, which can be retained inportfolio or sold to investors.  Suchloans are made at floating interest rates, generally with longer terms (up to25 years) than are available on a conventional loan 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 realestate loan portfolio consists both of real estate construction loans and realestate mortgage loans.  The Bank hasinitiated a program to generate more commercial and industrial real estateloans, which generally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. The Bank does not make real estate development loans.  Real estateconstruction loans are made for a much shorter term, and often at higherinterest rates, than conventional single-family residential real estateloans.  The cost of administering suchloans is often higher than for other real estate loans, as principal is drawnon periodically as construction progresses.

 

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

 

Consumer loans are madefor the purpose of financing the purchase of various types of consumer goods,home improvement loans, auto loans and other personal loans.  Consumer installment loans generally providefor monthly payments of principal and interest, at a fixed rate.  Most of the Bank’s consumer installment loansare generally secured by the personal 

 

20

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property beingpurchased.  The Bank generally makesconsumer loans to those customers with a prior banking relationship with theBank.

 

**Non-performingand Non-accrual Loans**

 

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

 

The followingtable presents information with respect to loans which, as of the datesindicated, were past due 90 days or more or were placed on non-accrual status(referred to collectively as “non-performing loans”):

 

| ** **                                                    | ** ** | **Three months as of****March 31****,** | ** ** | **Twelve months as of  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                    | ** ** | **2007**                                                  | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**                        | ** ** |
| ** **                                                    | ** ** | ** **                                                  | ** ** |
| Accruing, past  due 90 days or more:                          |       |                                                        |       |                                                      |       |   |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Real Estate                                                   |       | $                                                           | —     |                                                      | $          | — |   | $ | — |   |
| Commercial                                                    |       | —                                                      |       | —                                                    |       | — |   |
| Installment                                                   |       | —                                                      |       | —                                                    |       | — |   |
| Other                                                         |       | —                                                      |       | —                                                    |       | — |   |
| Total accruing                                                |       | —                                                      |       | —                                                    |       | — |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Nonaccrual  loans:                                            |       |                                                        |       |                                                      |       |   |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Real Estate                                                   |       | 3,200                                                       |       | —                                                    |       | 3,200 |   |
| Commercial                                                    |       | 115                                                         |       | —                                                    |       | 41 |   |
| Installment                                                   |       | 175                                                         |       | 155                                                       |       | 155 |   |
| Other                                                         |       | —                                                      |       | —                                                    |       | — |   |
| Total nonaccrual                                              |       | 3,490                                                       |       | 155                                                       |       | 3,396 |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Total  nonperforming                                          |       | $                                                           | 3,490      |                                                      | $          | 155 |   | $ | 3,396 |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Total loans end  of period                                    |       | $                                                           | 167,572    |                                                      | $          | 132,742 |   | $ | 171,126 |   |
|                                                          |       |                                                        |       |                                                      |       |   |   |
| Ratio of  nonperforming loans to total loans at end of period |       | 2.08                                                        | %          | 0.12                                                      | %          | 1.98 | % |

 

**SubsequentEvent**

 

The Companypreviously reported the transfer of a $3.2 million loan participation purchasedto non-accrual status on October 23, 2007 when it was informed by theoriginating bank that it had placed the loan on non-accrual status.   On April 29, 2008 the collateralsecuring the loan was acquired through a foreclosure sale.  The originating bank has received expressionsof interest in purchasing the foreclosed property from two entities.  Management does not at this time anticipateany material loss.

 

21

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**Summaryof Loan Loss Experience**

 
| ** **                                                                     | ** ** | ** **                           | ** ** | ** **            | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period**  | ** ** | **Year ended**   | ** ** |
| ** **                                                                     | ** ** | **Ended March 31,**        | ** ** | **December 31,** | ** ** |
| ** **                                                                     | ** ** | **2008**                             | ** ** | **2007**              | ** ** | **2007**                | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                     | ** ** | ** **                           | ** ** |
| Average loans  outstanding                                                     |       | $                                    | 172,284    |                  | $          | 130,718                 |       | $ | 146,944 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance,  beginning of period                                                |       | $                                    | 2,028      |                  | $          | 1,409                   |       | $ | 1409 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Loans charged  off during period:                                              |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | —                               |       | —                |       | 249                     |       |
| Installment                                                                    |       | —                               |       | —                |       | 1                       |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | —                  |       |
| Total charge  offs                                                             |       | —                               |       | —                |       | 250                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Recoveries  during period:                                                     |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | 1                                    |       | —                |       | —                  |       |
| Installment                                                                    |       | —                               |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | 4                       |       |
| Total recoveries                                                               |       | 1                                    |       | —                |       | 4                       |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Net loans  charged off during the period                                       |       | (1                                   | )          | —                |       | 246                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | —                               |       | —                |       | 865                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance, end  of period                                                      |       | $                                    | 2,029      |                  | $          | 1,409                   |       | $ | 2,028 |   |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.00                                 | %          | 0.00                  | %          | 0.17                    | %          |
| Ratio of  allowance to total loans at end of period                            |       | 1.19                                 | %          | 1.05                  | %          | 1.19                    | %          |
| Ratio of  allowance for loan losses to non-performing loans at end of period   |       | 58.14                                | %          | 909.03                | %          | 59.72                   | %          |

 

**Deposits**

 

Average depositsfor the three months ended March 31,2008 were $176,331,000 an increase of 37.67% compared with the sameperiod in 2007.  Average certificates ofdeposit represented 72.92% of average deposits for the three months ended March 31, 2008 compared with63.75% for the same period in 2007. Average interest bearing checking, money market and savings accounts asa group were 12.23% of average deposits for the three months ended March 31, 2008 compared with16.52% for the same period in 2007. Average demand deposits 

 

22

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represented 14.86% ofaverage deposits for the three months ended March 31, 2008 compared with19.73% for the same period in 2007.

 

The following table setsforth the scheduled maturities of the Company’s time deposits in denominationsof $100,000 or greater at March 31, 2008:

 

Maturities of TimeDeposits of

$100,000 or More

(Dollars in Thousands)

 
| Three months or  less                  |   | $      | 14,063 |   |
|----------------------------------------|--------|--------|--------|--------|
| Over three  months through six months  |   | 5,979  |   |
| Over six months  through twelve months |   | 16,398 |   |
| Over twelve  months                    |   | 24,890 |   |
| Total                                  |   | $      | 61,330 |   |

 

**Borrowing**

** **

**The Bank has lines of credit from the Federal Home LoanBank (FHLB) of San Francisco, Bank of the West, Pacific Coast Bankers’ Bank andThe Independent Bank with remaining available borrowing capacity on**March 31, 2008 of $4,917,000 (based on pledged collateral), $4,500,000,$6,000,000 and $5,000,000, respectively. The Federal Home Loan Bank line of credit has a maximum borrowingcapacity of twenty five percent (25%) of the Bank’s total assets, adjustedquarterly.  The Federal Home Loan Bankline of credit is secured by a portion of the Bank’s real estate secured loansand securities at March 31, 2008. The total principal balance of pledged loans was $37,289,000 andsecurities of $52,577,000.  The followingtable provides information on eighteen FHLB advances totaling $56,500,000 andoutstanding at March 31, 2008.

 

23

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| ** ** | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 3,000,000  |       | 4.30       | %           | 6/17/05    |         | 6/17/10    |   |
| 2,500,000  |       | 4.88       | %          | 8/20/07     |       | 8/20/10      |       |
| 5,000,000  |       | 4.96       | %          | 11/14/05    |       | 11/15/10     |       |
| 4,000,000  |       | 2.70       | %          | 1/24/08     |       | 1/24/11      |       |
| 2,250,000  |       | 4.75       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,750,000  |       | 4.72       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,500,000  |       | 5.52       | %          | 7/17/06     |       | 7/18/11      |       |
| 3,500,000  |       | 5.49       | %          | 7/17/06     |       | 7/18/11      |       |
| 1,000,000  |       | 5.22       | %          | 8/25/06     |       | 8/25/11      |       |
| 5,000,000  |       | 5.20       | %          | 7/30/07     |       | 7/30/12      |       |
| 3,000,000  |       | 4.85       | %          | 10/1/07     |       | 10/1/12      |       |
| 5,000,000  |       | 5.00       | %          | 9/18/07     |       | 9/18/14      |       |
| 1,000,000  |       | 7.72       | %          | 6/1/00      |       | 6/3/30       |       |
| 4,000,000  |       | 5.96       | %          | 8/2/04      |       | 7/28/34      |       |
| 5,000,000  |       | 5.63       | %          | 12/24/04    |       | 12/22/34     |       |
| 2,000,000  |       | 5.13       | %          | 5/4/05      |       | 5/1/35       |       |
| 2,000,000  |       | 5.31       | %          | 11/17/06    |       | 11/17/36     |       |
| 5,000,000  |       | 5.88       | %          | 6/29/07     |       | 6/29/37      |       |
| $          | 56,500,000 |       |       |        |       |         |       |   |

** **

**The**Bank of the West, Pacific Coast Bankers’ Bank and TheIndependent Bank lines of credit are unsecured.  The Bank did not utilize any overnightborrowings in 2008 or 2007.

** **

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

** **

**CapitalResources**

 

The Corporation maintains capital tocomply with legal requirements, to provide a margin of safety for itsdepositors and stockholders, and to provide for future growth and the abilityto pay dividends.  At March 31, 2008,stockholders’ equity was $14,747,000 versus $14,434,000 at December 31,2007.  The Corporation paid cashdividends to shareholders of $0 and $.25 for the 3 months ended March 31, 2008and for the year ended December 31, 2007, respectively.  The Bank paid cash dividends to theCorporation of $0 and $800,000 for the 3 months ended March 31, 2008and for the year ended December 31, 2007, respectively.

 

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

 

In general, therisk-based capital guidelines provide detailed definitions of which obligationswill be treated as capital, and assign different weights to various assets andoff-balance sheet items, depending upon the perceived degree of credit riskassociated with each asset.  Each asset 

 

24

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is assigned to oneof four risk-weighted categories.  Forexample, 0 percent for cash and unconditionally guaranteed governmentsecurities; 20 percent for deposits with other banks and fed funds; 50 percentfor state bonds and certain residential real estate loans; and 100 percent forcommercial loans and other assets. Capital is categorized as either Tier 1 capital, consisting of commonstock and retained earnings (or deficit), or Tier 2 capital, which includeslimited-life preferred stock and allowance for loan losses (subject to certainlimitations).  The guidelines also defineand set minimum capital requirements (risk-based capital ratios), whichincreased over a transition period, ended December 31, 1992.  Under the final 1992 rules, all banks wererequired to maintain Tier 1 capital of at least 4 percent and total capital of8.0% of risk-adjusted assets. The Bank had a Tier 1 capital to totalrisk-adjusted assets capital ratio of 11.19% and 12.65% at March 31, 2008and 2007, respectively.  The Bank’s Tier1 capital exceeds the minimum regulatory requirement by $13,502,000.  The Bank had a Total Risk-Based capital torisk-adjusted assets ratio of 12.27% and 13.62% at March 31, 2008 and2007, respectively.  The Bank’s TotalRisk-Based capital exceeds the minimum regulatory requirement by $7,957,000.

 

The Tier 1 leveragecapital ratio guidelines require a minimum leverage capital ratio of 4% of Tier1 capital to total assets less goodwill. The Bank had a leverage capital ratio of 8.07% and 10.16% at March 31,2008 and 2007, respectively.  The Bank’sTier 1 leverage capital exceeds the minimum regulatory requirement by$10,639,000.

 

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

 

The Corporation’s Boardof Directors approved a stock repurchase program pursuant to which theCorporation, from time to time and at management’s discretion, may repurchaseup to $500,000 of the Corporation’s outstanding shares.  At prevailing market prices on the date ofthe approval, approximately 62,500 shares (or about 3.38% of its 1,849,918shares of common stock currently outstanding) could be purchased pursuant tothe Board’s approval.  No time limit wasset for completion of the program.

 

## **Liquidity**

 

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future cash needs.  For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course of theBank’s business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings.  Inaddition, the Bank has a secured borrowing arrangement with the Federal HomeLoan Bank of San Francisco of approximately $61,747,000, based on twenty five percent of the Bank’s total assets as reported in the most recent quarterlyConsolidated Reports of Condition and Income for a bank with Domestic OfficesOnly. The line of credit is subject to pledging of acceptable collateral.  Additionally the Bank has unsecured federalfunds lines of credit with Bank of theWest, Pacific Coast Bankers’ Bank and The Independent Bank of $4,500,000,$6,000,000 and $5,000,000, respectively; to meet temporary liquidityrequirements.  Available borrowingcapacities on March 31, 2008 were $4,500,000, $6,000,000 and $5,000,000,respectively.

 

25

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As a matter of policy, the Bank seeks tomaintain a level of liquid assets, including marketable investment securities,equal to a least 15 percent of total assets (“total liquidity”). Additionallythe Bank maintains secondary sources of liquidity (borrowing lines from otherinstitutions) equal to at least an additional 10 percent of assets.  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 total liquidity at March 31, 2008 and 2007was 32.46% and 24.21%, respectively, while its average loan to deposit ratiofor such years was 97.70% and 102.06%, respectively.

 

Brokered deposits aredeposit instruments, such as certificates of deposit, deposit notes, bankinvestment contracts and certain municipal investment contracts that are issuedthrough brokers and dealers who then offer and/or sell these depositinstruments to one or more investors. Additionally, deposits on which a financial institution pays an interestrate significantly higher than prevailing rates are considered to be brokereddeposits.  Federal law and regulationrestricts banks from soliciting or accepting brokered deposits, unless the bankis well capitalized under Federal guidelines. The Bank had no brokered deposits at March 31, 2008 compared withapproximately $3,665,000 or 2.74% of total deposits at March 31, 2007.  None of the Bank’s brokered deposits paid aninterest rate significantly higher than prevailing rates.

 

**InterestRate Risk**

 

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

 

The purpose forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liabilitymanagement is managing the risk/return relationships between interest raterisk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidity concernsfollowed by capital adequacy, then interest rate risk and market risk in theinvestment portfolio.  The policy of theBank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain 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.

 

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed fundsrate.  The model converts a fed fundsrate change into rate changes for each major class of asset and liability, thensimulates the bank’s net interest margin based on the bank’s actual repricingover a one year period, assuming that maturities are reinvested in instrumentsidentical to those maturing during the 

 

26

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period.  The following table shows the affect on netinterest income of an upward or downward 100 and a 200 basis point rate shocksat March 31, 2008.

 
| **Rate Shock  Increase(Decrease) in Basis Points** | ** ** | **Percent  Increase(Decrease) in Net  Interest Income** | ** ** | **Asset/Liability Policy Limits  for Increase(Decrease) in Net  Interest Income** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| 100                                                                    |       | 5.5                                                                    | %          | 10.0                                                                                                            | %          |
| (100)                                                                  |       | (6.1                                                                   | )%         | (10.0                                                                                                           | )%         |
| 200                                                                    |       | 11.0                                                                   | %          | 20.0                                                                                                            | %          |
| (200)                                                                  |       | (12.2                                                                  | )%         | (20.0                                                                                                           | )%         |

 

**InvestmentSecurities**

 

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At March 31, 2008 and 2007 the account value was $986,000 and $1,925,000, respectively.  The Corporation has investments of $20,000 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC.  In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000. These are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

 

Thefollowing table sets forth the book and market value of the investmentsecurities at March 31, 2008:

 
| ** **                                       | ** ** | **INVESTMENT PORTFOLIO MIX  MARCH 31, 2008** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Book Value**                                              | ** ** | **Market Value** | ** ** |
| Securities  Available for Sale                   |       |                                                             |       |   |   |
| State/Local  Agency Bonds                        |       | $                                                                | 8,996      |   | $ | 8,686 |   |
| U.S. Government  Agency Securities               |       | 54,296                                                           |       | 54,280 |   |
| Total                                            |       | $                                                                | 63,292     |   | $ | 62,966 |   |
|                                             |       |                                                             |       |   |   |
| Held to Maturity                                 |       |                                                             |       |   |   |
| State/Local  Agency Bonds                        |       | $                                                                | 7,866      |   | $ | 8,112 |   |
|                                             |       |                                                             |       |   |   |
| Other  Investments, at cost                      |       |                                                             |       |   |   |
| AT Services LLC                                  |       | $                                                                | 20         |   | $ | 20 |   |
| Metrocities  Mortgage, LLC                       |       | 10                                                               |       | 10 |   |
| Federal Home  Loan Bank stock, restricted        |       | 2,689                                                            |       | 2,689 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93                                                               |       | 93 |   |
| Northern  California Bancorp, Inc. Trust II |       | 155                                                              |       | 155 |   |
| Independent  Bankers Financial Corporation       |       | 51                                                               |       | 50 |   |
| Visa, Inc.  Stock                           |       | 426                                                              |       | 426 |   |
|                                             |       | $                                                                | 3,444      |   | $ | 3,444 |   |

 

27

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The followingtable summarizes the maturity of the investment securities at March 31, 2008:

 

#### INVESTMENTPORTFOLIO MATURITIES

(Dollarsin thousands)

 
| ** **                         | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------|------------|
| Available for  Sale                |       |                    |       |                |       |
| Due between ten  and fifteen years |       | $                       | 49,611     |                | $          | 49,618 |   |
| Due over fifteen  years            |       | 13,681                  |       | 13,348              |       |
|                               |       | $                       | 63,292     |                | $          | 62,966 |   |
|                               |       |                    |       |                |       |
| Held to Maturity                   |       |                    |       |                |       |
| Due between ten  and fifteen years |       | $                       | 870        |                | $          | 882 |   |
| Due in over  fifteen years         |       | 6,996                   |       | 7,230               |       |
|                               |       | $                       | 7,866      |                | $          | 8,112 |   |

 

**Item 3.  Controls and Procedures**

 

(a) The Bank’s Chief Executive Officer and itsChief Financial Officer, after evaluating the effectiveness of the Bank’sdisclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) promulgatedunder the Exchange Act as of the end of the period covered by this report (the “EvaluationDate”) have concluded that as of the Evaluation Date, the Bank’s disclosurecontrols and procedures were adequate and effective to ensure that materialinformation relating to the Bank would be made known to them by others withinthe Bank, particularly during the period in which this report was beingprepared.  Disclosure controls andprocedures are designed to ensure that information required to be disclosed byus in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

(b) Changesin Internal Controls:  In the quarterended March 31,2008, the Company did not make anysignificant changes in, nor take any corrective actions regarding, its internalcontrols or other factor that could significantly affect these controls.

 

28

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**PART II-OTHERINFORMATION**

 

**Item1.  Legal Proceedings.**

 

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

 

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

 

None

 

**Item3.  Defaults of Senior Securities**

 

None

 

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

** **

None

 

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

####  

None

 

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

####  

A.            EXHIBITS

 
| 10 (ii) A(1) |   | Employment Contract of  Charles T. Chrietzberg, Jr., dated January 1, 2008                                                                     |
|-------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                     |
| 31.1              |   | Certification of the Chief Executive Officer of  Northern California Bancorp, Inc. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|              |   |                                                                                                                                                     |
| 31.2              |   | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|              |   |                                                                                                                                                     |
| 32.1              |   | Certification of the Chief Executive Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|              |   |                                                                                                                                                     |
| 32.2              |   | Certification of the Chief Financial Officer of Northern California  Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

B.            Reportson Form 8-K

 

None

 

29

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In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                    | NORTHERN CALIFORNIA  BANCORP, INC. |
|-------------------------|------------------------------------|
|                    |                               |   |
| Date: May 13, 2008 | By:                                |   /s/ Charles  T. Chrietzberg, Jr. |
|                    |                               |     Charles  T. Chrietzberg, Jr. |
|                    |                               |     Chairman  of the Board & |
|                    |                               |     Chief  Executive Officer |
|                    |                               |   |
|                    |                               |   |
| Date: May 13, 2008 | By:                                |   /s/ Bruce  N. Warner |
|                    |                               |     Bruce  N. Warner |
|                    |                               |     Chief  Financial Officer and |
|                    |                               |     Principal  Accounting Officer |

 

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