**U.S. SECURITIES AND EXCHANGECOMMISSION**

 

**Washington D.C.  20549**

 

**FORM 10-QSB**

 

|   | **ý** |   | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                 |
|--------|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |   |                                                                                                                                                                                                                                   |
|   |       |   | **for the quarterly period ended September  30, 2003**                                                                                                                                                                                 |
|   |       |   |                                                                                                                                                                                                                                   |
|   | **o**      |   | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No  fee required)**                                                                                                                             |
|   |       |   |                                                                                                                                                                                                                                   |
|   |       |   | **for the period  from                 to                 ** |

 

**Commission File Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of Small Business Issuer in its Charter)

 

**Incorporated in the State of California**

 

IRS Employer Identification Number **77-0421107**

 

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

 

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

 

Check whetherthe issuer: (1) filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes   ý         No   o

 

As of November3, 2003, the Corporation had 1,562,633 shares of common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

### **Item 1.            FINANCIALSTATEMENTS**

 

NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED BALANCE SHEET

 
|                                                                                                                     |   | **SEPTEMBER  30  2003** |   | **DECEMBER  31  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| ASSETS:                                                                                                                  |   |                    |   |                   |   |
| Cash and Cash Equivalents                                                                                                |   | 14,320,800              |   | 13,017,100             |   |
| Investment Securities, available for sale  (Note 1)                                                                      |   | 7,199,800               |   | 6,039,800              |   |
| Trading Account                                                                                                          |   | 159,100                 |   | 82,200                 |   |
| Other Investments                                                                                                        |   | 2,116,700               |   | 1,210,500              |   |
| Loans Held for Sale                                                                                                      |   | 2,159,500               |   | 982,500                |   |
| Gross Loans (Note 2)                                                                                                     |   | 67,265,500              |   | 60,041,300             |   |
| Allowance for Possible Loan Losses (Note 3)                                                                              |   | (694,400                | )      | (636,900               | )      |
| Deferred Origination Fees                                                                                                |   | (148,400                | )      | (130,000               | )      |
| Net Loans                                                                                                                |   | 66,422,700              |   | 59,274,400             |   |
| Bank Premises and Equipment, Net                                                                                         |   | 2,246,200               |   | 2,243,700              |   |
| Cash Surrender Value of Life Insurance                                                                                   |   | 2,233,600               |   | 2,160,400              |   |
| Interest Receivable and Other Assets                                                                                     |   | 1,833,700               |   | 1,268,700              |   |
| Total Assets                                                                                                             |   | 98,692,100              |   | 86,279,300             |   |
|                                                                                                                     |   |                    |   |                   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:                                                                               |   |                    |   |                   |   |
| Total Deposits (Note 4)                                                                                                  |   | 73,488,100              |   | 67,616,400             |   |
| Short-term Borrowing                                                                                                     |   | —                  |   | 200,000                |   |
| Long-term Borrowing                                                                                                      |   | —                  |   | 972,200                |   |
| Federal Home Loan Bank Borrowed Funds                                                                                    |   | 14,750,000              |   | 10,750,000             |   |
| Junior Subordinated Debt Securities                                                                                      |   | 3,000,000               |   | —                 |   |
| Interest Payable and Other Liabilities                                                                                   |   | 1,128,100               |   | 1,101,800              |   |
| Total Liabilities                                                                                                        |   | 92,366,200              |   | 80,640,400             |   |
|                                                                                                                     |   |                    |   |                   |   |
| Shareholders’ Equity:                                                                                               |   |                    |   |                   |   |
| Common Stock - No Par Value Authorized:  2,500,000 in 2003 and 2002 Outstanding 1,528,711 in 2003 and 1,479,175 in  2002 |   | 4,561,400               |   | 4,500,400              |   |
| Retained Earnings                                                                                                        |   | 1,687,500               |   | 1,120,900              |   |
| Accumulated Other Comprehensive Income  (Loss)                                                                           |   | 77,000                  |   | 17,600                 |   |
| Total Shareholders’ Equity                                                                                          |   | 6,325,900               |   | 5,638,900              |   |
| Total Liabilities & Shareholders’  Equity                                                                       |   | 98,692,100              |   | 86,279,300             |   |

 

2

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NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                          |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|---------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| INTEREST INCOME:                                              |   |                                  |   |                                 |   |   |   |   |   |
| Interest and Fees on Loans                                    |   | 1,360,400                             |   | 1,084,700                            |   | 3,769,700 |   | 3,225,600 |   |
| Interest on Time Deposits with Financial  Institutions        |   | 0                                     |   | 600                                  |   | 0 |   | 2,300 |   |
| Interest on Investment Securities                             |   | 49,700                                |   | 104,800                              |   | 231,100 |   | 291,400 |   |
| Interest on Federal Funds                                     |   | 22,700                                |   | 32,300                               |   | 74,000 |   | 92,700 |   |
| Total Interest Income                                         |   | 1,432,800                             |   | 1,222,400                            |   | 4,074,800 |   | 3,612,000 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| INTEREST EXPENSE:                                             |   |                                  |   |                                 |   |   |   |   |   |
| Interest on Interest-Bearing Transaction  Accounts            |   | 11,800                                |   | 25,800                               |   | 35,900 |   | 81,700 |   |
| Interest on Savings Accounts                                  |   | 15,000                                |   | 14,300                               |   | 46,200 |   | 42,800 |   |
| Interest on Time Deposits                                     |   | 284,000                               |   | 342,200                              |   | 862,400 |   | 1,113,900 |   |
| Interest on Other Borrowed Funds                              |   | 174,800                               |   | 84,400                               |   | 489,600 |   | 248,300 |   |
| Total Interest Expense                                        |   | 485,600                               |   | 466,700                              |   | 1,434,100 |   | 1,486,700 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Net Interest Income                                           |   | 947,200                               |   | 755,700                              |   | 2,640,700 |   | 2,125,300 |   |
| PROVISION FOR POSSIBLE LOAN LOSSES                            |   | 0                                     |   | 25,000                               |   | 75,000 |   | 77,000 |   |
| Net Interest Income After Provision for  Possible Loan Losses |   | 947,200                               |   | 730,700                              |   | 2,565,700 |   | 2,048,300 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| NONINTEREST INCOME:                                           |   |                                  |   |                                 |   |   |   |   |   |
| Service Charges on Deposit Accounts                           |   | 119,600                               |   | 130,600                              |   | 375,900 |   | 369,400 |   |
| SBA Loan Sales & Servicing Income                         |   | 127,200                               |   | 84,900                               |   | 418,200 |   | 330,200 |   |
| Other Operating Income                                        |   | 832,100                               |   | 683,400                              |   | 2,246,100 |   | 1,824,200 |   |
| Total Noninterest Income                                      |   | 1,078,900                             |   | 898,900                              |   | 3,040,200 |   | 2,523,800 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| NONINTEREST EXPENSE:                                          |   |                                  |   |                                 |   |   |   |   |   |
| Salaries and Employee Benefits                                |   | 626,200                               |   | 518,200                              |   | 1,837,800 |   | 1,547,500 |   |
| Occupancy and Equipment Expense                               |   | 124,500                               |   | 93,700                               |   | 387,300 |   | 270,200 |   |
| Professional Fees                                             |   | 21,900                                |   | 22,200                               |   | 70,600 |   | 62,600 |   |
| Data Processing                                               |   | 87,300                                |   | 108,700                              |   | 270,200 |   | 275,900 |   |
| FDIC & State Assessments                                  |   | 12,500                                |   | 4,400                                |   | 27,400 |   | 18,600 |   |
| Other Operating Expenses                                      |   | 790,600                               |   | 714,900                              |   | 2,103,700 |   | 1,957,600 |   |
| Income Tax Expense                                            |   | 154,000                               |   | 58,100                               |   | 342,300 |   | 135,700 |   |
| Total Noninterest Expense                                     |   | 1,817,000                             |   | 1,520,200                            |   | 5,039,300 |   | 4,268,100 |   |
| NET INCOME (LOSS)                                             |   | 209,100                               |   | 109,400                              |   | 566,600 |   | 304,000 |   |
|                                                          |   |                                  |   |                                 |   |   |   |   |   |
| Earnings Per Common Share                                     |   |                                  |   |                                 |   |   |   |   |   |
| Primary                                                       |   | 0.14                                  |   | 0.07                                 |   | 0.38 |   | 0.21 |   |
| Diluted                                                       |   | 0.12                                  |   | 0.06                                 |   | 0.32 |   | 0.17 |   |

 

3

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NORTHERN CALIFORNIA BANCORP, INC.AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSNINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

 
|                                                    |   | **2003**   |   | **2002**    |   |
|---------------------------------------------------------|--------|------------|--------|-------------|--------|
|                                                    |   |       |   |        |   |
| NET INCOME                                              |   | 566,600    |   | 304,000     |   |
| Adjustments to net income:                              |   |       |   |        |   |
| Depreciation and amortization expense                   |   | 120,700    |   | 34,600      |   |
| Amortization/Accretion on investments                   |   | (61,600    | )      | (5,100      | )      |
| (Gain) loss on sale of securities                       |   | (42,000    | )      | (51,700     | )      |
| Provision for possible loan losses                      |   | 75,000     |   | 77,000      |   |
| Increase (decrease) in accrued expenses                 |   | 20,689     |   | 105,500     |   |
| (Increase) decrease in prepaid expenses                 |   | (634,400   | )      | 193,000     |   |
| Increase (decrease) in interest payable                 |   | (20,900    | )      | (204,700    | )      |
| (Increase) decrease in interest receivable              |   | (35,500    | )      | (13,300     | )      |
| (Increase) decrease in loans held for sale              |   | (1,177,000 | )      | (553,700    | )      |
| Total adjustments to net income                         |   | (1,755,011 | )      | (418,400    | )      |
| Net cash provided (used) by operations                  |   | (1,188,411 | )      | (114,400    | )      |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                    |   |       |   |        |   |
| Proceeds from maturity of investments                   |   | 1,933,600  |   | —      |   |
| Proceeds from sale of investments                       |   | 70,400     |   | 12,814,300  |   |
| Purchase of securities                                  |   | (4,043,400 | )      | (10,435,100 | )      |
| Net (increase) decrease in loans                        |   | (7,165,100 | )      | (3,354,800  | )      |
| Capital expenditures                                    |   | (123,200   | )      | (169,600    | )      |
| Exercise of stock options                               |   | 82,500     |   | 30,300      |   |
| Stock repurchase                                        |   | (21,500    | )      | (2,300      | )      |
| Net cash provided (used) in investing activities        |   | (9,266,700 | )      | (1,117,200  | )      |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                    |   |       |   |        |   |
| Net increase (decrease) in deposit accounts             |   | 5,931,000  |   | (2,007,700  | )      |
| Net increase (decrease) in borrowed funds               |   | 5,827,811  |   | 2,750,000   |   |
| Net cash provided (used) by financing  activities       |   | 11,758,811 |   | 742,300     |   |
|                                                    |   |       |   |        |   |
| Net increase (decrease) in cash & cash  equivalents |   | 1,303,700  |   | (489,300    | )      |
| Cash & cash equivalents - beginning of  year        |   | 13,017,100 |   | 11,492,900  |   |
|                                                    |   |       |   |        |   |
| Cash & cash equivalents - end of period             |   | 14,320,800 |   | 11,003,600  |   |

 

4

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##### SeeNote 5 for Supplemental Disclosures

 
|                                                 |   | **SEPTEMBER  30  2003** |   | **DECEMBER  31  2002** |   |
|------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| (NOTE 1) INVESTMENT SECURITIES:                      |   |                    |   |                   |   |
|                                                 |   |                    |   |                   |   |
| Available for sale:                                  |   |                    |   |                   |   |
| US Government Securities                             |   | 2,004,600               |   | —                 |   |
| Corporate Debt Securities                            |   | 2,579,200               |   | 4,553,300              |   |
| Government National Mortgage Association  Securities |   | 2,616,000               |   | 1,486,500              |   |
|                                                 |   | 7,199,800               |   | 6,039,800              |   |
|                                                 |   |                    |   |                   |   |
| (NOTE 2) GROSS LOANS:                                |   |                    |   |                   |   |
|                                                 |   |                    |   |                   |   |
| Commercial and Industrial                            |   | 12,833,600              |   | 13,449,900             |   |
| Construction                                         |   | 3,699,000               |   | 4,066,300              |   |
| Real Estate – Mortgage                          |   | 50,097,600              |   | 41,999,800             |   |
| Installment                                          |   | 576,200                 |   | 461,900                |   |
| Government Guaranteed Loans Purchased                |   | 59,100                  |   | 63,400                 |   |
| Gross Loans                                          |   | 67,265,500              |   | 60,041,300             |   |
|                                                 |   |                    |   |                   |   |
| (NOTE 3) ALLOWANCE FOR POSSIBLE LOAN  LOSSES:        |   |                    |   |                   |   |
|                                                 |   |                    |   |                   |   |
| Balance at Beginning of Period                       |   | 636,900                 |   | 566,300                |   |
| Recoveries                                           |   | 900                     |   | 13,300                 |   |
| Provision for Possible Loan Losses                   |   | 75,000                  |   | 117,000                |   |
| Loans Charged Off                                    |   | (18,400                 | )      | (59,700                | )      |
| Balance at End of Period                             |   | 694,400                 |   | 636,900                |   |
|                                                 |   |                    |   |                   |   |
| (NOTE 4) DEPOSITS:                                   |   |                    |   |                   |   |
|                                                 |   |                    |   |                   |   |
| Demand                                               |   | 16,817,300              |   | 15,023,700             |   |
| Interest-Bearing Transaction                         |   | 14,066,600              |   | 12,653,400             |   |
| Savings                                              |   | 5,787,200               |   | 4,667,900              |   |
| Time Under $100,000                                  |   | 20,356,700              |   | 19,143,900             |   |
| Time Equal to or Greater than $100,000               |   | 16,460,300              |   | 16,127,500             |   |
|                                                 |   | 73,488,100              |   | 67,616,400             |   |

 

(Note 5) ****Basis of presentation****

 

The interim condensed financial statements of Northern CaliforniaBancorp, Inc. are unaudited and reflect all adjustments (consisting onlyof normal recurring adjustments), which are, in the opinion of management,necessary for a fair presentation, in all material respects, of the financialposition and operating results of the Company for the interim periods. The results of operations for the nine months ended September 30, 2003 arenot necessarily indicative of the results to be expected for the entire fiscalyear ending December 31, 2003.  The year-end balance sheet dataat December 31, 2002 was derived from the audited financial statements.

 

5

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This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Company’s Form10-KSB for the fiscal year ended December 31, 2002.

 

(Note 6)Stock Option Plan

 

Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148“Accounting for Stock-Based Compensation –Transition and Disclosure,”encourages all entities to adopt a fair value based method of accounting foremployee stock compensation plans, whereby compensation cost is measured at thegrant date based on the value of the award and is recognized over the serviceperiod, which is usually the vesting period.  However, it also allows an entity to continue to measurecompensation cost for those plans using the intrinsic value based method ofaccounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” whereby compensation cost is theexcess, if any, of the quoted market price of the stock at the grant date (orother measurement date) over the amount an employee must pay to acquire thestock.  Stock options issued under theCorporation’s stock option plan have no intrinsic value at the grant date, andunder Opinion No. 25 no compensation cost is recognized for them.

 

**The Corporation appliesAPB Opinion 25 and related Interpretations in accounting for the plan.  Accordingly, no compensation cost has beenrecognized.  Had compensation cost forthe Corporation’s stock-based compensation plan been determined based on thefair value at the grant date for awards under the plan consistent with themethod prescribed by SFAS No. 123, the Corporation’s net income and basicearnings per share would have been adjusted to the pro forma amounts indicatedbelow:**

 

|                   |   | **3 Months  Ended  September 30** |    | **9 Months  Ended  September 30** |   |
|------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|
|                   |   | **2003**                          |    | **2002**                          |   | **2003** |   | **2002** |   |
| Net income:            |   |                              |    |                              |   |   |   |   |   |
| As reported            |   | $                                 | 209,100 |                              | $      | 109,400 |   | $ | 566,600 |   | $ | 304,000 |   |
| Pro forma              |   | $                                 | 189,900 |                              | $      | 72,100 |   | $ | 547,400 |   | $ | 266,700 |   |
|                   |   |                              |    |                              |   |   |   |   |   |
| Earnings per  share:   |   |                              |    |                              |   |   |   |   |   |
| Basic - as  reported   |   | $                                 | 0.139   |                              | $      | 0.074 |   | $ | 0.377 |   | $ | 0.205 |   |
| Basic - pro  forma     |   | $                                 | 0.139   |                              | $      | 0.074 |   | $ | 0.364 |   | $ | 0.180 |   |
|                   |   |                              |    |                              |   |   |   |   |   |
| Diluted - as  reported |   | $                                 | 0.117   |                              | $      | 0.062 |   | $ | 0.317 |   | $ | 0.172 |   |
| Diluted -  pro forma   |   | $                                 | 0.117   |                              | $      | 0.062 |   | $ | 0.306 |   | $ | 0.151 |   |

 

The fair value of these options was estimated at the grant date usingthe Black-Scholes option pricing model with the following weighted-averageassumptions for 2003 and 2002: risk-free interest rate of 4.89 percent;dividend yield of 0 percent; expected option life of 5.0 years; and volatilityof 30 percent.  During the quarterending September 30, 2003, there were 32,596 in options exercised by officersof the corporation.

 

(NOTE 7)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| **Payments during the period ending:** |   | **9/30/03** |   | **9/30/02** |
|----------------------------------------|--------|-------------|--------|-------------|
| Interest                               |   | 1,485,300   |   | 1,684,700   |
| Income Taxes                           |   | 366,500     |   | 163,100     |

 

6

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**ITEM2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

**OVERVIEW**

 

The followingdiscussion reviews and analyzes the operating results and financial conditionof the Corporation, focusing on the Bank. It should be read in conjunction with the financial statements and theother financial data presented elsewhere herein.  The Corporation’ only activities have been investments.

 

For the ninemonths ended September 30, 2003 net income was $566,600, an increase of$262,600 when compared to the same period in 2002.  The increase in earnings during this period resulted from anincrease of $516,400 in non-interest income, an increase of $517,400 in netinterest income after provision for loan losses, partially offset by anincrease of $771,200 in non-interest expense.

 

7

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The followingtable sets forth certain selected financial ratios of the Corporation at, andfor the nine months ended, September 30, 2003 and 2002.

 
|                                               |   | **For the  nine months  Ended September 30, 2003** |   | **For the  nine months  Ended September 30, 2002** |   |
|----------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                               |   | **(Dollars in thousands except per share data)**   |   |
| Summary of Operating Results:                      |   |                                               |   |                                               |   |
| Total interest income                              |   | 4,075                                              |   | 3,612                                              |   |
| Total interest expense                             |   | 1,434                                              |   | 1,487                                              |   |
| Net interest income                                |   | 2,641                                              |   | 2,125                                              |   |
|                                               |   |                                               |   |                                               |   |
| Provision for possible loan losses                 |   | 75                                                 |   | 77                                                 |   |
| Net interest income after provision for  loan loss |   | 2,566                                              |   | 2,048                                              |   |
|                                               |   |                                               |   |                                               |   |
| Total other income                                 |   | 3,040                                              |   | 2,524                                              |   |
| Total other expense                                |   | 4,697                                              |   | 4,133                                              |   |
|                                               |   |                                               |   |                                               |   |
| Income (loss) before taxes                         |   | 909                                                |   | 440                                                |   |
| Provision for income tax                           |   | 342                                                |   | 136                                                |   |
|                                               |   |                                               |   |                                               |   |
| Net income (loss)                                  |   | 567                                                |   | 304                                                |   |
|                                               |   |                                               |   |                                               |   |
| Per Common Share Data:                             |   |                                               |   |                                               |   |
| Net income - Primary (1)                           |   | 0.38                                               |   | 0.21                                               |   |
| Net income - Diluted (2)                           |   | 0.32                                               |   | 0.17                                               |   |
| Book value, end of period                          |   | 4.14                                               |   | 3.63                                               |   |
| Avg shares outstanding (3)                         |   | 1,504,523                                          |   | 1,480,336                                          |   |
|                                               |   |                                               |   |                                               |   |
| Balance Sheet Data:                                |   |                                               |   |                                               |   |
| Total loans, net of unearned income (4)            |   | 69,277                                             |   | 57,113                                             |   |
| Total assets                                       |   | 98,692                                             |   | 80,665                                             |   |
| Total deposits                                     |   | 73,488                                             |   | 66,325                                             |   |
| Stockholders’ equity                          |   | 6,326                                              |   | 5,374                                              |   |

 

8

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|                                                  |   | **For the  nine months  Ended September 30, 2003** |   | **For the  nine months  Ended September 30, 2002** |   |
|-------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                  |   |                                               |   |                                               |   |
| Selected Financial Ratios (5):                        |   |                                               |   |                                               |   |
|                                                  |   |                                               |   |                                               |   |
| Return on average assets(6)                           |   | 0.81                                               | %      | 0.51                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Return on average stockholders’ equity(6)        |   | 12.75                                              | %      | 7.74                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net interest spread                                   |   | 3.88                                               | %      | 3.45                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net interest margin                                   |   | 4.24                                               | %      | 4.00                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Avg shareholders’ equity to average assets       |   | 6.34                                               | %      | 6.53                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Risked-Based capital ratios                           |   |                                               |   |                                               |   |
| Tier 1                                                |   | 9.61                                               | %      | 9.43                                               | %      |
| Total                                                 |   | 12.27                                              | %      | 10.37                                              | %      |
| Total loans to total deposits at end of  period       |   | 94.27                                              | %      | 86.11                                              | %      |
|                                                  |   |                                               |   |                                               |   |
| Allowance to total loans at end of period             |   | 1.00                                               | %      | 1.01                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Non-performing loans to total loans at end  of period |   | 0.04                                               | %      | 0.09                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net charge-offs to average loans                      |   | 0.03                                               | %      | 0.08                                               | %      |

 

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(1)   Primaryearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock outstanding during the year.  The weighted average number of common sharesused for this computation was 1,504,523 and 1,480,336 for September 30, 2003and 2002, respectively.

(2)   Diluted earnings (loss) per share amountswere computed on the basis of the weighted average number of shares of commonstock and common stock equivalents outstanding during the year.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,786,642 and 1,770,516 for September 30, 2003 and 2002,respectively.

(3)   Weighted average common shares.

(4)   Includes loans being held for sale.

(5)   Averages are of daily balances.

(6)   Calculated on an annualized basis.

 

9

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**NET INTEREST INCOME**

 

Net interestincome, the difference between (a) interest and fees earned on interest-earningassets and (b) interest paid on interest-bearing liabilities, is the mostsignificant component of the Bank’s earnings. Changes in net interest income from period to period result fromincreases or decreases in the average balances of interest-earning assetsportfolio, the availability of particular sources of funds and changes inprevailing interest rates.

 

Net interestincome for the nine-month period ended September 30, 2003 was $2,640,700compared to $2,125,300 for the same period in 2002.  The increase of $515,400 resulted from total interest incomeincreasing $462,800, while total interest expense decreased $52,600.  Average interest earning assets increased$12,302,000 (17.38%), while the average rate earned decreased 26 basispoints.  Average interest bearingliabilities increased $12,628,000 (21.35%), while the average rate paiddecreased 69 basis points.

 

The followingtable shows the components of the Bank’s net interest income, setting forth,for each the nine months ended September 30, 2003 and 2002, (i) average assets,liabilities and investments, (ii) interest income earned on interest-earningassets and interest expense paid on interest-bearing liabilities, (iii) averageyields earned on interest-earning assets and average rates paid oninterest-bearing liabilities, (iv) the net interest spread (i.e., the averageyield earned on interest-earning assets less the average rate paid on interest-bearingliabilities) and (v) the net interest yield on average interest-earning assets(i.e., net interest income divided by average interest-earning assets).  Yields are computed on a tax-equivalentbasis, no tax-exempt securities were held during the nine months endedSeptember 30, 2003 or 2002.  Non-accrualloans and overdrafts are included in average loan balances.  Average loans are presented net of unearnedincome.

 

10

----

 

**INTEREST SPREADANALYSIS:**

 
|                                 |   | **The Nine  Months  Ended September 30,** |   | **The Twelve  Months  Ended December 31,** |   |
|--------------------------------------|--------|-------------------------------------------|--------|--------------------------------------------|--------|
|                                 |   | **2003**                                  |   | **2002**                                   |   | **2002** |   |
|                                 |   | **Avg  Bal**                              |   | **Int  Earn  Paid**                        |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   |
|                                 |   | **(Dollars in thousands)**                |   |
| Interest Earning Assets:             |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing deposits at other banks  |   | 0                                         |   | 0                                          |   | 0.00 |   | 100 |   | 2 |   | 3.12 |   | 88 |   | 3 |   | 3.30 |   |
| Invest securities - Taxable          |   | 8,096                                     |   | 231                                        |   | 3.81 |   | 7,288 |   | 291 |   | 5.33 |   | 7,490 |   | 387 |   | 5.17 |   |
| Federal funds sold                   |   | 8,845                                     |   | 74                                         |   | 1.12 |   | 7,382 |   | 93 |   | 1.67 |   | 7,063 |   | 115 |   | 1.63 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total investments                    |   | 16,941                                    |   | 305                                        |   | 2.40 |   | 14,770 |   | 386 |   | 3.49 |   | 14,641 |   | 505 |   | 3.45 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                         |   | 3,626                                     |   | 293                                        |   | 10.79 |   | 2,288 |   | 195 |   | 11.37 |   | 2,870 |   | 272 |   | 9.46 |   |
| Real estate                          |   | 46,303                                    |   | 2,611                                      |   | 7.52 |   | 37,153 |   | 2,092 |   | 7.51 |   | 37,729 |   | 2,846 |   | 7.54 |   |
| Installment                          |   | 478                                       |   | 29                                         |   | 8.17 |   | 734 |   | 47 |   | 8.45 |   | 704 |   | 57 |   | 8.12 |   |
| Commercial                           |   | 15,737                                    |   | 836                                        |   | 7.08 |   | 15,839 |   | 892 |   | 7.51 |   | 15,454 |   | 1,191 |   | 7.71 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans                          |   | 66,144                                    |   | 3,770                                      |   | 7.60 |   | 56,013 |   | 3,226 |   | 7.68 |   | 56,758 |   | 4,365 |   | 7.69 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest earning assets        |   | 83,085                                    |   | 4,075                                      |   | 6.54 |   | 70,783 |   | 3,612 |   | 6.80 |   | 71,399 |   | 4,870 |   | 6.82 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:        |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing demand                   |   | 10,534                                    |   | 20                                         |   | 0.25 |   | 10,857 |   | 66 |   | 0.82 |   | 10,960 |   | 73 |   | 0.67 |   |
| Money market savings                 |   | 2,401                                     |   | 16                                         |   | 0.91 |   | 1,976 |   | 15 |   | 1.03 |   | 2,021 |   | 21 |   | 1.04 |   |
| Savings deposits                     |   | 5,946                                     |   | 46                                         |   | 1.04 |   | 4,063 |   | 43 |   | 1.40 |   | 4,199 |   | 54 |   | 1.29 |   |
| Time deposits >$100M              |   | 16,506                                    |   | 391                                        |   | 3.16 |   | 16,373 |   | 473 |   | 3.86 |   | 16,059 |   | 610 |   | 3.80 |   |
| Time deposits <$100M              |   | 20,165                                    |   | 472                                        |   | 3.12 |   | 20,681 |   | 640 |   | 4.13 |   | 20,371 |   | 815 |   | 4.00 |   |
| Other Borrowing                      |   | 16,236                                    |   | 490                                        |   | 4.02 |   | 4,010 |   | 227 |   | 6.35 |   | 5,402 |   | 306 |   | 5.67 |   |
| Total interest bearing liabilities   |   | 71,789                                    |   | 1,434                                      |   | 2.66 |   | 59,161 |   | 1,487 |   | 3.35 |   | 59,012 |   | 1880.2 |   | 3.19 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                  |   |                                      |   | 2,641                                      |   |   |   |   |   | 2,125 |   |   |   |   |   | 2,990 |   |   |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                  |   |                                      |   |                                       |   | 3.88 |   |   |   |   |   | 3.45 |   |   |   |   |   | 3.64 |   |
|                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on interest earning assets |   |                                      |   |                                       |   | 4.24 |   |   |   |   |   | 4.00 |   |   |   |   |   | 4.19 |   |

 

11

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|                                |   | **Nine  Months  Ended September 30,  2003 vs 2002  Increase(Decrease)  Due to changes** |   | **Twelve  Months  Ended December 31,  2002 vs 2001  Increase(Decrease)  Due to Changes** |   |
|-------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|
|                                |   | **Avg  Volume**                                                                         |   | **Avg  Rate**                                                                            |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                                |   | **(Dollars  in thousands)**                                                             |   |
| Interest Earning Assets:            |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Int-bearing deposits at other banks |   | (2                                                                                      | )      | 0                                                                                        |   | (2 | ) | (6 | ) | (3 | ) | (9 | ) |
| Invest securities - Taxable         |   | 32                                                                                      |   | (93                                                                                      | )      | (60 | ) | 3 |   | (85 | ) | (82 | ) |
| Federal funds sold                  |   | 18                                                                                      |   | (37                                                                                      | )      | (19 | ) | (114 | ) | (134 | ) | (249 | ) |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Total investments                   |   | 48                                                                                      |   | (130                                                                                     | )      | (81 | ) | (118 | ) | (222 | ) | (340 | ) |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Loans                               |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Construction                        |   | 114                                                                                     |   | (16                                                                                      | )      | 98 |   | 68 |   | (24 | ) | 44 |   |
| Real estate                         |   | 515                                                                                     |   | 4                                                                                        |   | 519 |   | 581 |   | (540 | ) | 41 |   |
| Installment                         |   | (16                                                                                     | )      | (1                                                                                       | )      | (17 | ) | (7 | ) | (25 | ) | (32 | ) |
| Commercial                          |   | (6                                                                                      | )      | (50                                                                                      | )      | (56 | ) | 114 |   | (377 | ) | (264 | ) |
| Total loans                         |   | 607                                                                                     |   | (64                                                                                      | )      | 544 |   | 755 |   | (966 | ) | (211 | ) |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Total Interest Earning Assets       |   | 656                                                                                     |   | (194                                                                                     | )      | 463 |   | 368 |   | (944 | ) | (576 | ) |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:          |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Int-bearing demand                  |   | (2                                                                                      | )      | (45                                                                                      | )      | (47 | ) | 15 |   | (35 | ) | (20 | ) |
| Money market savings                |   | 3                                                                                       |   | (2                                                                                       | )      | 1 |   | 12 |   | (13 | ) | (1 | ) |
| Savings deposits                    |   | 20                                                                                      |   | (16                                                                                      | )      | 3 |   | 6 |   | (22 | ) | (16 | ) |
| Time deposits >$100M             |   | 4                                                                                       |   | (87                                                                                      | )      | (83 | ) | 46 |   | (269 | ) | (223 | ) |
| Time deposits <$100M             |   | (16                                                                                     | )      | (153                                                                                     | )      | (168 | ) | 6 |   | (317 | ) | (311 | ) |
| Other Borrowing                     |   | 527                                                                                     |   | (284                                                                                     | )      | 243 |   | 62 |   | (48 | ) | 14 |   |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Total interest bearing deposits     |   | 535                                                                                     |   | (588                                                                                     | )      | (53 | ) | 147 |   | (703 | ) | (557 | ) |
|                                |   |                                                                                    |   |                                                                                     |   |   |   |   |   |   |   |   |   |
| Net change in net interest          |   | 12                                                                                      |   | 394                                                                                      |   | 516 |   | 221 |   | (241 | ) | (19 | ) |

 

12

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**Provision andAllowance for Loan Losses**

 

The provisionfor loan losses is an expense charged against operating income and added to theallowance for loan losses.  Theallowance for loan losses represents amounts which have been set aside for thespecific purpose of absorbing losses which may occur in the Bank’s loanportfolio.

 

The allowancefor loan losses reflects management’s ongoing evaluation of the risks inherentin the loan portfolio, both generally and with respect to specific loans, thestate of the economy, and the level of net loan losses experienced in thepast.  Management and the Board ofDirectors review the results of the State Banking Department and FDICexaminations, independent accountants’ observations, and the Bank ‘s internalreview as additional indicators to determine if the amount in the allowance forloan losses is adequate to protect against estimated future losses.  It is the Bank ‘s current practice, whichcould change in accordance with the factors mentioned above, to maintain anallowance that is at least equal to the sum of the following percentage of loanbalances by loan category.

 

| **Loan Category**                       |   | **Reserve%** |   |
|-----------------------------------------|--------|--------------|--------|
|                                    |   |         |   |
| Classified Loans:                       |   |         |   |
| Loans classified loss                   |   | 100.00       | %      |
| Loans classified doubtful               |   | 50.00        | %      |
| Loans classified substandard            |   |         |   |
| Real Estate Secured                     |   | 5.00         | %      |
| Non Real Estate Secured                 |   | 20.00        | %      |
|                                    |   |         |   |
| Unclassified Loans:                     |   |         |   |
| Real Estate - Loan to value 80% or less |   | 0.10         | %      |
| Real Estate - Loan to value over 80%    |   | 0.70         | %      |
| Real Estate - Construction              |   | 0.25         | %      |
| Loans to Individuals                    |   | 2.00         | %      |
| Commercial                              |   | 2.00         | %      |
| SBA Loans - Unguaranteed portion        |   | 2.00         | %      |
| Unfunded Loan Commitments               |   | .25          | %      |
| Concentration Risk Factor - Real Estate |   | .10          | %      |
| Economic Risk Factor                    |   | .25          | %      |
| SBA Loans - Guaranteed portion          |   | 0.00         | %      |
| Cash Secured Loans                      |   | 0.00         | %      |

 

Although no assurancecan be 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. AtSeptember 30, 2003 and 2002 the Bank’s allowance stood at 1.00 percent and 1.01percent of gross loans, respectively.  Aprovision of $75,000 was made to the allowance during the nine months endedSeptember 30, 2003, compared to a provision of $77,000 in the same period in 2002.  Charged off loans during the nine monthsended September 30, 2003 and 2002 totaled $18,400 and $59,700respectively.  Recoveries for the sameperiods were $1,000 and $12,700, respectively.

 

13

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The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.04 percent at September 30, 2003 compared with0.09 percent at September 30, 2002.

 

Based uponstatistics released by Federal and state banking authorities regarding banks ofsimilar size or otherwise located in California, Management believes that theBank ‘s ratios of delinquent and non performing loans to total loans are farbetter than average.  Prudent collectionefforts, and tighter lending controls, are responsible for the Bank’s strongperformance on these measures of credit quality.  However, no assurance can be given that the Bank’s loan portfoliowill continue to measure well against its peers on these ratios and qualitymeasures, or that losses will not otherwise occur in the future.

 

**Non-Interest Income**

 

Totalnon-interest income for the nine months ended September 30, 2003 was$3,040,200, compared with $2,523,800 for the same period in 2002.  The increase of  $516,400 was the result of increases of $6,500 in service chargeson deposit accounts, $88,000 income from SBA loan sales and servicing and$421,900 in income from other service charges, commissions and fees. Theincrease in other service charges, commissions and fees resulted from increasesof $123,200 in merchant discount fees, $123,000 in commercial bankingorigination fees and a gain of $45,600 in mark to market on trading assetscompared with a loss of $175,200 in 2002.

 

The sale ofSmall Business Administration (SBA) guaranteed loans is a significantcontributor to the Bank’s income.  SBAguaranteed loans yield up to 3 3/4% over the New York prime rate, and theguaranteed portions can be sold at premiums which vary with market conditions.  SBA loans are guaranteed by the full faith ofthe United States Government from 75 to 80 percent of the principalamount.  The guaranteed portion hasrisks comparable for an investor to a U. S. Government security and can usuallybe sold in the secondary financial market, either at a premium or at a yieldwhich allows the Bank to maintain a significant spread for itself.

 

There can beno assurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA requires lenders sharea portion of premiums in excess of 10% earned on the sale of the guaranteedportions, and to pay 50 basis points on the outstanding guaranteed balance.

 

**Non-Interest Expense**

 

Salary andbenefits expense for the nine months ended September 30, 2003 increased$290,300 compared with the same period in 2002.  The increase was due to the addition of three full time positionsfor the Carmel By The Sea Branch, which opened in November 2002, the additionof a lending officer in May 2003 and increased bonus accruals.

 

14

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Occupancy andequipment expense increased $117,100 compared with the same period in2002.  Occupancy expense increased$92,000, due primarily to increased premises rental expense, and equipmentexpense increased $25,000.  The openingof the Carmel By The Sea Branch and rental of the Tyler Street office accountedfor the majority of the increases.

 

Dataprocessing expense for the nine months ended September 30, 2003 decreased$5,700 compared to the same period in 2002.

 

For the nine months endedSeptember 30, 2003 professional fees increased $8,000 compared to the sameperiod in 2002.  The increase was due toincreased audit/accounting fees.

 

Other expensesfor the nine months ended September 30, 2003 totaled $2,103,700 compared with$1,957,600 for the same period in 2002. Significant changes occurred in the following categories with increasesin merchant processing expense $85,800, collection expense $23,500, advertisingexpense $15,100, telephone expense $11,700, stationary and supplies $10,800,business development $6,800, bank fees $6,000 and insurance expense $5,800;decreases occurred in travel expense $8,200, entertainment and meals expense$7,900, tellers’ differences $7,500, donations $6,400 and prepaid card programexpense $5,200.

 

Income taxexpense for the nine months ended September 30, 2003 was $342,300 compared with$135,700 for the same period in 2002. The $206,600 increase was due to a $469,200 increase in pretax.

 

**LOANS**

 

Loansrepresented 79.61% of average earning assets, and 71.45% of average totalassets for the nine months ended September 30, 2003, compared with 83.01% and70.28%, respectively during 2002.  Forthe nine months ended September 30, 2003 average loans increased 18.09% from$56,013,000 for the same period in 2002 to $66,144,000. Average real estateincreased $9,151,000 (24.63%) and average construction loans increased$1,338,000 (58.48%) while average installment loans decreased $256,000 (34.85%)and average commercial loans decreased $102,000 (0.64%).

 

The Bank’scommercial and industrial loans are generally made for the purpose of providingworking capital, financing the purchase of equipment or inventory, and otherbusiness purposes. Such loans generally have maturities ranging from one yearto several years.  Short-term businessloans are generally intended to finance current transactions and typicallyprovide for monthly interest payments with principal being payable at maturityor at 90-day intervals. Term loans (usually for a term of two to five years) normallyprovide for monthly installments of principal and interest.  The Bank from time to time utilizes accountsreceivable and inventory as security for loans.

 

The Bank isthe recognized leader for Small Business Administration lending in MontereyCounty, and holds SBA’s coveted Preferred Lender Status.  Generally, SBA

 

15

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loans are guaranteed by the SBAfor 75 to 80 percent of their principal amount, which can be retained inportfolio or sold to investors.  Suchloans are made at floating interest rates, but generally for longer terms (upto 25 years) than are available on a conventional basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventionalcommercial loans because they may be based upon credit standards the Bank wouldnot otherwise apply, such as lower cash flow coverage, or longer repaymentterms.

 

The Bank’sreal estate loan portfolio consists both of real estate construction loans andreal estate mortgage loans.  The Bankhas initiated a program to generate more commercial and industrial real estateloans, which generally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. The Bank does not make real estate development loans.  Real estateconstruction loans are made for a much shorter term, and often at higher interestrates, than conventional single-family residential real estate loans.  The cost of administering such loans isoften higher than for other real estate loans, as principal is drawn onperiodically as construction progresses.

 

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

 

Consumer loansare made for the purpose of financing the purchase of various types of consumergoods, home improvement loans, auto loans and other personal loans.  Consumer installment loans generally providefor monthly payments of principal and interest, at a fixed rate.  Most of the Bank’s consumer installmentloans are generally secured by the personal property being purchased.  The Bank generally makes consumer loans tothose customers with a prior banking relationship with the Bank.

 

16

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**Non-performing andNon-accrual Loans**

 

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

 

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

 
|                                                           |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                           |   | **2003**                              |   | **2002** |   |
|                                                           |   | **(Dollars in thousands)**            |   |
| Accruing,                                                      |   |                                  |   |   |   |
| past due 90 days or more:                                      |   |                                  |   |   |   |
|                                                           |   |                                  |   |   |   |
| Real Estate                                                    |   | 0                                     |   | 0 |   |
| Commercial                                                     |   | 0                                     |   | 0 |   |
| Installment                                                    |   | 0                                     |   | 0 |   |
| Other                                                          |   | 0                                     |   | 0 |   |
|                                                           |   | 0                                     |   | 0 |   |
|                                                           |   |                                  |   |   |   |
| Nonaccrual Loans:                                              |   |                                  |   |   |   |
|                                                           |   |                                  |   |   |   |
| Real Estate                                                    |   | 0                                     |   | 0 |   |
| Commercial                                                     |   | 28                                    |   | 50 |   |
| Installment                                                    |   | 0                                     |   | 0 |   |
| Other                                                          |   | 0                                     |   | 0 |   |
| Total non-accrual                                              |   | 28                                    |   | 50 |   |
|                                                           |   |                                  |   |   |   |
| Total non-performing                                           |   | 28                                    |   | 50 |   |
|                                                           |   |                                  |   |   |   |
| Total loans end of period                                      |   | 69,277                                |   | 57,190 |   |
|                                                           |   |                                  |   |   |   |
| Ratio of non-performing loans to total  loans at end of period |   | 0.04                                  | %      | 0.09 | % |

 

17

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These ratioshave been maintained as a result of a strengthening of underwriting criteria,frequent review of new and delinquent loans and a firm collection policy (withthe assistance of outside legal counsel). The Bank does not have any foreign loans or loans for highly leveragedtransactions.

 

**Summary of Loan LossExperience**

 
|                                                                           |   | **Nine  Months Ended  September 30, 2003** |   | **Nine Months  Ended  September 30, 2002** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                                                           |   | **(Dollars in thousands)**                 |   |
| Average loans outstanding                                                      |   | 66,144                                     |   | 56,013                                     |   |
|                                                                           |   |                                       |   |                                       |   |
| Allowance, beginning of period                                                 |   | 637                                        |   | 566                                        |   |
|                                                                           |   |                                       |   |                                       |   |
| Loans charged off during period:                                               |   |                                       |   |                                       |   |
| Commercial                                                                     |   | 18                                         |   | 58                                         |   |
| Installment                                                                    |   | 0                                          |   | 1                                          |   |
| Real Estate                                                                    |   | 0                                          |   | 1                                          |   |
| Other                                                                          |   | 0                                          |   | 0                                          |   |
| Total charge offs                                                              |   | 18                                         |   | 60                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Recoveries during period:                                                      |   |                                       |   |                                       |   |
| Commercial                                                                     |   | 1                                          |   | 13                                         |   |
| Installment                                                                    |   | 0                                          |   | 0                                          |   |
| Other                                                                          |   | 0                                          |   | 0                                          |   |
| Total recoveries                                                               |   | 1                                          |   | 13                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Net Loans charged off during the period                                        |   | 17                                         |   | 47                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Additions to allowance for possible loan  losses                               |   | 75                                         |   | 77                                         |   |
|                                                                           |   |                                       |   |                                       |   |
| Allowance, end of period                                                       |   | 694                                        |   | 596                                        |   |
|                                                                           |   |                                       |   |                                       |   |
| Ratio of net loans charged off to average  Loans outstanding during the period |   | 0.03                                       | %      | 0.08                                       | %      |
|                                                                           |   |                                       |   |                                       |   |
| Ratio of allowance to total loans at end of  period                            |   | 1.00                                       | %      | 1.01                                       | %      |

 

18

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**Funding Sources**

 

Averagedeposits for the nine months ended September 30, 2003 were $70,548,000 anincrease of 2.57% compared with the average balance for 2002.  Average certificates of deposit represented51.98% of average deposits for the nine months ended September 30, 2003.  Average interest checking accounts, moneymarket and savings accounts as a group was 26.76% of average deposits.  Average demand deposits represented 21.26%of average deposits.

 

**On March 27, 2003, the Company’s wholly ownedspecial-purpose trust subsidiary, Northern California Bancorp, Inc. Trust I(the “Trust”) issued $3 million in cumulative Trust Preferred Securities.  The securities bear a floating rate ofinterest of 3.25% over the three month LIBOR rate, payable quarterly.  Concurrent with the issuance of the TrustPreferred Securities, the Trust used the proceeds from the Trust Preferred Securitiesoffering to purchase a like amount of Junior Subordinated Debentures of theCompany.  The Subordinated Debenturesare the sole assets of the Trust and are eliminated, along with the relatedincome statement effects, in the consolidated financial statements.  The Company will pay interest on the JuniorSubordinated Debentures to the Trust, which represents the sole revenue andsole source of dividend distributions to the holders of the Trust PreferredSecurities.  The Company has the right,assuming no default has occurred, to defer payments of interest on the JuniorSubordinated Debentures at any time for a period not to exceed 20 consecutivequarters.  The Trust PreferredSecurities will mature on April 7, 2033, but can be redeemed under certain circumstancesat a premium prior to April 7, 2008, and can be redeemed, in whole or in part,on any January 7, April 7, July 7 or October 7 on or after April 7, 2008 atpar.  The Company fully andunconditionally guarantees the obligations of the Trust, on a subordinatedbasis.**

 

**The Company received $2.91 million from the Trustupon issuance of the Junior Subordinated Debentures, of which $1 million wascontributed by the Company to the Bank to increase its capital, $1.14 millionwas used to retire existing Company debt and the remainder held as workingcapital.  Under applicable regulatoryguidelines, a portion of the Trust Preferred Securities will qualify as Tier ICapital, and the remainder as Tier II Capital.**

 

**Issuance costs of $115,800 related to the TrustPreferred Securities have been deferred and will be amortized over the 30-yearlife of the securities.**

 

**During the nine months ended September 30, 2003interest expense on Junior Subordinated Debentures totaled $69,800 and theamortization of the issuance cost totaled $1,900.**

 

**The Bank has lines of credit from the Federal HomeLoan Bank of San Francisco and Pacific Coast Bankers’ Bank with maximumborrowing limits on September 30, 2003 of $15,749,000 and $2,500,000,respectively.  The Federal Home Loan Bankline of credit is secured by real estate secured loans and investmentsecurities at September 30, 2003 the total principal balances of pledged loanswas $22,617,600 and total pledged securities were $4,565,000.  The following table provides information onthe Federal Home Loan Bank advances out standing at September 30, 2003.**

 

19

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| **Advance  Amount** |   | **Rate** |   | **Funding  Date** |   | **Maturity  Date** |   |
|---------------------|--------|----------|--------|-------------------|--------|--------------------|--------|
|                |   |     |   |              |   |               |   |
| 1,000,000           |   | 6.81     | %      | 6/03/1997         |   | 6/03/2004          |   |
| 1,000,000           |   | 4.83     | %      | 10/06/1998        |   | 10/06/2003         |   |
| 1,000,000           |   | 7.72     | %      | 6/01/2000         |   | 6/03/2030          |   |
| 1,000,000           |   | 6.86     | %      | 8/10/2000         |   | 8/10/2005          |   |
| 2,750,000           |   | 3.44     | %      | 9/27/2002         |   | 9/27/2007          |   |
| 100,000             |   | 2.89     | %      | 10/29/2002        |   | 10/31/2005         |   |
| 3,900,000           |   | 2.83     | %      | 10/29/2002        |   | 10/31/2005         |   |
| 1,000,000           |   | 2.54     | %      | 2/04/2003         |   | 2/06/2006          |   |
| 1,500,000           |   | 3.34     | %      | 2/14/2003         |   | 2/14/2008          |   |
| 1,500,000           |   | 1.01     | %      | 6/20/2003         |   | 6/21/2004          |   |

 

The Bank has a$105,000 letter of credit issued by the Federal Home Loan Bank of San Franciscoto secure the uninsured portion of local agency deposits maintained with theBank.  The letter of credit maturesApril 17, 2006.

 

**Capital Resources**

 

The Companymaintains 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.  AtSeptember 30, 2003, stockholders’ equity was $6,325,900 versus $5,638,900 atDecember 31, 2002.  The Company paid aten (10%) percent stock dividend in 2002, 2001 and 2000.  The Bank paid cash dividends to theCorporation totaling $50,000 during the nine months ended September 30, 2003,$75,000 in 2002 and $200,000 in 2001.

 

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

 

Under currentrules, all banks were required to maintain Tier 1 capital of at least 4 percentand total capital of 8.0% of risk-adjusted assets. The Bank had a Tier 1risk-based capital ratio of 9.75% and a total risk-based capital ratio of10.63% at September 30, 2003, well above the minimum regulatory requirements.

 

The leveragecapital ratio guidelines require a minimum leverage capital ratio of 3% of Tier1 capital to total assets less goodwill. The Bank had a leverage capital ratio of 7.98% at September 30, 2003.

 

20

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**Liquidity**

 

Liquidityrepresents a bank’s ability to provide sufficient cash flows or cash resourcesin a manner that enables it to meet obligations in a timely fashion andadequately provides for anticipated future cash needs.  For the Bank, liquidity considerationsinvolve the capacity to meet expected and potential requirements of depositorsseeking access to balances and to provide for the credit demands of borrowingcustomers.  In the ordinary course ofthe Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. The Bank has a line of credit fromthe Federal Home Loan Bank of San Francisco of approximately $15,749,000, and a$2,500,000 unsecured Federal Funds Purchased line of credit with the PacificCoast Bankers’ Bank, to meet temporary liquidity requirements.

 

As a matter ofpolicy, the Bank seeks to maintain a level of liquid assets, includingmarketable investment securities, equal to at least 10 percent of total assets(“primary liquidity”), while maintaining sources of secondary liquidity(borrowing lines from other institutions) equal to at least an additional 10percent of assets.  In addition, itseeks to generally limit loans to not more than 90 percent of deposits. Within these ratios, the Bank generally has excess funds available to sell asfederal funds on a daily basis, and is able to fund its own liquidity needswithout the need of short-term borrowing. The Bank’s primary liquidity at September 30, 2003 was 21.00 percent,while its average loan to deposit ratio for the nine months ended September 30,2003 was 93.76 percent.

 

## **Interest Rate Risk**

 

Management of interestrate sensitivity (asset/liability management) involves matching and repricingrates of interest-earning assets with interest-bearing liabilities in a mannerdesigned to optimize net interest income within the constraints imposed byregulatory authorities, liquidity determinations and capitalconsiderations.  The Bank institutedformal asset/liability policies at the end of 1989.

 

The purposefor asset/liability management is to provide stable net interest income growthby protecting 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/liability management ismanaging the risk/return relationships between interest rate risk, liquidity,market risk and capital adequacy.  TheBank gives priority to liquidity concerns followed by capital adequacy, theninterest rate risk and market risk in the investment portfolio.  The policy of the Bank will be to controlthe exposure of the Bank’s earnings to changing interest rates by generally maintaininga position within a narrow range around an “earnings neutral position.” Anearnings neutral position is defined as the mix of assets and liabilities thatgenerate a net interest margin that is not affected by interest rate changes.  However, Management does not believe thatthe Bank can maintain a totally earnings neutral position.  Further, the actual timing of repricing ofassets and liabilities does not always correspond to the timing assumed by theBank for analytical purposes. Therefore, changes in market rates of interest will generally impact onthe Bank’s net interest income and net interest margin for long or shortperiods of time.

 

21

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The Bankmonitors its interest rate risk on a quarterly basis through the use of a modelwhich calculates the effect on earnings of changes in the fed funds rate.  The model converts a fed funds rate changeinto rate changes for each major class of asset and liability, then simulatesthe bank’s net interest margin based on the bank’s actual repricing over a oneyear period, assuming that maturities are reinvested in instruments identicalto those maturing during the period.  AtSeptember 30, 2003 the affect of a 2% increase in the federal funds sold ratewould result in a 5.00% increase in equity. At September 30, 2003 the fed funds target rate was 1.00%; therefore,the model assumed a 1% decrease in the fed funds rate resulting in negativeaffect on capital of 2.50%.

 

**Investment Securities**

 

At September30, 2003 the Company, in addition to its investment in Monterey County Bank,held investments of $159,100 in Trading Account Securities, $25,000 in MissionValley Bank and $204,200 in Diversified Holding Corporation.

 

The followingtable sets forth the book and market value of the Bank’s investment securitiesat September 30, 2003:

 

INVESTMENT PORTFOLIO MIX

 
|                                     |   | **Book  Value**            |   | **Market  value** |   |
|------------------------------------------|--------|----------------------------|--------|-------------------|--------|
|                                     |   | **(Dollars in thousands)** |   |
| Available for Sale:                      |   |                       |   |              |   |
| U. S. Agency Securities                  |   | 2,000                      |   | 2,005             |   |
| Government National Mortgage Association |   | 2,565                      |   | 2,616             |   |
| Equity Securities                        |   | 2,551                      |   | 2,579             |   |
|                                     |   | 7,116                      |   | 7,200             |   |

 

The followingtable summarizes the maturity of the Bank’s investment securities at September30, 2003:

 

INVESTMENT PORTFOLIO MATURITIES

(Dollars inthousands)

 
|                                      |   | **1 year****or less** |   | **over 1  through****3 years** |   | **over 3  through  5 years** |   | **over 5  through  15 years** |   | **over  15 years** |   |
|-------------------------------------------|--------|-----------------------|--------|--------------------------------|--------|------------------------------|--------|-------------------------------|--------|--------------------|--------|
| U. S. Agency Securities                   |   | —                |   | 1,005                          |   | 1,000                        |   | —                        |   | —             |   |
| Government  National Mortgage Association |   | —                |   | —                         |   | —                       |   | —                        |   | 2,616              |   |
| Corporate Debt Securities                 |   | —                |   | 1,801                          |   | —                       |   | 750                           |   | —             |   |
|                                      |   |                  |   |                           |   |                         |   |                          |   |               |   |
| Total                                     |   | —                |   | 2,806                          |   | 1,000                        |   | 750                           |   | 2,616              |   |

 

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**Item 3.            Controls and Procedures**

 

(a) Evaluation ofDisclosure Controls and Procedures:  Anevaluation of the Company’s disclosure controls and procedures (as Defined inSection 13(a) – 14(c) of the Securities Exchange Act of 1934 (the “Act”) wascarried out under the supervision and with the participation of the Company’sChief Executive Officer, Chief Financial Officer and other members of theCompany’s management within the 90-day period preceding the filing date of thisquarterly report.  The Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures as currently in effect are effective inensuring that the information required to be disclosed by the Registrant in thereports it files or submits under the Act is (i) accumulated and communicatedto the Company’s management (including the Chief Executive Officer and ChiefFinancial Officer) in a timely manner, and (ii) recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms.

 

# (b)Changes in Internal Controls:  In thequarter ended September 30, 2003, the Company did not make any significantchanges in, nor take any corrective actions regarding, its internal controls orother factor that could significantly affect these controls.

 

 

**PART II-OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

None

 

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

 

None

 

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

 

None

 

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

** **

A.            EXHIBITS

 

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

 

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

 

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

 

32.2Certification 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

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|        | NORTHERN CALIFORNIA BANCORP, INC.                                                 |
|-------------|-----------------------------------------------------------------------------------|
|        |                                                                              |
| Date:  | November 10, 2003                                                                 |   | By: |   /s/ Charles T. Chrietzberg,  Jr. |   |
|        | Charles T. Chrietzberg, Jr.  Chairman of the Board &  Chief Executive Officer |
|        |                                                                              |
| Date:       | November 10, 2003                                                                 |   | By: |   /s/ Bruce N. Warner |   |
|        | Bruce N. Warner                                                                   |
|        | Chief Financial Officer and  Principal Accounting Officer                         |
|        |                                                                              |
|             |                                                                                   |  |  |  |  |  |  |

 

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