** **

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

**Washington,D.C. 20549**

 

**FORM10-QSB/A**

**(Amendment No. 1)**

 
| ** **                                                                                                                                                                                                     | **x**      | **Quarterly report under Section  13 or 15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **for the quarterly period ended  June 30, 2007**                                                                                                                                                              |
|                                                                                                                                                                                                           |       |                                                                                    |
| ** **                                                                                                                                                                                                     | **o**      | **Transition report under Section  13 or 15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **(No fee required) for the  period from                 to               ** |

 

**CommissionFile Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

**Incorporatedin the State of California**

**IRSEmployer Identification Number 77-0421107**

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

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

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes  x                         No  o

 

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

 

Largeaccelerated filer o                 Acceleratedfiler o                 Non-acceleratedfiler x

 

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

 

As of July 27, 2007, theCorporation had 1,792,238 shares of common stock outstanding.

 

 

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EXPLANATORY NOTE

 

On August 14, 2007Northern California Bancorp, Inc., timely filed our original Quarterly Reporton Form 10-QSB for the quarterly period ended June 30, 2007. This Form 10-QSB/Ais being filed solely to include revised Consolidated Statements of Cash Flowsand revised certifications pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

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 | 11-29  |
| Item 3                | Controls and  Procedures                                                                    | 30     |
|                  |                                                                                        |   |
| **PART II**           | Other Information                                                                           | 30     |
| Item 1                | Legal Proceedings                                                                           | 30     |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 30     |
| Item 3                | Defaults Upon  Senior Securities                                                            | 31     |
| Item 4                | Submission  of Matters to a Vote of Security Holders                                        | 31     |
| Item 5                | Other Information                                                                           | 31     |
| Item 6                | Exhibits  and Reports on Form 8-K                                                           | 31     |
| Signatures            | 32                                                                                          |
| Certifications        | 33-36                                                                                       |
|                       |                                                                                             |        |  |  |

 

2

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**PARTI-FINANCIAL INFORMATION**

 

### Item 1.              FINANCIALSTATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                          | ** ** | **JUNE 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| **(in thousands except share data)**                                                            | ** ** | **2007**         | ** ** | **2006**             | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**  | ** ** | **(Audited)**        | ** ** |
| ASSETS:                                                                                                             |       |             |       |                 |       |
| Cash and Due  From Banks                                                                                            |       | $                | 13,461     |                 | $          | 4,979 |   |
| Federal Funds  Sold                                                                                                 |       | 10,565           |       | 17,455               |       |
| Total Cash and  Cash Equivalents                                                                                    |       | 24,026           |       | 22,434               |       |
| Trading Assets                                                                                                      |       | 1,708            |       | 1,762                |       |
| Time Deposits  with other Financial Institutions                                                                    |       | 1,000            |       | 1,000                |       |
| Investment  Securities, available for sale (Note 5)                                                                 |       | 27,435           |       | 15,286               |       |
| Investment  Securities, held to maturity at cost (fair value approximates $7,142 in 2007;  $7,072 in 2006) (Note 5) |       | 7,006            |       | 7,012                |       |
| Other  Investments (Note 6)                                                                                         |       | 2,203            |       | 1,967                |       |
| Loans Held for  Sale, at lower of cost or market                                                                    |       | 996              |       | 1,182                |       |
| Loans, net of  allowance for loan losses of $1,439 in 2007; $1,409 in 2006 (Note 7)                                 |       | 140,789          |       | 128,868              |       |
| Bank Premises  and Equipment, Net                                                                                   |       | 4,888            |       | 4,613                |       |
| Cash Surrender  Value of Life Insurance                                                                             |       | 3,733            |       | 3,671                |       |
| Interest  Receivable and Other Assets                                                                               |       | 2,436            |       | 2,775                |       |
| Total Assets                                                                                                        |       | $                | 216,220    |                 | $          | 190,570 |   |
|                                                                                                                |       |             |       |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                         |       |             |       |                 |       |
| Non interest  bearing demand                                                                                        |       | $                | 26,437     |                 | $          | 30,079 |   |
| Interest-bearing  demand                                                                                            |       | 16,112           |       | 17,262               |       |
| Savings                                                                                                             |       | 4,779            |       | 5,326                |       |
| Time less than  $100,000                                                                                            |       | 52,347           |       | 43,135               |       |
| Time in  denominations of $100,000 or more                                                                          |       | 49,700           |       | 35,826               |       |
| Total Deposits                                                                                                      |       | 149,375          |       | 131,628              |       |
|                                                                                                                |       |             |       |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                              |       | 39,750           |       | 34,750               |       |
| Junior  Subordinated Debt Securities                                                                                |       | 8,248            |       | 8,248                |       |
| Interest Payable  and Other Liabilities                                                                             |       | 5,182            |       | 3,542                |       |
| Total  Liabilities                                                                                                  |       | 202,555          |       | 178,168              |       |
|                                                                                                                |       |             |       |                 |       |
| Shareholders’  Equity:                                                                                         |       |             |       |                 |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,792,238 in 2007 and 1,721,715  in 2006             |       | 5,328            |       | 5,060                |       |
| Retained  Earnings                                                                                                  |       | 8,484            |       | 7,363                |       |
| Accumulated  Other Comprehensive Loss (Note 8)                                                                      |       | (147             | )          | (21                  | )          |
| Total  Shareholders’ Equity                                                                                    |       | 13,665           |       | 12,402               |       |
| Total  Liabilities & Shareholders’ Equity                                                                  |       | $                | 216,220    |                 | $          | 190,570 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH  PERIOD ENDING** | ** ** | **SIX-MONTH  PERIOD ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **June 30**                    | ** ** | **June 30**                  | ** ** |
| **(in thousands except share data)**                | ** ** | **2007**                            | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                                        |       |                                |       |                              |       |   |   |   |   |
| Loans                                                                   |       | $                                   | 3,443      |                              | $          | 2,866 |   | $ | 6,733 |   | $ | 5,398 |   |
| Time deposits  with other financial institutions                        |       | 14                                  |       | 11                                |       | 28 |   | 22 |   |
| Investment  securities                                                  |       | 435                                 |       | 230                               |       | 835 |   | 455 |   |
| Federal funds  sold                                                     |       | 110                                 |       | 190                               |       | 234 |   | 362 |   |
| Total Interest  Income                                                  |       | 4,002                               |       | 3,297                             |       | 7,830 |   | 6,237 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| INTEREST  EXPENSE:                                                      |       |                                |       |                              |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 13                                  |       | 16                                |       | 26 |   | 39 |   |
| Savings and time  deposit accounts                                      |       | 655                                 |       | 337                               |       | 1,185 |   | 655 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 525                                 |       | 339                               |       | 997 |   | 640 |   |
| Notes payable  and other                                                |       | 628                                 |       | 511                               |       | 1,253 |   | 1,001 |   |
| Total Interest  Expense                                                 |       | 1,821                               |       | 1,203                             |       | 3,461 |   | 2,335 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Net Interest  Income                                                    |       | 2,181                               |       | 2,094                             |       | 4,369 |   | 3,902 |   |
| Provision for  loan losses                                              |       | 275                                 |       | 95                                |       | 275 |   | 95 |   |
| Net interest  income, after provision for loan losses                   |       | 1,906                               |       | 1,999                             |       | 4,094 |   | 3,807 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  INCOME:                                                   |       |                                |       |                              |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 142                                 |       | 143                               |       | 307 |   | 282 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 173                                 |       | 148                               |       | 355 |   | 436 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                              |       | —                            |       | — |   | 1,313 |   |
| Other income                                                            |       | 714                                 |       | 1,130                             |       | 1,692 |   | 2,114 |   |
| Total  non-interest income                                              |       | 1,029                               |       | 1,421                             |       | 2,354 |   | 4,145 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| NON-INTEREST  EXPENSE:                                                  |       |                                |       |                              |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 983                                 |       | 898                               |       | 2,060 |   | 1,834 |   |
| Stock Based  Compensation Expense                                       |       | —                              |       | —                            |       | — |   | 18 |   |
| Occupancy and  Equipment Expense                                        |       | 221                                 |       | 200                               |       | 427 |   | 381 |   |
| Professional  Fees                                                      |       | 50                                  |       | 43                                |       | 88 |   | 83 |   |
| Data Processing                                                         |       | 90                                  |       | 79                                |       | 178 |   | 166 |   |
| Other general  and administrative                                       |       | 916                                 |       | 871                               |       | 1,709 |   | 1,717 |   |
| Total  non-interest expenses                                            |       | 2,260                               |       | 2,091                             |       | 4,462 |   | 4,199 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Income before  tax provision                                            |       | 675                                 |       | 1,329                             |       | 1,986 |   | 3,753 |   |
| Income tax  provision                                                   |       | 364                                 |       | 648                               |       | 865 |   | 1,650 |   |
| Net income                                                              |       | $                                   | 311        |                              | $          | 681 |   | $ | 1,121 |   | $ | 2,103 |   |
|                                                                    |       |                                |       |                              |       |   |   |   |   |
| Earnings per  common share                                              |       |                                |       |                              |       |   |   |   |   |
| Basic                                                                   |       | $                                   | 0.179      |                              | $          | 0.418 |   | $ | 0.644 |   | $ | 1.289 |   |
| Diluted                                                                 |       | $                                   | 0.173      |                              | $          | 0.377 |   | $ | 0.622 |   | $ | 1.163 |   |

 

4

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**NORTHERNCALIFORNIA BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY**

 
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**              | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | ** Income**             | ** ** | ** ** | ** ** |
| **(in thousands except share data)**                         | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**                   | ** ** | **Total**  | ** ** |
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                                                    |       | 1,631,439          |       | $          | 4,772      |         | $          | 4,129                        |       | $          | 30         |   | $ | 8,931 |   |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                         |       |       |       |
| Net income                                                                       |       | —             |       | —     |       | 3,837        |       | —                       |       | 3,837      |       |
| Change in net unrealized  gain on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | (51                          | )          | (51        | )          |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                         |       | 3,786      |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| $ 0.35 per share  dividend                                                  |       | —             |       | —     |       | (603         | )          | —                       |       | (603       | )          |
| Stock based  compensation                                                        |       | —             |       | 18         |       | —       |       | —                       |       | 18         |       |
| Exercise of  stock options                                                       |       | 90,276             |       | 270        |       | —       |       | —                       |       | 270        |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Balance at  December 31, 2006 (audited)                                          |       | 1,721,715          |       | 5,060      |       | 7,363        |       | (21                          | )          | 12,402     |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                         |       |       |       |
| Net income                                                                       |       | —             |       | —     |       | 1,121        |       | —                       |       | 1,121      |       |
| Change in net  unrealized loss on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | (126                         | )          | (126       | )          |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                         |       | 995        |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Exercise of  stock options                                                       |       | 70,523             |       | 268        |       | —       |       | —                       |       | 268        |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Balance at June  30, 2007 (unaudited)                                            |       | 1,792,238          |       | $          | 5,328      |         | $          | 8,484                        |       | $          | (147       | ) | $ | 13,665 |   |

 

5

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDEDJUNE 30, 2007 AND 2006

 
| ** **                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |     |       |     |       |
| Net income                                                                         |       | $        | 1,121      |     | $          | 2,103 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |     |       |     |       |
| Depreciation and  amortization expense                                             |       | 141      |       | 138      |       |
| Realized (gain)  loss on sales of available-for-sale securities, net               |       | —   |       | (1,313   | )          |
| Amortization of  deferred loan (fees) costs                                        |       | 159      |       | 159      |       |
| Amortization  (accretion) of discounts and premiums on investment securities, net  |       | (10      | )          | —   |       |
| (Gain) loss on  sale of equipment                                                  |       | (1       | )          | —   |       |
| Provision for  loan losses                                                         |       | 275      |       | 95       |       |
| Stock based  compensation                                                          |       | —   |       | 8        |       |
| Increase in  trading assets                                                        |       | 54       |       | (377     | )          |
| Decrease in  loans held for sale                                                   |       | 186      |       | 2,470    |       |
| Increase in  interest receivable                                                   |       | (161     | )          | (95      | )          |
| Increase in  other assets                                                          |       | 560      |       | (1,079   | )          |
| Increase in  deferred tax asset                                                    |       | (139     | )          | (94      | )          |
| Increase in  interest payable                                                      |       | 235      |       | 139      |       |
| Increase in  other liabilities                                                     |       | 1,405    |       | 27       |       |
| Net cash  provided by operating activities                                         |       | 3,825    |       | 2,181    |       |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |     |       |     |       |
| Proceeds from  maturity/sale of investment securities                              |       | 9,904    |       | 1,874    |       |
| Purchase of  investments                                                           |       | (22,383  | )          | (3,237   | )          |
| Net increase in  loans                                                             |       | (32,369  | )          | (34,605  | )          |
| Loan purchases                                                                     |       | (1,462   | )          | (7,000   | )          |
| Loan sales                                                                         |       | 21,474   |       | 27,652   |       |
| Proceeds from  sale of equipment                                                   |       | 1        |       | 18       |       |
| Additions to  bank premises and equipment                                          |       | (414     | )          | (246     | )          |
| Net cash used by  investing activities                                             |       | (25,249  | )          | (15,544  | )          |
|                                                                               |       |     |       |     |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |     |       |     |       |
| Net increase in  deposits                                                          |       | 17,747   |       | 4,578    |       |
| Proceeds from borrowings                                                           |       | 5,000    |       | 4,000    |       |
| Repayments of  borrowings                                                          |       | —   |       | (2,000   | )          |
| Proceeds from  exercise of stock options                                           |       | 269      |       | 7        |       |
| Net cash  provided by financing activities                                         |       | 23,016   |       | 6,585    |       |
|                                                                               |       |     |       |     |       |
| Net increase  (decrease) in cash and cash equivalents                              |       | 1,592    |       | (6,778   | )          |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 22,434   |       | 24,131   |       |
|                                                                               |       |     |       |     |       |
| **CASH  AND CASH EQUIVALENTS, ENDING**                                             |       | $        | 24,026     |     | $          | 17,353 |   |

 

See Note 9 for supplemental disclosures

 

6

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**SUMMARY OF ACCOUNTING POLICIES**

 

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

 

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

 

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

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the FASBissued Interpretation No. 48 (“FIN 48”), *“Accounting forUncertainty in Income Taxes*, an interpretation of FASB Statement No.109, *Accounting for Income Taxes*,” effectivefor the Company beginning after December 15, 2006 with earlier adoptionencouraged. FIN 48 clarifies the accounting for income taxes by prescribing theminimum recognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. The Bank is currently assessingthe impact of this guidance on its financial statements.

 

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

 

Thisstatement establishes a fair value hierarchy that distinguishes betweenvaluations obtained from sources independent of the entity and those from theentity’s own unobservable inputs that are not corroborated by observable marketdata. SFAS 157 expands disclosures about the use of fair value to measureassets and liabilities in interim and annual periods subsequent to initialrecognition. The disclosures focus on the inputs used to measure fair value andfor recurring fair value measurements using significant unobservable inputs,the effect of the measurements on earnings or changes in net assets for theperiod. This statement encourages an entity to combine the fair valueinformation disclosed under this statement with the fair value information disclosedunder other accounting pronouncements, including SFAS 107, “Disclosures aboutFair Value of Financial Instruments”, where practicable. The Bank is currentlyassessing the impact of this guidance on its financial statements.

 

In February 2007, the FASBissued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — including an amendment of FASB StatementNo. 115” which is effective for the Company as of the beginning of thefirst fiscal year that begins after November 15, 2007. Early adoption ispermitted as of the fiscal year that begins on or after November 15, 2006,provided that the Company also elects to apply the provisions of FASB StatementNo. 157, “Fair Value Measurements”. The Bank is currently evaluating the impact of adopting this Statement onthe Company’s financial statements.

 

7

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(NOTE3). STOCK BASED COMPENSATION

 

TheCorporation records compensation expense associated with stock-based awards inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107. SFASNo. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123).  However, SFAS No. 123R requires all stock-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values at the date of grant.  Thestock-based compensation expense totaled $0 and $17,800 for the six monthsended June 30, 2007 and 2006, respectively.  The Corporation selected to usethe modified prospective method of adopting SFAS 123R.  Thus, stock optionexpense is recognized only for options that vested after January 1, 2006. Future compensation expense may be greater if additional stock options aregranted by the Corporation.

 

Underthe Corporation’s Stock Option Plan, the Bank may grant incentive stock optionsand non-qualified stock options to directors, officers, and employees of theCorporation and its subsidiary, so long as the Corporation owns a majority ofthe equity interest of such subsidiary.  Incentive Stock Options aregranted at fair value of the common stock on the date of grant.  However,an incentive stock option granted to an individual owning 10% or more of theCorporation’s stock after such grant must have an exercise price of at least110%****of such fair market value andan exercise period of not more than five years.  Non-qualified stockoptions may be granted at prices not lower than 85% of the fair market value ofthe common stock on the date of grant.  The Board of Directors isauthorized to determine when options become exercisable within a period notexceeding 10 years from the date of grant.

 

**There were no options grantedduring the six months ended June 30, 2007 or 2006.**

** **

(NOTE 4). EARNINGS PER SHARE

 

**Basic earnings per share represents income available tocommon stockholders divided by the weighted-average number of common sharesoutstanding during the period. Diluted earnings per share reflects additionalcommon shares that would have been outstanding, if potential dilutive commonshares had been issued, as well as any adjustment to income that would resultfrom the assumed issuance. Potential common shares that may be issued by theBank relate to outstanding stock options and warrants and are determined usingthe treasury stock method.**

** **

**8**

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** **

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

** **
| ** **                                                         | ** ** | **Earnings per share calculation**                   | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **For the six months ended June 30,** | ** ** |
| ** **                                                         | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                          | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                             | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                          | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                   | 1,121      |   | 1,739,254 |   | $ | 0.644 |   | $ | 2,103 |   | 1,631,766 |   | $ | 1.289 |   |
|                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                              |       | 61,794 |   | (0.022 | ) | — |   | 176,119 |   | (0.126 | ) |
|                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                        |       | $                                                                   | 1,121      |   | 1,801,048 |   | $ | 0.622 |   | $ | 2,103 |   | 1,807,885 |   | $ | 1.163 |   |

** **
| ** **                                  | ** ** | **JUNE 30** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                        |       |             |       |                 |       |
| (NOTE 5)  INVESTMENT SECURITIES:            |       |             |       |                 |       |
| Available for  sale:                        |       |             |       |                 |       |
| Government  National Mortgage Association   |       | $                | 474        |                 | $          | 626 |   |
| U.S. government  Agencies                   |       | 26,961           |       | 14,660               |       |
|                                        |       | $                | 27,435     |                 | $          | 15,286 |   |
|                                        |       |             |       |                 |       |
| Held to maturity:                           |       |             |       |                 |       |
| State/Local  Agency                         |       | $                | 7,006      |                 | $          | 7,012 |   |
|                                        |       |             |       |                 |       |
| (NOTE 6) OTHER  INVESTMENTS                 |       |             |       |                 |       |
| AT Services LLC                             |       | $                | 20         |                 | $          | 20 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,869            |       | 1,634                |       |
| Independent  Bankers Financial Corporation  |       | 51               |       | 50                   |       |
| MasterCard Inc  Class “B” Stock   |       | 5                |       | 5                    |       |
| Metrocities  Mortgage, LLC                  |       | 10               |       | 10                   |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93               |       | 93                   |       |
| Northern  California Bancorp, Inc. Trust II |       | 155              |       | 155                  |       |
|                                        |       | $                | 2,203      |                 | $          | 1,967 |   |

** **

**9**

----

** **

(NOTE 7) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES:

 
| Commercial and  Industrial             |   | $       | 26,337  |    | $      | 26,361  |   |
|----------------------------------------|--------|---------|---------|---------|--------|---------|--------|
| Construction                           |   | 21,826  |    | 17,326  |   |
| Real Estate -  Mortgage                |   | 93,581  |    | 86,207  |   |
| Installment                            |   | 734     |    | 695     |   |
| Government  Guaranteed Loans Purchased |   | 36      |    | 39      |   |
|                                   |   | 142,514 |    | 130,628 |   |
| Allowance for  loan losses             |   | (1,439  | )       | (1,409  | )      |
| Deferred  origination fees, net        |   | (286    | )       | (351    | )      |
| Net Loans                              |   | $       | 140,789 |    | $      | 128,868 |   |
|                                   |   |    |    |    |   |
| Balance at  Beginning of Period        |   | $       | 1,409   |    | $      | 1,101   |   |
| Recoveries                             |   | 1       |    | 7       |   |
| Provision for  Possible Loan Losses    |   | 275     |    | 410     |   |
| Loans Charged  Off                     |   | (246    | )       | (109    | )      |
| Balance at End  of Period              |   | $       | 1,439   |    | $      | 1,409   |   |

** **

(NOTE8) COMPREHENSIVE INCOME (LOSS):

 

Thecomponents of other comprehensive income and related tax effects for the sixmonth period ended June 30, 2007 and the year ended December 31, 2006 are asfollows:

 
| ** **                                                                            | ** ** | **June**        | ** ** | **December**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                                            | ** ** | **2007**        | ** ** | **2006**      | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding losses on available - for - sale securities and other assets, net |       | $               | (228       | )             | $          | (93 | ) |
| Tax effect                                                                            |       | 102             |       | 42            |       |
|                                                                                  |       |            |       |          |       |
| Net-of-tax  amount                                                                    |       | $               | (126       | )             | $          | (51 | ) |

 

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

 
| ** **                                                           | ** ** | **2007**        | ** ** | **2006**      | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                                                           | ** ** | **(Unaudited)** | ** ** | **(Audited)** | ** ** |
| Unrealized  holding losses on available – for - sale securities |       | $               | (293       | )             | $          | (79 | ) |
| Unrealized  holding gains on available for sale strip receivable     |       | 27              |       | 41            |       |
| Tax effect                                                           |       | 119             |       | 17            |       |
|                                                                 |       |            |       |          |       |
| Net-of-tax  amount                                                   |       | $               | (147       | )             | $          | (21 | ) |

 

10

----

 

(NOTE 9) SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 
| ** **                                                 | ** ** | **JUNE 30** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|
| **Payments during the period ending:** | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Interest                                                   |       | $                | 3,200      |   | $ | 2,196 |   |
| Income Taxes                                               |       | $                | 582        |   | $ | 1,668 |   |

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

** **

**Statements Regarding Forward-Looking Information**

** **

**Exceptfor historical information contained herein, the matters discussed orincorporated by reference in this report contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein,the words “anticipate,” “believe,” “estimate,” “may,” “intend,” “expect,” andsimilar expressions identify certain of such forward-looking statements. Actual results of Monterey County Bank could differ materially from suchforward-looking statements contained herein.  Factors that could causefuture results to vary from current expectations include, but are not limitedto, the following: changes in economic conditions (both generally and morespecifically in the markets in which the Bank operates); changes in interestrates, deposit flows, loan demand, real estate values and competition; changesin accounting principles, policies or guidelines and in government legislationand regulation (which change from time to time and over which the Bank has nocontrol); other factors affecting the Bank’s operations, markets, products andservices; and other risks detailed in this Form 10-QSB and in the Bank’s otherreports filed with the Federal Deposit Insurance Corporation and pursuant tothe rules and regulations of the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management’s analysis only as of the datehereof.  The Corporation undertakes no obligation to publicly revise theseforward-looking statements to reflect events or circumstances that arise afterthe date thereof.**

** **

**CRITICAL ACCOUNTING POLICIES**

 

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

 

Various elements of the Bank’s accounting policies,by their nature, are inherently subject to estimation techniques, valuationassumptions and other subjective assessments. Critical accounting policies arethose that involve the most complex and subjective decisions and assessmentsand have the greatest potential impact on the Bank’s results of operation. Inparticular, management has identified one accounting policy that, due tojudgments, estimates

 

11

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and assumptions inherent in this policy, and the sensitivity of theBank’s financial statements to those judgments, estimates and assumptions, iscritical to an understanding of the Bank’s financial statements. This policyrelates to the methodology that determines the Bank’s allowance for loan losses.Management has discussed the development and selection of this critical accountingpolicy with the Bank’s Audit Committee of the Board of Directors. AlthoughManagement believes the level of the allowance at June 30, 2007 is adequate toabsorb losses inherent in the loan portfolio, a decline in the regional economymay result in increasing losses that cannot reasonably be predicted at thistime. For further information regarding the allowance for loan losses see “Provisionand Allowance for Loan Losses” included elsewhere herein.

 

**OVERVIEW**

 

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

 

For the six months endedJune 30, 2007 net income was $1,121,000, compared to $2,103,000 for the sameperiod in 2006. For the six months ended June 30, 2007 net interest incomeafter provision for loan losses increased $287,000, total non-interest incomedecreased $1,791,000, while non-interest expense increased $263,000 and incometax provision decreased $785,000. The decrease in non-interest income wasattributable primarily to the recording of a $1,313,000 gain on the sale of aninvestment during the first quarter of 2006, decreased credit card programrevenues and a trading asset mark to market loss.

 

12

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The following table setsforth certain selected financial ratios of the Corporation at and for the sixmonths ended, June 30, 2007 and 2006.

 
| ** **                                           | ** ** | **The six months**                                                   | ** ** | **The six months**           | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **Ended June 30, 2007**                                         | ** ** | **Ended June 30, 2006** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of  Operating Results:                       |       |                                                                           |       |                                   |       |
| Total interest  income                               |       | $                                                                              | 7,830      |                                   | $          | 6,237 |   |
| Total interest  expense                              |       | 3,461                                                                          |       | 2,335                                  |       |
| Net interest  income                                 |       | 4,369                                                                          |       | 3,902                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Provision for  possible loan losses                  |       | 275                                                                            |       | 95                                     |       |
| Net interest  income after provision for loan losses |       | 4,094                                                                          |       | 3,807                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Total  non-interest income                           |       | 2,354                                                                          |       | 4,145                                  |       |
| Total  non-interest expenses                         |       | 4,462                                                                          |       | 4,199                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Income before  taxes                                 |       | 1,986                                                                          |       | 3,753                                  |       |
| Provision for  income taxes                          |       | 865                                                                            |       | 1,650                                  |       |
|                                                 |       |                                                                           |       |                                   |       |
| Net income                                           |       | $                                                                              | 1,121      |                                   | $          | 2,103 |   |
|                                                 |       |                                                                           |       |                                   |       |
| Per Common Share  Data:                              |       |                                                                           |       |                                   |       |
|                                                 |       |                                                                           |       |                                   |       |
| Net income -  Primary (1)                            |       | $                                                                              | 0.644      |                                   | $          | 1.289 |   |
| Net income -  Diluted (2)                            |       | 0.622                                                                          |       | 1.163                                  |       |
| Book value, end  of period                           |       | 8.36                                                                           |       | 6.69                                   |       |
| Avg shares  outstanding (3)                          |       | 1,739,254                                                                      |       | 1,631,766                              |       |
|                                                 |       |                                                                           |       |                                   |       |
| Balance Sheet  Data:                                 |       |                                                                           |       |                                   |       |
|                                                 |       |                                                                           |       |                                   |       |
| Total loans, net  of unearned income (4)             |       | $                                                                              | 141,785    |                                   | $          | 118,529 |   |
| Total assets                                         |       | 216,220                                                                        |       | 171,446                                |       |
| Total deposits                                       |       | 149,375                                                                        |       | 122,699                                |       |
| Stockholders’  equity                           |       | 13,665                                                                         |       | 10,938                                 |       |

 

13

----

 
| ** **                                                     | ** ** | **The six months**           | ** ** | **The six months**           | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **Ended June 30, 2007** | ** ** | **Ended June 30, 2006** | ** ** |
| Selected  Financial Ratios:                                    |       |                                   |       |                                   |       |
|                                                           |       |                                   |       |                                   |       |
| Return on  average assets (5) (6)                              |       | 1.16                                   | %          | 2.58                                   | %          |
| Return on  average stockholders’ equity (5) (6)           |       | 16.96                                  | %          | 41.14                                  | %          |
| Net interest  spread                                           |       | 4.28                                   | %          | 4.55                                   | %          |
| Net yield on  interest earning assets (5)                      |       | 4.97                                   | %          | 5.25                                   | %          |
| Avg  shareholders’ equity to average assets (5)           |       | 6.83                                   | %          | 6.27                                   | %          |
| Risked-Based  capital ratios                                   |       |                                   |       |                                   |       |
| Tier 1                                                         |       | 10.29                                  | %          | 9.84                                   | %          |
| Total                                                          |       | 14.04                                  | %          | 14.65                                  | %          |
| Total loans to  total deposits at end of period (4)            |       | 94.92                                  | %          | 96.60                                  | %          |
| Allowance for  loan losses to total loans at end of period (4) |       | 1.00                                   | %          | 1.00                                   | %          |
| Nonperforming  loans to total loans at end of period (4)       |       | 0.11                                   | %          | 0.02                                   | %          |
| Net charge-offs  to average loans (4)                          |       | 0.18                                   | %          | 0.00                                   | %          |

 

----

(1)   Basicearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock outstanding during the year. The weightedaverage number of common shares used for this computation was 1,739,254 and1,631,766 for June 30, 2007 and 2006, respectively.

 

(2)   Dilutedearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock and common stock equivalents outstandingduring the year. Common stock equivalents include director/employee stockoptions. The weighted average number of shares used for this computation was1,801,048 and 1,807,885 for June 30, 2007 and 2006, respectively.

 

(3)   Weightedaverage common shares.

 

(4)   Includesloans being held for sale.

 

(5)   Averagesare of daily balances.

 

(6)   June30, 2007 calculated on an annualized basis.

 

**NET INTEREST INCOME**

 

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

 

Net interest income forthe six months ended June 30, 2007 was $4,369,000 compared to $3,902,000 forthe same period in 2006. The increase of $467,000 resulted from total interestincome increasing $1,593,000, while total interest expense increased $1,126,000.Average

 

14

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interest earning assets increased$26,062,000 (17.27%), while the average rate earned increased 54 basis points. Averageinterest bearing liabilities increased $27,237,000 (22.13%), while the averagerate paid increased 81 basis points.

 

The following tablesshow the components of the Bank’s net interest income, setting forth, for eachof the three months ended and six months ended June 30, 2007 and 2006, (i)average assets, liabilities and investments, (ii) interest income earned oninterest-earning assets and interest expense paid on interest-bearingliabilities, (iii) average yields earned on interest-earning assets and averagerates paid on interest-bearing liabilities, (iv) the net interest spread (i.e.,the average yield earned on interest-earning assets less the average rate paidon interest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets). Yields are computed on a tax-equivalent basis,resulting in adjustments to interest earned on municipal bonds of $37,000 and$37,000 for the three months ended June 30, 2007 and 2006, respectively and$70,000 and $73,000 for the six months ended June 30, 2007 and 2006,respectively. Non-accrual loans and overdrafts are included in average loanbalances. Average loans are presented net of unearned income.

 

15

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| ** **                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** |
| ** **                                                  | ** ** | **Average**                                         | ** ** | ** **                                          | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                         | ** ** | **Interest**                                        | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                   | 139,026    |                                                | $          | 3,443 |   | 9.91 | % | $ | 115,760 |   | $ | 2,867 |   | 9.91 | % |
| Time deposits -  in other banks                             |       | 1,000                                               |       | 14                                                  |       | 5.73 | % | 1,000 |   | 11 |   | 4.40 | % |
| Invest  securities - taxable                                |       | 26,923                                              |       | 360                                                 |       | 5.34 | % | 12,855 |   | 145 |   | 4.51 | % |
| Invest  securities - nontaxable                             |       | 7,007                                               |       | 112                                                 |       | 6.39 | % | 7,020 |   | 118 |   | 6.72 | % |
| Federal funds  sold                                         |       | 8,698                                               |       | 110                                                 |       | 5.07 | % | 15,509 |   | 190 |   | 4.90 | % |
| Total  interest-earning assets                              |       | 182,654                                             |       | 4,039                                               |       | 8.85 | % | 152,144 |   | 3,331 |   | 8.76 | % |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,306                                              | )          |                                                |       |   |   | (1,103 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,566                                               |       |                                                |       |   |   | 5,405 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,886                                               |       |                                                |       |   |   | 4,382 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,061                                               |       |                                                |       |   |   | 734 |   |   |   |   |   |
| Other assets                                                |       | 5,172                                               |       |                                                |       |   |   | 6,523 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                   | 199,033    |                                                |       |   |   |   | $ | 168,085 |   |   |   |   |   |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                   | 14,740     |                                                | $          | 9 |   | 0.25 | % | $ | 13,214 |   | $ | 9 |   | 0.27 | % |
| Money market  savings                                       |       | 1,870                                               |       | 3                                                   |       | 0.73 | % | 4,101 |   | 7 |   | 0.68 | % |
| Savings deposits                                            |       | 4,388                                               |       | 11                                                  |       | 1.01 | % | 7,793 |   | 20 |   | 1.03 | % |
| Time deposits  >$100M                                    |       | 40,817                                              |       | 525                                                 |       | 5.14 | % | 30,429 |   | 338 |   | 4.44 | % |
| Time deposits  <$100M                                    |       | 49,898                                              |       | 644                                                 |       | 5.16 | % | 32,167 |   | 318 |   | 3.95 | % |
| Other Borrowing                                             |       | 43,108                                              |       | 634                                                 |       | 5.89 | % | 34,998 |   | 511 |   | 5.84 | % |
| Total  interest-bearing liabilities                         |       | 154,821                                             |       | 1,827                                               |       | 4.72 | % | 117,148 |   | 1,203 |   | 3.92 | % |
|                                                        |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                |       |                                                |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 26,274                                              |       |                                                |       |   |   | 31,685 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,501                                               |       |                                                |       |   |   | 786 |   |   |   |   |   |
| Other  liabilities                                          |       | 2,857                                               |       |                                                |       |   |   | 2,170 |   |   |   |   |   |
| Total  Liabilities                                          |       | 185,450                                             |       |                                                |       |   |   | 157,343 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 13,583                                              |       |                                                |       |   |   | 10,742 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                   | 199,033    |                                                |       |   |   |   | $ | 168,085 |   |   |   |   |   |
| Net interest  income                                        |       |                                                |       | $                                                   | 2,213      |   |   |   |   |   | $ | 2,128 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                |       |                                                |       | 8.85 | % |   |   |   |   | 8.76 | % |
| Interest expense  as a percentage of average earning assets |       |                                                |       |                                                |       | 4.00 | % |   |   |   |   | 3.16 | % |
| Net yield on  interest earning assets                       |       |                                                |       |                                                |       | 4.85 | % |   |   |   |   | 5.59 | % |
| Net interest  spread                                        |       |                                                |       |                                                |       | 4.13 | % |   |   |   |   | 4.84 | % |

 

16

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| ** **                                                  | ** ** | **Six Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                          | ** ** | **2006**                                          | ** ** |
| ** **                                                  | ** ** | ** **                                        | ** ** | **Int**                                           | ** ** | **Avg** | ** ** | ** ** | ** ** | **Int** | ** ** | **Avg** | ** ** |
| ** **                                                  | ** ** | **Avg**                                           | ** ** | **Earn**                                          | ** ** | **%** | ** ** | **Avg** | ** ** | **Earn** | ** ** | **%** | ** ** |
| ** **                                                  | ** ** | **Bal**                                           | ** ** | **Paid**                                          | ** ** | **Rate** | ** ** | **Bal** | ** ** | **Paid** | ** ** | **Rate** | ** ** |
| ** **                                                  | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **(Dollars in  thousands)** | ** ** | ** ** | ** ** |
| Assets:                                                     |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                 | 134,895    |                                              | $          | 6,733 |   | 9.98 | % | $ | 112,837 |   | $ | 5,400 |   | 9.57 | % |
| Time deposits -  in other banks                             |       | 1,072                                             |       | 28                                                |       | 5.23 | % | 1,000 |   | 22 |   | 4.38 | % |
| Invest  securities - taxable                                |       | 25,030                                            |       | 638                                               |       | 5.10 | % | 14,316 |   | 279 |   | 3.87 | % |
| Invest  securities - nontaxable                             |       | 7,009                                             |       | 227                                               |       | 6.48 | % | 7,022 |   | 236 |   | 6.73 | % |
| Federal funds  sold                                         |       | 8,943                                             |       | 234                                               |       | 5.23 | % | 15,711 |   | 362 |   | 4.61 | % |
| Total interest-earning  assets                              |       | 176,948                                           |       | 7,860                                             |       | 8.88 | % | 150,885 |   | 6,299 |   | 8.34 | % |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,357                                            | )          |                                              |       |   |   | (1,102 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,529                                             |       |                                              |       |   |   | 5,984 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,807                                             |       |                                              |       |   |   | 4,375 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,039                                             |       |                                              |       |   |   | 720 |   |   |   |   |   |
| Other assets                                                |       | 5,046                                             |       |                                              |       |   |   | 2,849 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                 | 193,012    |                                              |       |   |   |   | $ | 163,711 |   |   |   |   |   |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                              |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                 | 14,588     |                                              | $          | 18 |   | 0.25 | % | $ | 12,868 |   | $ | 23 |   | 0.36 | % |
| Money market  savings                                       |       | 1,935                                             |       | 7                                                 |       | 0.73 | % | 4,275 |   | 16 |   | 0.75 | % |
| Savings deposits                                            |       | 4,555                                             |       | 23                                                |       | 1.00 | % | 7,969 |   | 40 |   | 1.00 | % |
| Time deposits  >$100M                                    |       | 39,279                                            |       | 997                                               |       | 5.08 | % | 30,297 |   | 640 |   | 4.23 | % |
| Time deposits  <$100M                                    |       | 46,929                                            |       | 1,163                                             |       | 4.96 | % | 32,679 |   | 615 |   | 3.76 | % |
| Other Borrowing                                             |       | 43,053                                            |       | 1,252                                             |       | 5.82 | % | 35,015 |   | 1,001 |   | 5.72 | % |
| Total  interest-bearing liabilities                         |       | 150,339                                           |       | 3,461                                             |       | 4.60 | % | 123,101 |   | 2,335 |   | 3.79 | % |
|                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,791                                            |       |                                              |       |   |   | 27,930 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,442                                             |       |                                              |       |   |   | 733 |   |   |   |   |   |
| Other liabilities                                           |       | 2,226                                             |       |                                              |       |   |   | 1,688 |   |   |   |   |   |
| Total  Liabilities                                          |       | 179,798                                           |       |                                              |       |   |   | 153,451 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 13,214                                            |       |                                              |       |   |   | 10,260 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                 | 193,012    |                                              |       |   |   |   | $ | 163,711 |   |   |   |   |   |
| Net interest income                                         |       |                                              |       | $                                                 | 4,398      |   |   |   |   |   | $ | 3,964 |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                              |       |                                              |       | 8.88 | % |   |   |   |   | 8.34 | % |
| Interest expense  as a percentage of average earning assets |       |                                              |       |                                              |       | 3.91 | % |   |   |   |   | 3.09 | % |
| Net yield on  interest earning assets                       |       |                                              |       |                                              |       | 4.97 | % |   |   |   |   | 5.25 | % |
| Net interest  spread                                        |       |                                              |       |                                              |       | 4.28 | % |   |   |   |   | 4.55 | % |

 

17

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**Rate and Volume Analysis:**

 

Thefollowing tables show the increase or decrease in interest income, interest expenseand net interest income, resulting from changes in rates and volumes, for eachof the three months ended and the six months ended June 30, 2007 compared withthe same periods in 2006.

 
| ** **                                | ** ** | **Increase (decrease) in the three months ended**  | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **June 30, 2007 compared with June 30, 2006** | ** ** |
| ** **                                | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase in  interest income:             |       |                                                                             |       |   |   |   |   |
| Loans                                     |       | $                                                                                | 576        |   | $ | — |   | 576 |   |
| Time deposits -  in other banks           |       | —                                                                           |       | 3 |   | 3 |   |
| Invest  securities - taxable              |       | 159                                                                              |       | 56 |   | 215 |   |
| Invest  securities - nontaxable           |       | —                                                                           |       | (6 | ) | (6 | ) |
| Federal funds  sold                       |       | (84                                                                              | )          | 4 |   | (80 | ) |
| Total  interest-earning assets            |       | 651                                                                              |       | 57 |   | 708 |   |
|                                      |       |                                                                             |       |   |   |   |   |
| Increase  (decrease) in interest expense: |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                  |       | $                                                                                | 1          |   | $ | (1 | ) | $ | — |   |
| Money market  savings                     |       | (4                                                                               | )          | — |   | (4 | ) |
| Savings deposits                          |       | (9                                                                               | )          | — |   | (9 | ) |
| Time deposits  >$100M                  |       | 115                                                                              |       | 71 |   | 187 |   |
| Time deposits  <$100M                  |       | 175                                                                              |       | 151 |   | 326 |   |
| Other Borrowing                           |       | 118                                                                              |       | 5 |   | 123 |   |
| Total  interest-bearing liabilities       |       | 398                                                                              |       | 226 |   | 624 |   |
| Increase in net  interest income:         |       | $                                                                                | 253        |   | $ | (169 | ) | $ | 84 |   |

 
| ** **                                    | ** ** | **Increase (decrease) in the six months ended**    | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **June 30, 2007 compared with June 30, 2006** | ** ** |
| ** **                                    | ** ** | **Volume**                                                                       | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:      |       |                                                                             |       |   |   |   |   |
| Loans                                         |       | $                                                                                | 1,056      |   | $ | 277 |   | $ | 1,333 |   |
| Time deposits -  in other banks               |       | 2                                                                                |       | 4 |   | 6 |   |
| Invest securities  - taxable                  |       | 205                                                                              |       | 153 |   | 358 |   |
| Invest  securities - nontaxable               |       | (0                                                                               | )          | (9 | ) | (9 | ) |
| Federal funds  sold                           |       | (156                                                                             | )          | 28 |   | (128 | ) |
|                                          |       |                                                                             |       |   |   |   |   |
| Total  interest-earning assets                |       | 1,106                                                                            |       | 454 |   | 1,560 |   |
|                                          |       |                                                                             |       |   |   |   |   |
| Increase  (decrease) in interest expense:     |       |                                                                             |       |   |   |   |   |
| Interest-bearing  demand                      |       | 3                                                                                |       | (8 | ) | (5 | ) |
| Money market  savings                         |       | (9                                                                               | )          | (0 | ) | (9 | ) |
| Savings deposits                              |       | (17                                                                              | )          | (0 | ) | (17 | ) |
| Time deposits  >$100M                      |       | 190                                                                              |       | 167 |   | 357 |   |
| Time deposits  <$100M                      |       | 268                                                                              |       | 281 |   | 549 |   |
| Other Borrowing                               |       | 230                                                                              |       | 21 |   | 251 |   |
| Total  interest-bearing liabilities           |       | 665                                                                              |       | 461 |   | 1,126 |   |
| Increase  (decrease) in net interest expense: |       | $                                                                                | 441        |   | $ | (7 | ) | $ | 434 |   |

 

18

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**Provision and Allowance for LoanLosses**

 

The provision for loanlosses is an expense charged against operating income and added to theallowance for loan losses. The allowance for loan losses represents amounts setaside for the specific purpose of absorbing losses that may occur in the Bank’sloan portfolio.

 

The allowance for loanlosses reflects management’s ongoing evaluation of the risks inherent in theloan portfolio both generally and with respect to specific loans, the state ofthe economy, and the level of net loan losses experienced in the past. Managementand the Board of Directors review the results of the State Banking Departmentand FDIC examinations, independent accountants’ observations, and the Bank’sexternal credit reviews as additional indicators to determine if the amount inthe allowance for loan losses is adequate to protect against estimated futurelosses

 

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

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

 

Although no assurance canbe given that actual losses will not exceed the amount provided for in theallowance, Management believes that the allowance is adequate to provide forall estimated credit losses in light of all known relevant factors. At June 30, 2007 and 2006 the Bank’sallowance stood at 1.00 percent. Provisions made to the allowance during thesix months ended June 30, 2007 or 2006 were $275,000 and $95,000, respectively.Loans charged off during the six months ended June 30, 2007 totaled $246,000, while no loans were charged offduring the same period in 2006. Recoveries were $1,000 for both June 30, 2007and 2006, respectively.

 

19

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The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.11 percent at June30, 2007 compared with 0.02 percent for the same period in 2006.

 

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

 

**Non-Interest Income**

 

Total non-interest incomefor the six months ended June30, 2007 was $2,354,000 compared with $4,145,000 for the same period in 2006. Thedecrease of $1,791,000 resulted from the first quarter 2006 gain of $1,313,000on the sale of the Bank’s investment in Pacific Coast Bankers’ Bancshares, markto market loss of $135,000 in the trading assets compared with a $57,000 gainduring the same period in 2006, decreases of $165,000 credit card programrevenues, $104,000 commercial banking origination fees, $95,000 in merchantcredit card income, $82,000 in income from sales and servicing of SmallBusiness Administration Loans and an increase of $27,000 in service charges ondeposit accounts.

 

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

 

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

 

**Non-Interest Expense**

 

Salary and benefitsexpense for the six months ended June 30, 2007 increased $206,000 compared with the same periodin 2006. The increase was due to theaddition of a Marketing Officer, Credit Analyst, and merit payincreases.

 

Total occupancy andequipment expense for the six months ended June 30, 2007 was $427,000 compared to$381,000 for the same period in 2006. The increase was primarily due toincreases in depreciation expense of $13,000, janitorial services of $7,000 andstorage rental of $6,000.

 

Professional fees for thesix months ended June30, 2007 was $88,000 compared to $83,000 for the same period in 2006.

 

Data processing expensefor the six months ended June30, 2007 was $178,000 compared to $166,000 for the same period in 2006.

 

20

----

 

Other general andadministrative expenses for the six months ended June 30, 2007 totaled $1,709,000compared with $1,717,000 for the same period in 2006, which is a decrease of$8,000. Significant changes occurred in the following categories; no provision for possible losses on debtsecurities was made during 2007 while the provision was decreased $39,000during the same period in 2006; no provisionfor possible losses on unfunded loan commitments was made during 2007 while theprovision was decreased $31,000 during the same period in 2006; increasesoccurred in business development of $37,000, director fees of $35,000and entertainment and meals of $15,000; while decreases occurred in merchantcredit card processing expense of $66,000, other operating losses of $64,000,advertising expense of $29,000, donations of $17,000 and bank fees of $12,000.

 

The income tax provisionfor the six months ended June30, 2007 totaled $865,000 at an effective tax rate of 43.55%. The income taxprovision for the six months ended June30, 2006 totaled $1,650,000 at an effective tax rate of 43.98%. The decrease of$785,000 was due to a $591,000 provision in 2006 related to the gain on sale ofan investment and decreased other income.

 

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

 

**LOANS**

 

Loans represented 76.23%of average earning assets, and 69.95% of average total assets for the sixmonths ended June30, 2007 compared with 74.78% and 69.23%, respectively during 2006. For the sixmonths ended June 30, 2007,average loans increased 19.55% from $112,837,000 for the same period in 2006 to$134,895,000. Average real estate loans increased $12,607,000 (16.67%), averageconstruction loans increased $8,448,000 (77.66%), average commercial loansincreased $1,327,000 (5.23%), and average installment loans decreased $323,000(33.34%).

 

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

 

21

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

 

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

 

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

 

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

 

**Non-performing and Non-accrualLoans**

 

The Bank’s present policyis to cease accruing interest on loans which are past due as to principal orinterest 90 days or more, except for loans which are well secured or whencollection of interest and principal is deemed likely. When a loan is placed onnon-accrual, previously accrued and unpaid interest is generally reversed outof income unless adequate collateral from which to collect the principal of,and interest on, the loan appears to be available.

 

22

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

 
| ** **                                                    | ** ** | **Six months as of ****June**** 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**                           | ** ** |
| Accruing, past  due 90 days or more:                          | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
|                                                          |       |                                                           |       |   |   |
| Real estate                                                   |       | $                                                              | —     |   | $ | — |   |
| Commercial                                                    |       | —                                                         |       | — |   |
| Installment                                                   |       | —                                                         |       | — |   |
| Other                                                         |       | —                                                         |       | — |   |
| Total accruing                                                |       | —                                                         |       | — |   |
|                                                          |       |                                                           |       |   |   |
| Non-accrual  Loans:                                           |       |                                                           |       |   |   |
|                                                          |       |                                                           |       |   |   |
| Real estate                                                   |       | —                                                         |       | — |   |
| Commercial                                                    |       | —                                                         |       | 18 |   |
| Installment                                                   |       | 155                                                            |       | 155 |   |
| Other                                                         |       | —                                                         |       | — |   |
| Total  non-accrual                                            |       | 155                                                            |       | 173 |   |
|                                                          |       |                                                           |       |   |   |
| Total  nonperforming                                          |       | $                                                              | 155        |   | $ | 173 |   |
|                                                          |       |                                                           |       |   |   |
| Total loans end  of period                                    |       | 141,785                                                        |       | 118,529 |   |
|                                                          |       |                                                           |       |   |   |
| Ratio of  nonperforming loans to total loans at end of period |       | 0.11                                                           | %          | 0.15 | % |

 

These ratios have beenmaintained as a result of conservative underwriting criteria, frequent reviewof new and delinquent loans and a firm collection policy (with the assistanceof outside legal counsel). The Bank does not have any foreign loans or loansfor highly leveraged transactions.

 

23

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## **Summaryof Loan Loss Experience**

 
| ** **                                                                     | ** ** | ** **                          | ** ** | ** **                       | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period** | ** ** | **Year ended**              | ** ** |
| ** **                                                                     | ** ** | **Ended June 30,**        | ** ** | **December 31,**            | ** ** |
| ** **                                                                     | ** ** | **2007**                            | ** ** | **2006**                         | ** ** | **2006**                | ** ** |
| ** **                                                                     | ** ** | ** **                          | ** ** | **(Dollars in  thousands)** | ** ** | ** **              | ** ** |
| Average loans  outstanding                                                     |       | $                                   | 134,895    |                             | $          | 112,837                 |       | $ | 118,699 |   |
|                                                                           |       |                                |       |                             |       |                    |       |
| Allowance,  beginning of period                                                |       | 1,409                               |       | 1,101                            |       | 1,101                   |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Loans charged  off during period:                                              |       |                                |       |                             |       |                    |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Commercial                                                                     |       | 245                                 |       | —                           |       | —                  |       |
| Installment                                                                    |       | 1                                   |       | —                           |       | 109                     |       |
| Real Estate                                                                    |       | —                              |       | —                           |       | —                  |       |
| Other                                                                          |       | —                              |       | —                           |       | —                  |       |
| Total charge  offs                                                             |       | 246                                 |       | —                           |       | 109                     |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Recoveries during  period:                                                     |       |                                |       |                             |       |                    |       |
| Commercial                                                                     |       | 1                                   |       | 1                                |       | —                  |       |
| Installment                                                                    |       | —                              |       | —                           |       | 7                       |       |
| Real Estate                                                                    |       | —                              |       | —                           |       | —                  |       |
| Other                                                                          |       | —                              |       | 1                                |       | —                  |       |
| Total recoveries                                                               |       | 1                                   |       |                             |       | 7                       |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Net Loans  charged off during the period                                       |       | 245                                 |       | (1                               | )          | 102                     |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | 275                                 |       | 95                               |       | 410                     |       |
|                                                                           |       |                                |       |                             |       |                    |       |
| Allowance, end  of period                                                      |       | $                                   | 1,439      |                             | $          | 1,197                   |       | $ | 1,409 |   |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.18                                | %          | 0.00                             | %          | 0.09                    | %          |
| Ratio of  allowance to total loans at end of period                            |       | 1.00                                | %          | 1.00                             | %          | 1.07                    | %          |

 

**Deposits**

 

Average deposits for thesix months ended June30, 2007 were $133,076,000 an increase of 14.70% compared with the same periodin 2006. Average certificates of deposit represented 64.78% of average depositsfor the six months ended June30, 2007. Average interest bearing checking, money market and savings accountsas a group were 15.84% of average deposits for the six months ended June 30, 2007. Average demand depositsrepresented 19.38% of average deposits for the six months ended June 30, 2007.

 

24

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

 
| Maturities of Time Deposits of    $ 100,000 or More | ** ** |
|--------------------------------------------------------------------------------------------------|------------|
| (Dollars in Thousands)                                                                 | ** ** |
|                                                                                             |       |   |   |
| Three months or  less                                                                            |       | $ | 15,724 |   |
| Over three  months through six months                                                            |       | 8,497 |   |
| Over six months  through twelve months                                                           |       | 17,217 |   |
| Over twelve  months                                                                              |       | 8,262 |   |
| Total                                                                                            |       | $ | 49,700 |   |

 

**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**June 30, 2007 of $7,775,000 (based on pledged collateral),$4,500,000, $6,000,000 and $5,000,000, respectively. The Federal Home Loan Bankline of credit has a maximum borrowing capacity of twenty five percent (25%) ofthe Bank’s total assets, adjusted quarterly. The Federal Home Loan Bank line ofcredit is secured by a portion of the Bank’s real estate secured loans andsecurities at June 30, 2007. The total principal balance of pledged loans was$36,673,000 and securities of $25,441,000. The following table providesinformation on fourteen FHLB advances totaling $39,750,000 and outstanding at June 30, 2007.

** **
| ** ** | ** ** | ** ** | ** ** | **Funding** | ** ** | **Maturity** | ** ** |
|------------|------------|------------|------------|-------------|------------|--------------|------------|
| **Amount** | ** ** | **Rate**   | ** ** | **Date**    | ** ** | **Date**     | ** ** |
| $          | 2,750      |       | 3.44       | %           | 9/27/02    |         | 9/27/07    |   |
| 3,000      |       | 4.30       | %          | 6/17/05     |       | 6/17/10      |       |
| 5,000      |       | 4.96       | %          | 11/14/05    |       | 11/15/10     |       |
| 2,250      |       | 4.75       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,750      |       | 4.72       | %          | 1/26/06     |       | 1/26/11      |       |
| 1,500      |       | 5.52       | %          | 7/17/06     |       | 7/18/11      |       |
| 3,500      |       | 5.49       | %          | 7/17/06     |       | 7/18/11      |       |
| 1,000      |       | 5.22       | %          | 8/25/06     |       | 8/25/11      |       |
| 1,000      |       | 7.72       | %          | 6/1/00      |       | 6/3/30       |       |
| 4,000      |       | 5.96       | %          | 8/2/04      |       | 7/28/34      |       |
| 5,000      |       | 5.63       | %          | 12/24/04    |       | 12/22/34     |       |
| 2,000      |       | 5.13       | %          | 5/4/05      |       | 5/1/35       |       |
| 2,000      |       | 5.31       | %          | 11/17/06    |       | 11/17/36     |       |
| 5,000      |       | 5.88       | %          | 6/29/07     |       | 6/29/37      |       |
| $          | 39,750     |       |       |        |       |         |       |   |

** **

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

** **

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

 

25

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** **

**Capital Resources**

 

The Corporationmaintains capital to comply with legal requirements, to provide a margin ofsafety for its depositors and stockholders, and to provide for future growthand the ability to pay dividends.  At June30, 2007, stockholders’ equity was $13,665,000 versus $12,402,000 at December31, 2006.  The Corporation paid no cashdividends during the six months ended June30, 2007 and $0.35 for the year ended December 31, 2006.  The Bank paid the Corporation a $100,000 cashdividend during the six months ended June30, 2007 and $625,000 during the year ended December 31, 2006.

 

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

 

Under current rules, allbanks are required to maintain Tier 1 capital of at least 4 percent and totalcapital of 8.0% of risk-adjusted assets. The Bank had Tier 1 risk-based capitalratios of 11.83% and 12.48% at June 30, 2007 and 2006, respectively.  The Bank’s Tier 1 capital exceeds the minimumregulatory requirement by $12,831,000. The Bank had Total risk-based capital ratios of 12.73% and 13.38% at June 30, 2007 and 2006,respectively.  The Bank’s TotalRisk-Based capital exceeds the minimum regulatory requirement by $4,474,000.These ratios are well above the minimum regulatory requirements.  The Corporation had Tier 1 risk-based capitalratios of 10.29% and 9.85% at June30, 2007 and 2006, respectively.  TheCorporation had Total risk-based capital ratios of 14.04% and 14.66% at June 30, 2007 and 2006, respectively.

 

The leverage capitalratio guidelines require a minimum leverage capital ratio of 3% of Tier 1capital to total assets less goodwill. The Company had leverage capital ratios of 8.40% and 7.72% at June 30, 2007 and 2006, respectively;while the Bank’s leverage capital ratios were 9.87% and 10.33% at June 30, 2007 and 2006.  The Bank’s Tier 1 leverage capital exceedsthe minimum regulatory requirement by $13,496,000.

 

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

 

## **Liquidity**

 

Liquidity represents abank’s ability to provide sufficient cash flows or cash resources in a mannerthat enables it to meet obligations in a timely fashion and adequately providesfor anticipated future cash needs.  Forthe Bank, liquidity considerations involve the capacity to meet expected andpotential requirements of depositors seeking access to balances and to providefor the credit demands of borrowing customers. In the ordinary course of the Bank’s business, funds are generated fromthe repayment of loans, maturities within the investment securities portfolioand the acquisition of deposit balances and short-term borrowings.  In addition, the Bank has a secured borrowingarrangement with the Federal Home Loan Bank of

 

26

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San Francisco ofapproximately $46,174,000of which $40,080,000 had been advanced at June30, 2007****and unsecured federalfunds lines of credit with Bank of the West,Pacific Coast Bankers’ Bank and The Independent Bank of $4,500,000, $6,000,000and $5,000,000, respectively; to meet temporary liquidity requirements.

 

As a matter of policy,the Bank seeks to maintain a level of liquid assets, including marketable investmentsecurities, equal to a least 15 percent of total assets (“total liquidity”).Additionally the Bank maintains secondary sources of liquidity (borrowing linesfrom other institutions) equal to at least an additional 10 percent ofassets.  Within these ratios, the Bankgenerally has excess funds available to sell as federal funds on a daily basis,and is able to fund its own liquidity needs without the need of short-termborrowing.  The Bank’s total liquidity atJune30, 2007 and 2006 was 28.10% and 23.32%, respectively, while its average loanto deposit ratio for such years was 95.75% and 97.54%, 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 June 30, 2007 compared withapproximately $5,341,000 or 4.35% of total deposits at June 30, 2006.  None of the Bank’s brokered deposits paid aninterest rate significantly higher than prevailing rates.

 

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

 

**InterestRate Risk**

 

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

 

27

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Further, the actualtiming of repricing of assets and liabilities does not always correspond to thetiming assumed by the Bank for analytical purposes.  Therefore, changes in market rates ofinterest will generally impact on the Bank’s net interest income and netinterest margin for long or short periods of time.

 

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed fundsrate.  The model converts a fed fundsrate change into rate changes for each major class of asset and liability, thensimulates 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 period. The following table shows the affect on net interest income of an upwardor downward 100 and a 200 basis point rate shocks at June 30, 2007.

 

| **Rate Shock  Increase(Decrease) in Basis  Points** | ** ** | **Percent  Increase(Decrease) in Net  Interest Income** | ** ** | **Asset/Liability Policy Limits  for Increase(Decrease) in Net  Interest Income** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| 100                                                                |       | 5.5                                                                    | %          | 10.0                                                                                                            | %          |
| (100)                                                              |       | (5.7                                                                   | )%         | (10.0                                                                                                           | )%         |
| 200                                                                |       | 11.0                                                                   | %          | 20.0                                                                                                            | %          |
| (200)                                                              |       | (11.4                                                                  | )%         | (20.0                                                                                                           | )%         |

 

**Investment Securities**

 

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At June 30, 2007 and 2006 the account value was $1,708,000 and $1,404,000, respectively.  The Corporation has investments of $20,000 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC.  In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000, these are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

 

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

 
| ** **                                | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **JUNE 30, 2007**            | ** ** |
| ** **                                | ** ** | **Book Value**                    | ** ** | **Market Value** | ** ** |
| Securities  Available for Sale            |       |                                   |       |   |   |
| Government  National Mortgage Association |       | $                                      | 482        |   | $ | 474 |   |
| U.S. Government  Agency Securities        |       | 27,245                                 |       | 26,961 |   |
| Total                                     |       | $                                      | 27,727     |   | $ | 27,435 |   |
|                                      |       |                                   |       |   |   |
| Held to Maturity                          |       |                                   |       |   |   |
| State/Local Agency  Bonds                 |       | $                                      | 7,006      |   | $ | 7,142 |   |

 

28

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| ** **                                  | ** ** | **INVESTMENT PORTFOLIO MIX  JUNE 30, 2007** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Book Value**                                             | ** ** | **Market Value** | ** ** |
| Other  Investments, at cost                 |       |                                                            |       |   |   |
| AT Services LLC                             |       | $                                                               | 20         |   | $ | 20 |   |
| Metrocities  Mortgage, LLC                  |       | 10                                                              |       | 10 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,869                                                           |       | 1,869 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93                                                              |       | 93 |   |
| Northern  California Bancorp, Inc. Trust II |       | 155                                                             |       | 155 |   |
| Independent  Bankers Financial Corporation  |       | 51                                                              |       | 51 |   |
| MasterCard, Inc.  Class B Stock             |       | 5                                                               |       | 5 |   |
|                                        |       | $                                                               | 2,203      |   | $ | 2,203 |   |

 

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

 
| ** **                              | ** ** | **INVESTMENT PORTFOLIO MATURITIES** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|
| ** **                              | ** ** | **(Dollars in thousands)**          | ** ** |
| ** **                              | ** ** | **Amortized Cost**                       | ** ** | **Fair Value** | ** ** |
| Available for  Sale                     |       |                                          |       |   |   |
| Due within one  year                    |       | $                                             | 2,995      |   | $ | 2,974 |   |
| Due between one  and five years         |       | —                                        |       | — |   |
| Due between five  and ten years         |       | 12,000                                        |       | 11,896 |   |
| Due between ten  and fifteen years      |       | 12,250                                        |       | 12,091 |   |
| GNMA – Mortgage  Backed Securities |       | 482                                           |       | 474 |   |
|                                    |       | $                                             | 27,727     |   | $ | 27,435 |   |
|                                    |       |                                          |       |   |   |
| Held to Maturity                        |       |                                          |       |   |   |
| Due in over ten  years                  |       | $                                             | 7,006      |   | $ | 7,142 |   |

 

29

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**Item 3. Controls and Procedures**

** **

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

 

(b) Changes in Internal Controls:  In the quarter ended June30, 2007, the Company did not make any significant changes in, nor take anycorrective actions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

**PART II-OTHER INFORMATION**

** **

**Item1.  Legal Proceedings.**

** **

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

 

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

** **

None

 

**Item3.  Default of Senior Securities**

** **

None

 

30

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

** **

**The following proposals were presented to shareholders atthe Corporation’s annual shareholders’ meeting held on May 24, 2007.**

** **

**Proposal Number 1:   Electionof Directors**

** **
| ** **                   | ** ** | **Number of  Affirmative Votes** | ** ** | **Number of  Votes Withheld** | ** ** |
|------------------------------|------------|--------------------------------------------|------------|-----------------------------------------|------------|
| David A.  Bernahl, II        |       | 1,490,335                                  |       | 5,730                                   |       |
| Mark A. Briant               |       | 1,492,335                                  |       | 5,730                                   |       |
| Charles T.  Chrietzberg, Jr. |       | 1,490,176                                  |       | 7,889                                   |       |
| Sandra G.  Chrietzberg       |       | 1,489,502                                  |       | 8,563                                   |       |
| Stephanie G.  Chrietzberg    |       | 1,490,176                                  |       | 7,889                                   |       |
| Peter J.  Coniglio           |       | 1,492,355                                  |       | 5,730                                   |       |
| Carla S. Hudson              |       | 1,492,355                                  |       | 5,730                                   |       |
| John M. Lotz                 |       | 1,492,355                                  |       | 5,730                                   |       |

** **

**Proposal Number 2:   Ratificationof the Company’s 2007 Stock Option Plan**

** **
| **Number of  Affirmative Votes** | ** ** | **Number of  Against** | ** ** | **Number of  Abstentions** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| 1,393,119                                  |       | 28,729                      |       | 22,618                          |       |

** **

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

#### ** **

None

 

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

#### ** **

A.        EXHIBITS

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

 

B.         Reports on Form 8-K

 

None

 

31

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

 
|                    | NORTHERN CALIFORNIA  BANCORP, INC. |
|-------------------------|------------------------------------|
|                    |                               |   |
| Date: November 20, 2007 |                               | By: | /s/ Charles T.  Chrietzberg, Jr. |   |
|                    |                               | Charles T. Chrietzberg,  Jr. |
|                    |                               | Chairman of the Board  & |
|                    |                               | Chief Executive Officer |
|                    |                               |   |
|                    |                               |   |
| Date: November 20, 2007 |                               | By: | /s/ Bruce N. Warner |   |
|                    |                               | Bruce N. Warner |
|                    |                               | Chief  Financial Officer and |
|                    |                               | Principal  Accounting Officer |

 

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