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

**FORM10-QSB**

x      **Quarterly report under Section 13 or 15(d) of the Securities ExchangeAct of 1934 for the quarterly period ended September 30, 2006**

**o****       Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No feerequired) for the period from               to               **

**Commission File Number 0-27666**

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of Small Business Issuer in its Charter)

**Incorporatedin the State of California**

**IRSEmployer Identification Number 77-0421107**

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

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

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

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

As of October 27, 2006,the Corporation had 1,718,965 shares of common stock outstanding.

 

 

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**TABLE OF CONTENTS**

 
| **Facing Page**       |   |                                                                                        |   | 1      |
|-----------------------|--------|---------------------------------------------------------------------------------------------|--------|--------|
| **Table of Contents** |   | 2                                                                                           |
| **PART I**            |   | Financial Information                                                                       |   | 3-6    |
| Item 1                |   | Financial Statements                                                                        |   |   |
|                  |   | Consolidated Balance  Sheets                                                                |   | 3      |
|                  |   | Consolidated  Statements of Operations                                                      |   | 4      |
|                  |   | Consolidated  Statements of Changes in Shareholders’ Equity                            |   | 5      |
|                  |   | Consolidated  Statements of Cash Flows                                                      |   | 6      |
|                  |   | Summary of  Accounting Policies                                                             |   | 7-10   |
| Item 2                |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 11-28  |
| Item 3                |   | Controls and  Procedures                                                                    |   | 28-29  |
|                  |   |                                                                                        |   |   |
| **PART II**           |   | Other Information                                                                           |   |   |
| Item 1                |   | Legal Proceedings                                                                           |   | 29     |
| Item 2                |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 29     |
| Item 3                |   | Defaults Upon  Senior Securities                                                            |   | 29     |
| Item 4                |   | Submission of  Matters to a Vote of Security Holders                                        |   | 29     |
| Item 5                |   | Other Information                                                                           |   | 29     |
| Item 6                |   | Exhibits and  Reports on Form 8-K                                                           |   | 30     |
| Signatures            |   |                                                                                        |   | 30     |
| Certifications        |   |                                                                                        |   |   |

 

 

2

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**PART I-FINANCIALINFORMATION**

**Item 1. **                    FINANCIAL STATEMENTS

**NORTHERNCALIFORNIA BANCORP, INC.**

**ANDSUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                               | ** ** | **September 30  2006** | ** **  | **December 31  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|----------------------------|------------|
| ** **                                                                                                               | ** ** | **(Unaudited)**             | ** **  | **(Audited)**              | ** ** |
| ASSETS:                                                                                                                  |       |                        |        |                       |       |
| Cash and Due From Banks                                                                                                  |       | $                           | 6,278,800   |                       | $          | 5,830,600 |   |
| Federal Funds Sold                                                                                                       |       | 22,145,000                  |        | 18,300,000                 |       |
| Total Cash and  Cash Equivalents                                                                                         |       | 28,423,800                  |        | 24,130,600                 |       |
| Trading Assets                                                                                                           |       | 1,262,800                   |        | 1,027,500                  |       |
| Time Deposits with  other Financial Institutions                                                                         |       | 1,000,000                   |        | 1,000,000                  |       |
| Investment Securities,  available for sale (Note 4)                                                                      |       | 14,083,800                  |        | 11,065,300                 |       |
| Investment Securities,  held to maturity cost (fair value approximates $7,300,200 in 2006; $6,561,100  in 2005) (Note 4) |       | 7,015,500                   |        | 7,025,000                  |       |
| Other Investments (Note  5)                                                                                              |       | 1,962,800                   |        | 2,020,500                  |       |
| Loans Held for Sale                                                                                                      |       | 720,100                     |        | 5,315,000                  |       |
| Loans, net of allowance  for loan losses of $1,246,800 in 2006; $1,100,700 in 2005 (Note 6)                         |       | 120,880,200                 |        | 101,985,000                |       |
| Bank Premises and  Equipment, Net                                                                                        |       | 4,502,900                   |        | 4,362,300                  |       |
| Cash Surrender Value of  Life Insurance                                                                                  |       | 3,586,500                   |        | 2,466,700                  |       |
| Interest Receivable and  Other Assets                                                                                    |       | 2,168,100                   |        | 2,247,200                  |       |
| Total Assets                                                                                                             |       | $                           | 185,606,500 |                       | $          | 162,645,100 |   |
|                                                                                                                     |       |                        |        |                       |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                              |       |                        |        |                       |       |
|                                                                                                                     |       |                        |        |                       |       |
| Non interest  bearing demand                                                                                             |       | $                           | 36,188,200  |                       | $          | 30,814,900 |   |
| Interest-bearing  demand                                                                                                 |       | 17,551,100                  |        | 17,824,500                 |       |
| Savings                                                                                                                  |       | 7,769,600                   |        | 7,659,300                  |       |
| Time less than  $100,000                                                                                                 |       | 32,661,800                  |        | 32,143,200                 |       |
| Time in  denominations of $100,000 or more                                                                               |       | 34,831,600                  |        | 29,678,200                 |       |
| Total Deposits                                                                                                           |       | 129,002,300                 |        | 118,120,100                |       |
|                                                                                                                     |       |                        |        |                       |       |
| Federal Home Loan Bank  Borrowed Funds                                                                                   |       | 32,750,000                  |        | 24,750,000                 |       |
| Junior Subordinated  Debt Secuirites                                                                                     |       | 8,248,000                   |        | 8,248,000                  |       |
| Interest Payable and  Other Liabilities                                                                                  |       | 3,639,600                   |        | 2,596,100                  |       |
| Total  Liabilities                                                                                                       |       | 173,639,900                 |        | 153,714,200                |       |
|                                                                                                                     |       |                        |        |                       |       |
| Shareholders’ Equity:                                                                                               |       |                        |        |                       |       |
| Common Stock - No  Par Value, authorized 2,500,000  Outstanding:1,698,789 in 2006 and 1,631,439 in 2005                  |       | 5,004,600                   |        | 4,771,800                  |       |
| Retained  Earnings                                                                                                       |       | 6,973,200                   |        | 4,128,600                  |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 7)                                                                  |       | (11,200                     | )           | 30,500                     |       |
| Total  Shareholders’ Equity                                                                                         |       | 11,966,600                  |        | 8,930,900                  |       |
| Total Liabilities &  Shareholders’ Equity                                                                       |       | $                           | 185,606,500 |                       | $          | 162,645,100 |   |

 

3

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**NORTHERNCALIFORNIA BANCORP, INC.**

**ANDSUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**
| ** **                                                              | ** ** | **Three-Month**

**Period Ending**

**September 30,** | ** ** | **Nine-Month**

**Period Ending**

**September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                              | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| INTEREST INCOME:                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Loans                                                                   |       | $                                                     | 3,128,300  |                                                 | $          | 2,273,400 |   | $ | 8,526,500 |   | $ | 6,921,300 |   |
| Time deposits  with other financial institutions                        |       | 14,300                                                |       | 8,300                                                |       | 36,200 |   | 19,300 |   |
| Investment  securities                                                  |       | 288,900                                               |       | 218,600                                              |       | 744,300 |   | 565,700 |   |
| Federal funds  sold                                                     |       | 219,800                                               |       | 118,500                                              |       | 581,700 |   | 242,600 |   |
| Total Interest Income                                                   |       | 3,651,300                                             |       | 2,618,800                                            |       | 9,888,700 |   | 7,748,900 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| INTEREST  EXPENSE:                                                      |       |                                                  |       |                                                 |       |   |   |   |   |
| Interest-bearing  transaction accounts                                  |       | 14,900                                                |       | 15,600                                               |       | 54,200 |   | 48,400 |   |
| Savings and time  deposit accounts                                      |       | 368,500                                               |       | 271,100                                              |       | 1,023,000 |   | 762,500 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 399,800                                               |       | 256,600                                              |       | 1,040,200 |   | 717,400 |   |
| Notes payable  and other                                                |       | 586,400                                               |       | 416,600                                              |       | 1,587,800 |   | 1,133,000 |   |
| Total Interest Expense                                                  |       | 1,369,600                                             |       | 959,900                                              |       | 3,705,200 |   | 2,661,300 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Net Interest Income                                                     |       | 2,281,700                                             |       | 1,658,900                                            |       | 6,183,500 |   | 5,087,600 |   |
| Provision for  loan losses                                              |       | 50,000                                                |       | —                                               |       | 145,000 |   | 125,000 |   |
| Net interest income, after provision for loan losses                    |       | 2,231,700                                             |       | 1,658,900                                            |       | 6,038,500 |   | 4,962,600 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| OTHER INCOME:                                                           |       |                                                  |       |                                                 |       |   |   |   |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Service charges  on deposit accounts                                    |       | 144,700                                               |       | 134,200                                              |       | 426,500 |   | 451,300 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 176,400                                               |       | 249,300                                              |       | 612,800 |   | 719,500 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                                                |       | —                                               |       | 1,313,400 |   | — |   |
| Other income                                                            |       | 962,300                                               |       | 768,800                                              |       | 3,076,300 |   | 1,714,400 |   |
| Total other income                                                      |       | 1,283,400                                             |       | 1,152,300                                            |       | 5,429,000 |   | 2,885,200 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| NONINTEREST  EXPENSE:                                                   |       |                                                  |       |                                                 |       |   |   |   |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Salaries and  Employee Benefits                                         |       | 925,000                                               |       | 740,200                                              |       | 2,768,700 |   | 2,395,200 |   |
| Stock Based  Compensation Expense                                       |       | —                                                |       | —                                               |       | 7,500 |   | — |   |
| Occupancy and  Equipment Expense                                        |       | 210,200                                               |       | 187,300                                              |       | 590,900 |   | 474,700 |   |
| Professional  Fees                                                      |       | 34,800                                                |       | 33,800                                               |       | 117,700 |   | 107,200 |   |
| Data Processing                                                         |       | 65,000                                                |       | 101,200                                              |       | 230,600 |   | 275,700 |   |
| Other general  and administrative                                       |       | 860,700                                               |       | 796,100                                              |       | 2,580,400 |   | 2,486,400 |   |
| Total operating expenses                                                |       | 2,095,700                                             |       | 1,858,600                                            |       | 6,295,800 |   | 5,739,200 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Income before  tax provision                                            |       | 1,419,400                                             |       | 952,600                                              |       | 5,171,700 |   | 2,108,600 |   |
| Income tax  provision                                                   |       | 677,600                                               |       | 398,400                                              |       | 2,327,100 |   | 992,800 |   |
| Net income                                                              |       | $                                                     | 741,800    |                                                 | $          | 554,200 |   | $ | 2,844,600 |   | $ | 1,115,800 |   |
|                                                                    |       |                                                  |       |                                                 |       |   |   |   |   |
| Earnings per  common share                                              |       |                                                  |       |                                                 |       |   |   |   |   |
| Basic                                                                   |       | $                                                     | 0.452      |                                                 | $          | 0.344 |   | $ | 1.735 |   | $ | 0.693 |   |
| Diluted                                                                 |       | $                                                     | 0.385      |                                                 | $          | 0.288 |   | $ | 1.478 |   | $ | 0.580 |   |

 

4

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**NORTHERNCALIFORNIA BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**NINEMONTHS ENDED SEPTEMBER 30, 2006**

** **
| ** **                                                                       | ** ** | **Number of  Shares** | ** ** | **Common  Stock** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------------------|------------|-------------------------------------------------------|------------|------------|------------|
|                                                                             | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **             | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                                                    |       | 1,608,019                  |       | $                 | 4,719,900  |                   | $          | 2,525,600                                             |       | $          | 75,600     |   | $ | 7,321,100 |   |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Comprehensive  income:                                                           |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Net income for the year                                                          |       | —                     |       | —            |       | 1,929,300              |       | —                                                |       | 1,929,300  |       |
| Change in net unrealized gain on securities and  other assets net of tax effects |       | —                     |       | —            |       | —                 |       | (45,100                                               | )          | (45,100    | )          |
| Total comprehensive income                                                       |       |                       |       |              |       |                   |       |                                                  |       | 1,884,200  |       |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| $0.20 per share dividend                                                         |       | —                     |       | —            |       | (326,300               | )          | —                                                |       | (326,300   | )          |
| Repurchase of common stock                                                       |       | (3,795                     | )          | (15,200           | )          | —                 |       | —                                                |       | (15,200    | )          |
| Exercise of stock options                                                        |       | 27,215                     |       | 67,100            |       | —                 |       | —                                                |       | 67,100     |       |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Balance at  December 31, 2005                                                    |       | 1,631,439                  |       | $                 | 4,771,800  |                   | $          | 4,128,600                                             |       | $          | 30,500     |   | $ | 8,930,900 |   |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Comprehensive  income:                                                           |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Net income for the year                                                          |       | —                     |       | —            |       | 2,844,600              |       | —                                                |       | 2,844,600  |       |
| Change in net unrealized gain on securities and  other assets net of tax effects |       | —                     |       | —            |       | —                 |       | (41,700                                               | )          | (41,700    | )          |
| Total comprehensive income                                                       |       |                       |       |              |       |                   |       |                                                  |       | 2,802,900  |       |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| $0.20 per share dividend                                                         |       | —                     |       | —            |       | —                 |       | —                                                |       | —     |       |
| Repurchase of common stock                                                       |       | —                     |       | —            |       | —                 |       | —                                                |       | —     |       |
| Stock based compensation                                                         |       |                       |       | 7,500             |       | —                 |       | —                                                |       | 7,500      |       |
| Exercise of stock options                                                        |       | 67,350                     |       | 225,300           |       | —                 |       | —                                                |       | 225,300    |       |
|                                                                             |       |                       |       |              |       |                   |       |                                                  |       |       |       |
| Balance at September  30, 2006                                                   |       | 1,698,789                  |       | $                 | 5,004,600  |                   | $          | 6,973,200                                             |       | $          | (11,200    | ) | $ | 11,966,600 |   |

 

5

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**NORTHERNCALIFORNIA BANCORP, INC.**

**ANDSUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**NINEMONTHS ENDED SEPTEMBER 30, 2006 AND 2005**

 
| ** **                                                                         | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net income                                                                         |       | $           | 2,844,600  |        | $          | 1,115,800 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |        |       |        |       |
| Depreciation and amortization expense                                              |       | 207,100     |       | 169,800     |       |
| Realized (gain) loss on sales of available-for-sale  securities, net               |       | (1,313,400  | )          | —      |       |
| Amortization of deferred loan (fees) costs                                         |       | 158,900     |       | 50,300      |       |
| Amortization (accretion) of discounts and premiums on  investment securities       |       | (1,300      | )          | 4,000       |       |
| (Gain) loss on sale of equipment                                                   |       | (400        | )          | 100         |       |
| Provision for loan losses                                                          |       | 145,000     |       | 125,000     |       |
| Stock based compensation                                                           |       | 7,500       |       | —      |       |
| Increase in trading assets                                                         |       | (235,300    | )          | (62,800     | )          |
| Increase in interest receivable                                                    |       | (45,600     | )          | (31,200     | )          |
| Increase in other assets                                                           |       | (1,092,300  | )          | (2,781,600  | )          |
| Increase in deferred tax asset                                                     |       | (51,900     | )          | (41,400     | )          |
| Increase in interest payable                                                       |       | 519,500     |       | 311,100     |       |
| Increase in other liabilities                                                      |       | 524,000     |       | 281,900     |       |
| Net cash provided (used) by operating activities                                   |       | 1,666,400   |       | (859,000    | )          |
|                                                                               |       |        |       |        |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          | ** ** | ** **  | ** ** | ** **  | ** ** |
| Increase in time deposits                                                          |       | —      |       | (1,000,000  | )          |
| Proceeds from maturity/sale of investment securities                               |       | 2,054,100   |       | 420,700     |       |
| Purchase of investments                                                            |       | (3,587,600  | )          | (6,043,200  | )          |
| Net increase in loans                                                              |       | (36,987,400 | )          | (30,943,800 | )          |
| Loan purchases                                                                     |       | (13,200,000 | )          | (6,425,900  | )          |
| Loan sales                                                                         |       | 30,988,300  |       | 35,387,600  |       |
| (Increase) decrease in loans held for sale                                         |       | 4,594,900   |       | (578,100    | )          |
| Proceeds from sale of equipment                                                    |       | 19,500      |       | 500         |       |
| Additions to bank premises and equipment                                           |       | (362,500    | )          | (2,262,600  | )          |
| Net cash used by investing activities                                              |       | (16,480,700 | )          | (11,444,800 | )          |
|                                                                               |       |        |       |        |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net increase in deposits                                                           |       | 10,882,200  |       | 11,405,200  |       |
| Proceeds from borrowings                                                           |       | 10,000,000  |       | 4,000,000   |       |
| Repayments of borrowings                                                           |       | (2,000,000  | )          | —      |       |
| Repurchase of common stock and stock options                                       |       | —      |       | (15,200     | )          |
| Proceeds from exercise of stock options                                            |       | 225,300     |       | 46,100      |       |
| Net cash provided by financing activities                                          |       | 19,107,500  |       | 15,436,100  |       |
|                                                                               |       |        |       |        |       |
| Net increase in cash and cash equivalents                                          |       | 4,293,200   |       | 3,132,300   |       |
|                                                                               |       |        |       |        |       |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 24,130,600  |       | 16,809,000  |       |
|                                                                               |       |        |       |        |       |
| **CASH AND CASH EQUIVALENTS,  ENDING**                                             |       | $           | 28,423,800 |        | $          | 19,941,300 |   |

 

See Note 8 for supplemental disclosures

 

6

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**SUMMARY OF ACCOUNTING POLICIES**

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

The interim condensed financial statements of Northern CaliforniaBancorp, Inc. and subsidiary (“Corporation”) are unaudited and reflect alladjustments (consisting only of normal recurring adjustments), which are, inthe opinion of management, necessary for a fair presentation, in all materialrespects, of the financial position and operating results of the Corporationfor the interim periods.  The results of operations for the ninemonths ended September 30, 2006 are not necessarily indicative of the resultsto be expected for the entire fiscal year ending December 31, 2006.  Theyear-end balance sheet data at December 31, 2005 was derived from theaudited financial statements.

This financial information should be read in conjunction with theaudited financial statements and notes thereto included in the Corporation’sForm 10-KSB for the fiscal year ended December 31, 2005.

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Prior to January 1, 2006, the Corporation accounted for its stockoptions under the recognition and measurement principles of AccountingPrinciple Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees* (APB No. 25), and relatedinterpretations. Accordingly, no stock-based employee compensation cost wasreflected in net earnings prior to January 1, 2006 as all options to purchasecommon stock of the Bank had an exercise price equal to, or greater than, themarket value of the underlying common stock on the date of grant.

Effective January 1, 2006, the Corporation began recording compensationexpense associated with stock-based awards in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 123 (revised 2004), *Share-Based Payment* (SFAS No. 123R) as interpretedby SEC Staff Accounting Bulletin No. 107. SFAS No. 123R supersedes APB No. 25,and amends SFAS No. 95 *Statement of CashFlows*. Generally, the approach in SFAS No. 123R is similar to theapproach described in SFAS No. 123, *Accountingfor Stock Based Compensation*(SFAS No. 123). However, SFAS No. 123Rrequires all stock-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues at the date of grant. The stock-based compensation expense amountrecorded was $7,500 through September 30, 2006.

The fair value of each option granted isestimated on the date of grant using the Black-Scholes option-pricingmodel.  The Bank uses the following inputvariables as of the grant date, to arrive at the fair value for each grant:

1)  Grant date

2)  Options granted

3)  Exercise price

4)  Stock price on date of grant

5)  Expected dividend rate

6)  Expected volatility

7)  Risk free interest rate on grant date

8)  Expected term

9)  Expected forfeiture rate

7

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Pro forma informationregarding net income and earnings per share for the nine months ended September30, 2005 is presented below as if the Bank had accounted for all stock-basedcompensation under the fair value method of SFAS No. 123.  In February 2004, options were granted thatprovided full vesting on January 1, 2005 and 10,000 options were granted inJune 2005.
|                                                                        | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                                   |       |                                                          |       |
| Reported net  earnings                                                 |       | $                                                             | 1,115,800  |   |
| Stock-based employee  compensation expense, net of related tax effects |       | (14,600                                                       | )          |
| Pro forma net  earnings                                                |       | $                                                             | 1,101,200  |   |
|                                                                   |       |                                                          |       |
| Earnings per  share as reported:                                       |       |                                                          |       |
| Basic                                                                  |       | $                                                             | 0.693      |   |
| Diluted                                                                |       | $                                                             | 0.580      |   |
| Pro forma  earnings per share:                                         |       |                                                          |       |
| Basic                                                                  |       | $                                                             | 0.684      |   |
| Diluted                                                                |       | $                                                             | 0.573      |   |

 

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

(NOTE 3). EARNINGS PER SHARE

**Basic earnings per share represents income available tocommon stockholders divided by the weighted-average number of common sharesoutstanding during the period.  Dilutedearnings per share reflects additional common shares that would have beenoutstanding, if potential dilutive common shares had been issued, as well asany adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued bythe Bank relate to outstanding stock options and warrants and are determinedusing the treasury stock method.**

8

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

** **
| ** **                                                        | ** ** | **Earnings  per share calculation**

**For  the nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                                          | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Weighted  Net  Income**                                                         | ** ** | **Weighted  Average  Shares** | ** ** | **Per Share  Amount** | ** ** | **Net  Income** | ** ** | **Average  Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic earnings  per share                                         |       | $                                                                                 | 2,844,600  |   | 1,639,356 |   | $ | 1.735 |   | $ | 1,115,800 |   | 1,609,327 |   | $ | 0.693 |   |
|                                                              |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive sharesassumed exercise of outstanding options |       | —                                                                            |       | 285,224 |   | (0.257 | ) | — |   | 313,852 |   | (0.113 | ) |
|                                                              |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per  share                                       |       | $                                                                                 | 2,844,600  |   | 1,924,580 |   | $ | 1.478 |   | $ | 1,115,800 |   | 1,923,179 |   | $ | 0.580 |   |

** **
|                                             | ** ** | **September,30** | ** ** | **December 31** | ** ** |
|---------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                        |       |             |       |                 |       |
| (NOTE 4)  INVESTMENT SECURITIES:            |       |             |       |                 |       |
| Available for  sale:                        |       |             |       |                 |       |
| Corporate Debt  Securities                  |       | $                | 742,200    |                 | $          | 630,500 |   |
| Government  National Mortgage Association   |       | 692,000          |       | 837,800              |       |
| U.S. government  Agencies                   |       | 12,649,600       |       | 9,597,000            |       |
|                                        |       | $                | 14,083,800 |                 | 11,065,300 |   |
|                                        |       |             |       |                 |       |
| Held to  maturity:                          |       |             |       |                 |       |
| State/Local  Agency                         |       | $                | 7,015,500  |                 | $          | 7,025,000 |   |
|                                        |       |             |       |                 |       |
| (NOTE 5) OTHER  INVESTMENTS                 |       |             |       |                 |       |
| AT Services LLC                             |       | $                | 20,100     |                 | $          | 40,000 |   |
| Metrocities  Mortgage, LLC                  |       | 10,000           |       | 10,000               |       |
| Pan Pacific Bank                            |       | —           |       | 100,000              |       |
| Independent  Bankers Financial Corporation  |       | 50,000           |       | —               |       |
| MasterCard Inc  Class “B” Stock   |       | 5,400            |       | —               |       |
| Federal Home  Loan Bank stock, restricted   |       | 1,539,300        |       | 1,182,600            |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000           |       | 93,000               |       |
| Northern  California Bancorp, Inc. Trust II |       | 155,000          |       | 155,000              |       |
| Rush Financial  Technologies, Inc.          |       | 90,000           |       | —               |       |
| Pacific Coast  Bankers’ Bank Stock     |       | —           |       | 439,900              |       |
|                                        |       | $                | 1,962,800  |                 | $          | 2,020,500 |   |

** **

9

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** **

(NOTE 6) LOANS ANDALLOWANCE FOR POSSIBLE LOAN LOSSES:
| Commercial and Industrial              |   | $           | 24,774,700  |        | $      | 20,920,900  |   |
|----------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| Construction                           |   | 11,627,000  |        | 10,455,900  |   |
| Real Estate -  Mortgage                |   | 85,354,300  |        | 71,005,800  |   |
| Installment                            |   | 674,400     |        | 942,300     |   |
| Government  Guaranteed Loans Purchased |   | 40,600      |        | 45,300      |   |
|                                   |   | 122,471,000 |        | 103,370,200 |   |
| Allowance for  loan losses             |   | (1,246,800  | )           | (1,100,700  | )      |
| Deferred  origination fees, net        |   | (344,000    | )           | (284,500    | )      |
| Net Loans                              |   | $           | 120,880,200 |        | $      | 101,985,000 |   |
|                                   |   |        |        |        |   |
| Balance at  Beginning of Period        |   | $           | 1,100,700   |        | $      | 963,000     |   |
| Recoveries                             |   | 1,100       |        | 1,900       |   |
| Provision for  Possible Loan Losses    |   | 145,000     |        | 150,000     |   |
| Loans Charged  Off                     |   | —      |        | (14,200     | )      |
| Balance at End of  Period              |   | $           | 1,246,800   |        | $      | 1,100,700   |   |

 

 (NOTE 7) COMPREHENSIVE INCOME(LOSS):

The components of other comprehensive income and related tax effects forthe nine  month periods ending September30, 2006 and 2005 are as follows (unaudited):

 
|                                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding (losses) on available - for - sale securities and other assets, net |       | $        | (75,800    | )        | $          | (35,100 | ) |
| Tax effect                                                                              |       | 34,100   |       | 15,800   |       |
| Net-of-tax amount                                                                       |       | $        | (41,700    | )        | $          | (19,300 | ) |

 

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

 
|                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding losses on available — for - sale securities |       | $        | (67,600    | )        | $          | (81,100 | ) |
| Unrealized  holding gains on available for sale strip receivable     |       | 47,300   |       | 183,300  |       |
| Tax effect                                                           |       | 9,100    |       | (46,000  | )          |
| Net-of-tax amount                                                    |       | $        | (11,200    | )        | $          | 56,200 |   |

 

(NOTE 8) SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 
|                                     | ** ** | **9/30/2006** | ** ** | **9/30/2005** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|
| Payments during  the period ending: |       |          |       |          |       |
| Interest                            |       | $             | 3,185,600  |          | $          | 2,326,600 |   |
| Income Taxes                        |       | $             | 2,376,400  |          | $          | 960,700 |   |

 

10

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

**StatementsRegarding Forward-Looking Information**

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

**OVERVIEW**

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

For the ninemonths ended September 30, 2006 net income was $2,844,600, compared to$1,115,800 for the same period in 2005. For the nine months ended September 30, 2006 net interest income afterprovision for loan losses increased $1,075,900, total other income increased$2,543,800, while operating expense increased $556,600 and income tax provisionincreased $1,344,300.

11

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The followingtable sets forth certain selected financial ratios of the Corporation at andfor the nine months ended, September 30, 2006 and 2005.

 
|                                                    | ** ** | **The nine months  Ended  September 30, 2006**             | ** ** | **The nine months  Ended  September 30, 2005** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of  Operating Results:                     |       |                                                                           |       |                                                               |       |
| Total interest  income                             |       | $                                                                              | 9,889      |                                                               | $          | 7,749 |   |
| Total interest  expense                            |       | 3,705                                                                          |       | 2,661                                                              |       |
| Net interest  income                               |       | 6,184                                                                          |       | 5,088                                                              |       |
| Provision for  possible loan losses                |       | 145                                                                            |       | 125                                                                |       |
| Net interest  income after provision for loan loss |       | 6,039                                                                          |       | 4,963                                                              |       |
| Total other  income                                |       | 5,429                                                                          |       | 2,885                                                              |       |
| Total other  expense                               |       | 6,296                                                                          |       | 5,739                                                              |       |
|                                               |       |                                                                           |       |                                                               |       |
| Income before  taxes                               |       | 5,172                                                                          |       | 2,109                                                              |       |
| Provision for  income tax                          |       | 2,327                                                                          |       | 993                                                                |       |
| Net income                                         |       | $                                                                              | 2,845      |                                                               | $          | 1,116 |   |
|                                               |       |                                                                           |       |                                                               |       |
| Per Common Share  Data:                            |       |                                                                           |       |                                                               |       |
|                                               |       |                                                                           |       |                                                               |       |
| Net income -  Primary (1)                          |       | $                                                                              | 1.735      |                                                               | $          | 0.693 |   |
| Net income -  Diluted (2)                          |       | 1.478                                                                          |       | 0.580                                                              |       |
| Book value, end  of period (3)                     |       | 7.32                                                                           |       | 5.21                                                               |       |
| Avg shares  outstanding (4)                        |       | 1,639,356                                                                      |       | 1,609,327                                                          |       |
|                                               |       |                                                                           |       |                                                               |       |
| Balance Sheet  Data:                               |       |                                                                           |       |                                                               |       |
|                                               |       |                                                                           |       |                                                               |       |
| Total loans, net  of unearned income (5)           |       | $                                                                              | 121,600    |                                                               | $          | 97,421 |   |
| Total assets                                       |       | 185,607                                                                        |       | 151,165                                                            |       |
| Total deposits                                     |       | 129,002                                                                        |       | 108,668                                                            |       |
| Stockholders’ equity  (6)                     |       | 11,967                                                                         |       | 8,448                                                              |       |

 

12

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|                                                      | ** ** | **The nine months  Ended  September 30, 2006** | ** ** | **The nine months  Ended  September 30, 2005** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Selected  Financial Ratios (4):                      |       |                                                               |       |                                                               |       |
|                                                 |       |                                                               |       |                                                               |       |
| Return on  average assets (5)                        |       | 2.25                                                               | %          | 1.03                                                               | %          |
| Return on  average stockholders’ equity (5)     |       | 35.59                                                              | %          | 19.17                                                              | %          |
| Net interest  spread                                 |       | 4.61                                                               | %          | 4.78                                                               | %          |
| Net yield on  interest earning assets                |       | 5.38                                                               | %          | 5.24                                                               | %          |
| Avg  shareholders’ equity to average assets     |       | 6.33                                                               | %          | 5.37                                                               | %          |
| Risked-Based  capital ratios                         |       |                                                               |       |                                                               |       |
| Tier 1                                               |       | 10.44                                                              | %          | 9.11                                                               | %          |
| Total                                                |       | 14.91                                                              | %          | 15.23                                                              | %          |
| Total loans to  total deposits at end of period      |       | 94.26                                                              | %          | 89.65                                                              | %          |
| Allowance to  total loans at end of period           |       | 1.01                                                               | %          | 1.10                                                               | %          |
| Nonperforming  loans to total loans at end of period |       | 0.21                                                               | %          | 0.11                                                               | %          |
| Net charge-offs to  average loans                    |       | 0.00                                                               | %          | 0.01                                                               | %          |

----

(1)          Basic earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of common shares used for this computationwas 1,639,356 and 1,609,327 for September 30, 2006 and 2005, respectively.

(2)          Diluted earnings (loss)per share amounts were computed on the basis of the weighted average number ofshares of common stock and common stock equivalents outstanding during theyear.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,924,580 and 1,923,179 for September 30, 2006 and 2005,respectively.

(3)   Weighted average common shares.

(4)   Includesloans being held for sale.

(5)   Averages are of daily balances.

(6)   September30, 2006 calculated on an annualized basis.

**NETINTEREST INCOME**

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

Netinterest income for the nine months ended September 30, 2006 was $6,183,500compared to $5,087,600 for the same period in 2005.  The increase of $1,095,900 resulted fromtotal interest income increasing $2,139,800, while total interest expenseincreased $1,043,900.  Average interestearning assets increased $23,181,000 (17.55%), while the average rate earned 

13

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increased63 basis points.  Average interestbearing liabilities increased $12,271,000 (10.87%), while the average rate paidincreased 81 basis points.

Thefollowing tables show the components of the Bank’s net interest income, settingforth, for each of the three months ended and the nine months ended September 30, 2006 and 2005, (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 average yieldearned on interest-earning assets less the average rate paid oninterest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets).  Yields arecomputed on a tax-equivalent basis, resulting in adjustments to interest earnedon municipal bonds of $37,300   and$35,700 for the three months ended September 30, 2006 and 2005, respectivelyand $110,500 and $103,300 for the nine months ended September 30, 2006 and2005, respectively.  Non-accrual loansand overdrafts are included in average loan balances.  Average loans are presented net of unearnedincome.

 

14

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| ** **                                                  | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Three Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                                    | ** ** | ** **                                                     | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                                    | ** ** | **Interest**                                                   | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                              | 120,846    |                                                           | $          | 3,126 |   | 10.35 | % | $ | 103,227 |   | $ | 2,262 |   | 8.77 | % |
| Time deposits - in  other banks                             |       | 1,000                                                          |       | 14                                                             |       | 5.73 | % | 1,000 |   | 8 |   | 3.35 | % |
| Invest securities -  taxable                                |       | 17,163                                                         |       | 188                                                            |       | 4.38 | % | 12,783 |   | 118 |   | 3.70 | % |
| Invest securities -  nontaxable                             |       | 7,017                                                          |       | 120                                                            |       | 6.86 | % | 6,668 |   | 111 |   | 6.66 | % |
| Federal funds sold                                          |       | 17,050                                                         |       | 220                                                            |       | 5.16 | % | 13,768 |   | 119 |   | 3.44 | % |
| Total interest-earning  assets                              |       | 163,076                                                        |       | $                                                              | 3,669      |   | 9.00 | % | 137,447 |   | $ | 2,619 |   | 7.62 | % |
|                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Allowance for credit  losses                                |       | (1,198                                                         | )          |                                                           |       |   |   | (1,089 | ) |   |   |   |   |
| Non-interest bearing  assets:                               |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Cash and due from banks                                     |       | 5,155                                                          |       |                                                           |       |   |   | 5,843 |   |   |   |   |   |
| Premises and equipment                                      |       | 4,469                                                          |       |                                                           |       |   |   | 4,285 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 837                                                            |       |                                                           |       |   |   | 579 |   |   |   |   |   |
| Other assets                                                |       | 5,054                                                          |       |                                                           |       |   |   | 3,176 |   |   |   |   |   |
| Total average assets                                        |       | $                                                              | 177,393    |                                                           |       |   |   |   | $ | 150,241 |   |   |   |   |   |
|                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing demand                                     |       | $                                                              | 13,255     |                                                           | $          | 9 |   | 0.27 | % | $ | 13,434 |   | $ | 9 |   | 0.26 | % |
| Money market savings                                        |       | 3,131                                                          |       | 6                                                              |       | 0.74 | % | 3,775 |   | 7 |   | 0.73 | % |
| Savings deposits                                            |       | 7,214                                                          |       | 18                                                             |       | 1.02 | % | 8,000 |   | 20 |   | 1.00 | % |
| Time deposits >$100M                                     |       | 33,505                                                         |       | 400                                                            |       | 4.77 | % | 29,190 |   | 257 |   | 3.52 | % |
| Time deposits <$100M                                     |       | 32,508                                                         |       | 351                                                            |       | 4.32 | % | 30,405 |   | 251 |   | 3.30 | % |
| Other Borrowing                                             |       | 39,476                                                         |       | 586                                                            |       | 5.94 | % | 32,344 |   | 417 |   | 5.15 | % |
| Total interest-bearing  liabilities                         |       | 129,089                                                        |       | $                                                              | 1,371      |   | 4.25 | % | 117,148 |   | $ | 960 |   | 3.28 | % |
|                                                        |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Non-interest bearing  liabilities:                          |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 34,472                                                         |       |                                                           |       |   |   | 22,984 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,073                                                          |       |                                                           |       |   |   | 623 |   |   |   |   |   |
| Other liabilities                                           |       | 1,321                                                          |       |                                                           |       |   |   | 1,308 |   |   |   |   |   |
| Total Liabilities                                           |       | 165,955                                                        |       |                                                           |       |   |   | 142,063 |   |   |   |   |   |
| Total shareholders  equity                                  |       | 11,438                                                         |       |                                                           |       |   |   | 8,178 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                              | 177,393    |                                                           |       |   |   |   | $ | 150,241 |   |   |   |   |   |
| Interest income as a  percentage of average earning assets  |       |                                                           |       |                                                           |       | 9.00 | % |   |   |   |   | 7.62 | % |
| Interest expense as a  percentage of average earning assets |       |                                                           |       |                                                           |       | 3.36 | % |   |   |   |   | 2.79 | % |
| Net yield on interest earning assets                        |       |                                                           |       |                                                           |       | 5.64 | % |   |   |   |   | 4.83 | % |

 

15

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| ** **                                                  | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Average**                                                   | ** ** | ** **                                                    | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                                   | ** ** | **Interest**                                                  | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                             | 115,677    |                                                          | $          | 8,526 |   | 9.83 | % | $ | 102,680 |   | $ | 6,921 |   | 8.99 | % |
| Time deposits -  in other banks                             |       | 1,000                                                         |       | 36                                                            |       | 4.83 | % | 890 |   | 19 |   | 2.89 | % |
| Invest  securities - taxable                                |       | 15,395                                                        |       | 467                                                           |       | 4.05 | % | 11,244 |   | 335 |   | 3.97 | % |
| Invest  securities - nontaxable                             |       | 7,020                                                         |       | 357                                                           |       | 6.77 | % | 6,505 |   | 333 |   | 6.83 | % |
| Federal funds  sold                                         |       | 16,162                                                        |       | 582                                                           |       | 4.80 | % | 10,754 |   | 243 |   | 3.01 | % |
| Total  interest-earning assets                              |       | 155,254                                                       |       | $                                                             | 9,968      |   | 8.56 | % | 132,073 |   | $ | 7,851 |   | 7.93 | % |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,134                                                        | )          |                                                          |       |   |   | (1,023 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 5,041                                                         |       |                                                          |       |   |   | 5,454 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,407                                                         |       |                                                          |       |   |   | 3,781 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 761                                                           |       |                                                          |       |   |   | 562 |   |   |   |   |   |
| Other assets                                                |       | 4,131                                                         |       |                                                          |       |   |   | 3,742 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                             | 168,461    |                                                          |       |   |   |   | $ | 144,590 |   |   |   |   |   |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity:                 |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:                              |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                             | 12,998     |                                                          | $          | 32 |   | 0.33 | % | $ | 12,664 |   | $ | 24 |   | 0.25 | % |
| Money market  savings                                       |       | 3,890                                                         |       | 22                                                            |       | 0.75 | % | 4,315 |   | 24 |   | 0.75 | % |
| Savings deposits                                            |       | 7,714                                                         |       | 58                                                            |       | 1.01 | % | 7,957 |   | 59 |   | 0.99 | % |
| Time deposits  >$100M                                    |       | 31,378                                                        |       | 1,040                                                         |       | 4.42 | % | 28,526 |   | 717 |   | 3.35 | % |
| Time deposits  <$100M                                    |       | 32,621                                                        |       | 966                                                           |       | 3.95 | % | 29,444 |   | 704 |   | 3.19 | % |
| Other Borrowing                                             |       | 36,518                                                        |       | 1,588                                                         |       | 5.80 | % | 29,942 |   | 1,133 |   | 5.05 | % |
| Total  interest-bearing liabilities                         |       | 125,119                                                       |       | $                                                             | 3,706      |   | 3.95 | % | 112,848 |   | $ | 2,661 |   | 3.14 | % |
|                                                        |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 30,122                                                        |       |                                                          |       |   |   | 21,902 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 909                                                           |       |                                                          |       |   |   | 541 |   |   |   |   |   |
| Other  liabilities                                          |       | 1,655                                                         |       |                                                          |       |   |   | 1,540 |   |   |   |   |   |
| Total  Liabilities                                          |       | 157,805                                                       |       |                                                          |       |   |   | 136,830 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 10,656                                                        |       |                                                          |       |   |   | 7,760 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                             | 168,461    |                                                          |       |   |   |   | $ | 144,590 |   |   |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                          |       |                                                          |       | 8.56 | % |   |   |   |   | 7.93 | % |
| Interest expense  as a percentage of average earning assets |       |                                                          |       |                                                          |       | 3.18 | % |   |   |   |   | 2.69 | % |
| Net yield on interest  earning assets                       |       |                                                          |       |                                                          |       | 5.38 | % |   |   |   |   | 5.24 | % |

 

16

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**Rate and Volume Analysis:**

The following tables show the increase ordecrease in interest income, interest expense and net interest income,resulting from changes in rates and volumes, for each of the three months endedand the nine months ended September 30, 2006 compared with the same periods in2005.

 
|                                              | ** ** | **Increase (decrease) in the  three months ended  September 30, 2006 compared  with September 30, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Volume**                                                                                                                                                      | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase in  interest income:                |       |                                                                                                                                                            |       |   |   |   |   |
| Loans                                        |       | $                                                                                                                                                               | 386        |   | $ | 478 |   | $ | 864 |   |
| Time deposits -  in other banks              |       | —                                                                                                                                                          |       | 6 |   | 6 |   |
| Invest  securities - taxable                 |       | 41                                                                                                                                                              |       | 29 |   | 70 |   |
| Invest  securities - nontaxable              |       | 6                                                                                                                                                               |       | 3 |   | 9 |   |
| Federal funds  sold                          |       | 28                                                                                                                                                              |       | 73 |   | 101 |   |
| Total  interest-earning assets               |       | 461                                                                                                                                                             |       | 589 |   | 1,050 |   |
|                                         |       |                                                                                                                                                            |       |   |   |   |   |
| Increase  (decrease) in interest expense:    |       |                                                                                                                                                            |       |   |   |   |   |
| Interest-bearing  demand                     |       | $                                                                                                                                                               | (0         | ) | $ | — |   | $ | (0 | ) |
| Money market  savings                        |       | (1                                                                                                                                                              | )          | 0 |   | (1 | ) |
| Savings deposits                             |       | (2                                                                                                                                                              | )          | 0 |   | (2 | ) |
| Time deposits  >$100M                     |       | 38                                                                                                                                                              |       | 106 |   | 144 |   |
| Time deposits  <$100M                     |       | 17                                                                                                                                                              |       | 83 |   | 100 |   |
| Other Borrowing                              |       | 92                                                                                                                                                              |       | 78 |   | 170 |   |
| Total  interest-bearing liabilities          |       | 144                                                                                                                                                             |       | 267 |   | 411 |   |
| Increase (decrease) in  net interest income: |       | $                                                                                                                                                               | 317        |   | $ | 323 |   | $ | 639 |   |

 
|                                               | ** ** | **Increase (decrease) in the  nine months ended  September 30, 2006 compared  with September 30, 2005** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Volume**                                                                                                                                                     | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:      |       |                                                                                                                                                           |       |   |   |   |   |
| Loans                                         |       | $                                                                                                                                                              | 877        |   | $ | 729 |   | $ | 1,606 |   |
| Time deposits -  in other banks               |       | 2                                                                                                                                                              |       | 15 |   | 17 |   |
| Invest  securities - taxable                  |       | 124                                                                                                                                                            |       | 9 |   | 133 |   |
| Invest  securities - nontaxable               |       | 26                                                                                                                                                             |       | (3 | ) | 23 |   |
| Federal funds  sold                           |       | 122                                                                                                                                                            |       | 217 |   | 339 |   |
| Total  interest-earning assets                |       | 1,151                                                                                                                                                          |       | 966 |   | 2,118 |   |
|                                          |       |                                                                                                                                                           |       |   |   |   |   |
| Increase  (decrease) in interest expense:     |       |                                                                                                                                                           |       |   |   |   |   |
| Interest-bearing  demand                      |       | $                                                                                                                                                              | 1          |   | $ | 8 |   | $ | 9 |   |
| Money market  savings                         |       | (2                                                                                                                                                             | )          | (0 | ) | (2 | ) |
| Savings deposits                              |       | (2                                                                                                                                                             | )          | 1 |   | (1 | ) |
| Time deposits  >$100M                      |       | 72                                                                                                                                                             |       | 251 |   | 323 |   |
| Time deposits  <$100M                      |       | 76                                                                                                                                                             |       | 186 |   | 262 |   |
| Other Borrowing                               |       | 249                                                                                                                                                            |       | 206 |   | 455 |   |
| Total  interest-bearing liabilities           |       | 393                                                                                                                                                            |       | 652 |   | 1,045 |   |
| Increase (decrease) in  net interest expense: |       | $                                                                                                                                                              | 758        |   | $ | 314 |   | $ | 1,072 |   |

 

17

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**Provisionand Allowance for Loan Losses**

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

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of the StateBanking Department and FDIC examinations, independent accountants’observations, and the Bank’s internal review as additional indicators todetermine if the amount in the allowance for loan losses is adequate to protectagainst estimated future losses.

Provisions to the allowancefor loan losses are made quarterly if needed, in anticipation of futurepotential loan losses.  The quarterlyprovision is calculated on a predetermined formula to ensure adequacy as the portfoliogrows.  The formula is composed ofvarious components.  Allowance factorsare utilized in estimating the adequacy of the allowance for loan losses.  The allowance is determined by assigned specificallowances for all loans.  As higherallowance levels become necessary as a result of this analysis, the allowancefor loan losses will be increased through the provision for loan losses.

 

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

 

Although no assurance can be given that actual losseswill not exceed the amount provided for in the allowance, Management believesthat the allowance is adequate to provide for all estimated credit losses inlight of all known relevant factors. At September 30, 2006 and 2005 the Bank’sallowance stood at 1.01 percent and 1.10 percent of gross loans,respectively.  A provision of $145,000was made to the allowance during the nine months ended September 30, 2005,compared with a provision of $125,000 for the same period in 2005.  No loans were 

18

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chargedoff during the nine months ended September 30, 2006, $7,600 in loans werecharged off during the same period in 2005. Recoveries for the same periods were $1,100 and $1,400, respectively.

TheBank’s non-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.21 percent at September 30, 2006 compared with0.11 percent for the same period in 2005.

Based upon statistics released by Federal and statebanking authorities regarding banks of similar size or otherwise located inCalifornia, management believes that the Bank ‘s ratios of delinquent andnon-performing loans to total loans are far better than average.  Prudent collection efforts, and tighterlending controls, are responsible for the Bank’s strong performance on thesemeasures of credit quality.  However, noassurance can be given that the Bank’s loan portfolio will continue to measurewell against its peers on these ratios and quality measures, or that losseswill not otherwise occur in the future.

**Non-InterestIncome**

Total other income for the nine months ended September30, 2006 was $5,429,000 compared with $2,885,200 for the same period in2005.  The increase of $2,543,800resulted from the gain on sale of the Bank’s investment in Pacific CoastBankers’ Bank of $1,313,400, an increase in income from other service charges,commissions and fees of $1,361,900, and decreases of $106,700 in income fromsales and servicing of Small Business Administration Loans and $24,800 inservice charges on deposit accounts.  Theincrease in other service charges, commissions and fees was due primarily to a$113,900 mark to market loss on trading assets compared with a $348,300 mark tomarket loss in 2005, and increases of $662,600 in fee income from credit card programs,$243,300 in merchant discount fees, $103,500 in commercial banking originationfees and $29,800 from stored value card programs.

TheBank entered into an agreement in February 2006 with GC Acquisitions,LLC (“GCA”), the owner of a portfolio of consumercredit card contracts and receivables, under which the Bank will offerMasterCard® credit cards to qualifying GCA credit card contract holders.  GCAwill, through its affiliates,agents and vendors, establish new credit card accounts with the Bank forcertain of its existing credit card contract holders, service the credit cardaccounts and own the receivables generated from the accounts.  The conversion of the portfolio began inMarch 2006 with approximately 252,000 customers being contacted and at September30th theportfolio had 217,500 accounts on file. GCA maintains reserve deposits with the Bank based on cardholderactivity and available credit, at September 30th the reserve deposits totaled $8,828,600.  The Bank’s revenues from the program will bedependent on the number of cards in the portfolio and the amount of reservedeposits maintained.

In July 2006, GCA gave the Bank notice, inaccordance with its agreement, of its intent to transfer 20% of the portfolioaccounts, which amounts to approximately 52,000 accounts.  GCA will paythe Bank a transfer fee of approximately $143,500.  This represents sixtimes the average monthly fee per card calculated prior to the transfer date ofOctober 31, 2006.

In addition to the 52,000 accounts, GCA has requestedand the Bank approved transfers of an additional 15,000 accounts on October 31,2006 and 20,000 accounts on or about November 30, 2006.  GCA will pay theBank transfer fees of $82,800 and $134,500, which represents twelve times theaverage monthly fee per card calculated prior to the transfer date.

19

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The sale of SmallBusiness Administration (SBA) guaranteed loans is a significant contributor tothe Bank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums, which vary with market conditions.  SBA loans are guaranteed by the full faith ofthe United States Government from 75 to 85 percent of the principal amount.  The guaranteed portion has risks comparablefor an investor to a U. S. Government security and can usually be sold in thesecondary financial market, either at a premium or at a yield which allows theBank to maintain a significant spread for itself.

There can be noassurance that the gains on sale will continue at, or above, the levelsrealized in the past three years.  Inaddition, increasing competition among lenders for qualified SBA borrowersmakes it difficult for the Bank to continually expand its program in this area,and may limit the level of premium that can be earned with regard thereto.  Furthermore, the SBA recently began requiringlenders to share a portion of premiums in excess of 10% earned on the sale ofthe guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannotpredict the significance of the impact these changes will have on SBA income.

**Non-InterestExpense**

Salary andbenefits expense for the nine months ended September 30, 2006 increased$373,500 compared with the same period in 2005. The increase was due to merit pay increases, increased employee benefitscost, increased commissions paid and increased bonus accrual.

Total occupancyand equipment expense for the nine months ended September 30, 2006 was $590,900compared to $474,700 for the same period in 2005.  The increase was primarily due to increasesin depreciation expense of $37,300, premises rent expense less sublease income$33,400, merchant terminal expense net of terminal rent $29,400, property taxes$6,000 and utilities $6,300.

Professional feesfor the nine months ended September 30, 2006 was $117,700 compared to $107,200for the same period in 2005.  Theincrease of $10,500 was due primarily to legal fees increasing $9,900.

Data processingexpense for the nine months ended September 30, 2006 was $230,600 compared to$275,700 for the same period in 2005. The decrease of $45,100 is due to the re-negotiation of the dataprocessing contract during the 4th quarter of 2005.

Other general andadministrative expenses for the nine months ended September 30, 2006 totaled$2,580,400 compared with $2,486,400 for the same period in 2005.  Significant changes occurred in the followingcategories with increases in merchant expense $112,900, other operating losses$61,500, advertising expense $59,200, loan expense $33,000, businessdevelopment $32,200, stationary and supplies $25,900, donations $18,100, bankfees $16,600, dues and memberships $9,800; while decreases occurred inprovision for possible losses on debt securities $213,700, provision for possiblelosses on unfunded commitments $59,000, and credit card program expense$11,100.

20

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The income taxprovision for the nine months ended September 30, 2006 totaled $2,327,100compared with $992,800 for the same period of 2005.  The increase of $1,334,300 was due to a$591,000 provision related to the gain on sale of the Bank’s investment inPacific Coast Bankers’ Bank and increased income.

**LOANS**

Loans represented 74.55% of average earning assets,and 69.00% of average total assets for the nine months ended September 30, 2006compared with 77.74% and 71.31%, respectively during 2005. For the nine monthsended September 30, 2006, average loans increased 12.66% from $102,680,000 forthe same period in 2005 to $115,677,000. Average real estate loans increased $11,005,000 (16.41%), averagecommercial loans increased $1,319,000 (5.45%), average installment loansincreased $249,000 (39.31%) and average construction loans increased $424,000(3.94%).

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

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

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

21

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Consumerloans are made for the purpose of financing the purchase of various types ofconsumer goods, home improvement loans, auto loans and other personalloans.  Consumer installment loansgenerally provide for monthly payments of principal and interest, at a fixedrate.  Most of the Bank’s consumerinstallment loans are generally secured by the personal property beingpurchased.  The Bank generally makesconsumer loans to those customers with a prior banking relationship with theBank.

**Non-performingand Non-accrual Loans**

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

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

 
|                                                               | ** ** | **Nine months as of  September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                                               | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**                     | ** ** |
| **Accruing,  past due 90 days or more:**                      | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Real Estate                                                   |       | $                                                        | 0          |   | $ | 0 |   |
| Commercial                                                    |       | 0                                                        |       | 0 |   |
| Installment                                                   |       | 0                                                        |       | 0 |   |
| Other                                                         |       | 0                                                        |       | 0 |   |
| Total accruing                                                |       | 0                                                        |       | 0 |   |
|                                                          |       |                                                     |       |   |   |
| **Nonaccrual  Loans:**                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Real Estate                                                   |       | 0                                                        |       | 0 |   |
| Commercial                                                    |       | 95                                                       |       | 102 |   |
| Installment                                                   |       | 155                                                      |       | 0 |   |
| Other                                                         |       | 0                                                        |       | 0 |   |
| Total nonaccrual                                              |       | 250                                                      |       | 102 |   |
|                                                          |       |                                                     |       |   |   |
| Total nonperforming                                           |       | 250                                                      |       | 102 |   |
|                                                          |       |                                                     |       |   |   |
| Total loans end  of period                                    |       | 121,600                                                  |       | 97,421 |   |
|                                                          |       |                                                     |       |   |   |
| Ratio of nonperforming  loans to total loans at end of period |       | 0.21                                                     | %          | 0.11 | % |
|                                                               |            |                                                          |            |  |  |  |  |

 

22

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

## **Summary of Loan Loss Experience**

| ** **                                                                     | ** ** | **As of the period  Ended September 30,** | ** ** | **As of the  Year ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                                           | ** ** | **2005**                                                    | ** ** | **2005** | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)**                               | ** ** |
| Average loans  outstanding                                                     |       | $                                                                  | 115,677    |                                                        | $          | 102,680 |   | $ | 108,963 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Allowance,  beginning of period                                                |       | 1,101                                                              |       | 963                                                         |       | 963 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Loans charged  off during period:                                              |       |                                                               |       |                                                        |       |   |   |
| Commercial                                                                     |       | —                                                             |       | 8                                                           |       | — |   |
| Installment                                                                    |       | —                                                             |       | —                                                      |       | 14 |   |
| Real Estate                                                                    |       | —                                                             |       | —                                                      |       | — |   |
| Other                                                                          |       | —                                                             |       | —                                                      |       | — |   |
| Total charge offs                                                              |       | —                                                             |       | 8                                                           |       | 14 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Recoveries  during period:                                                     |       |                                                               |       |                                                        |       |   |   |
| Commercial                                                                     |       | 1                                                                  |       | —                                                      |       | — |   |
| Installment                                                                    |       | —                                                             |       | 1                                                           |       | 2 |   |
| Real Estate                                                                    |       | —                                                             |       | —                                                      |       | — |   |
| Other                                                                          |       | —                                                             |       | —                                                      |       | — |   |
| Total recoveries                                                               |       | 1                                                                  |       | 1                                                           |       | 2 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Net Loans  charged off during the period                                       |       | (1                                                                 | )          | 6                                                           |       | 12 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Additions to  allowance for possible loan losses                               |       | 145                                                                |       | 125                                                         |       | 150 |   |
|                                                                           |       |                                                               |       |                                                        |       |   |   |
| Allowance, end  of period                                                      |       | 1,247                                                              |       | 1,082                                                       |       | 1,101 |   |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.00                                                               | %          | 0.01                                                        | %          | 0.01 | % |
| Ratio of allowance to  total loans at end of period                            |       | 1.01                                                               | %          | 1.10                                                        | %          | 1.01 | % |
|                                                                                |            |                                                                    |            |                                                             |            |  |  |  |  |  |

 

**Other Assets**

Cash surrender value of life insurance increased$1,119,700 due primarily to the purchase of a $1,000,000 insurance policy.

 

23

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**Deposits**

Average deposits for the nine months ended September30, 2006 were $118,723,000 an increase of 13.28% compared with the same periodin 2005.  Average certificates of depositrepresented 53.91% of average deposits for the nine months ended September 30,2006.  Average interest bearing checking,money market and savings accounts as a group was 20.72% of average deposits forthe nine months ended September 30, 2006. Average demand deposits represented 25.37% of average deposits for thenine months ended September 30, 2006.

The following table setsforth the scheduled maturities of the Company’s time deposits in denominationsof $100,000 or greater at September 30, 2006:
| ** **                             |   | **Maturities of Time Deposits of**

**$100,000 or More** |       |
|----------------------------------------|--------|----------------------------------------------------------|------------|
| ** **                             |   | **(Dollars in Thousands)**                               | ** ** |
| Three months or less                   |   | $                                                        | 13,567,000 |   |
| Over three months  through six months  |   | 5,713,800                                                |       |
| Over six months through  twelve months |   | 13,549,100                                               |       |
| Over twelve months                     |   | 2,001,700                                                |       |
| Total                                  |   | $                                                        | 34,831,600 |   |

 

**Borrowing**

**The Bank has a financing arrangement with the Federal HomeLoan Bank of San Francisco which has a total financing availability of twentyfive percent (25%) of the Bank’s total assets, adjusted quarterly;approximately $40,278,800 at September 30, 2006.  The Federal Home Loan Bank borrowing issecured by some of the Bank’s real estate secured loans and securities.  The Federal Home Loan Bank assigns a maximumborrowing capacity for each type of loan and security pledge.  At September 30, 2006 the total principalbalances of pledged loans was $33,353,700 and the carrying value of securitieswas $13,391,800 with a total borrowing capacity of $33,994,000.  The following table provides information ontwelve (12) advances totaling $32,750,000 outstanding at September 30, 2006.**

** **

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

 

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**The Bank has a letter of credit in the amount of$330,000, expiring April 17, 2007, issued by Federal Home Loan Bank of SanFrancisco, which is used to secure local agency deposits.  The beneficiary of the letter of credit isthe Administrator of Local Agency Security, Department of FinancialInstitutions.**

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

**Capital Resources**

TheCompany maintains capital to comply with legal requirements, to provide amargin of safety for its depositors and stockholders, and to provide for futuregrowth and the ability to pay dividends. At September 30, 2006, stockholders’ equity was $11,966,600 versus$8,930,900 at December 31, 2005.  TheCompany paid cash dividends of $0.20 and $0.165 in 2005 and 2004,respectively.  The Bank paid a $25,000cash dividend during the nine months ended September 30, 2006.

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

Undercurrent rules, all banks are required to maintain Tier 1 capital of at least 4percent and total capital of 8.0% of risk-adjusted assets. The Bank had Tier 1risk-based capital ratios of 12.69% and 12.58% at September 30, 2006 and 2005,respectively.  The Bank had Totalrisk-based capital ratios of 13.60% and 13.57% at September 30, 2006 and 2005,respectively.  These ratios are wellabove the minimum regulatory requirements. The Company had Tier 1 risk-based capital ratios of 10.44% and 9.11% atSeptember 30, 2006 and 2005, respectively. The Company had Total risk-based capital ratios of 14.91% and 15.23% atSeptember 30, 2006 and 2005, respectively.

Theleverage capital ratio guidelines require a minimum leverage capital ratio of3% of Tier 1 capital to total assets less goodwill.  The Company had leverage capital ratios of7.80% and 6.79% at September 30, 2006 and 2005, respectively; while the Bank’sleverage capital ratios were 10.23% and 9.36% at September 30, 2006 and 2005.

Underregulatory guidelines, the $8 million in Trust Preferred Securities outstandingwill qualify as Tier 1 capital up to 25% of Tier 1 capital.  Any additional Trust Preferred Securitieswill qualify as Tier 2 capital.

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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 of theBank’s business, funds are generated from the repayment of loans, maturitieswithin the investment securities portfolio and the acquisition of depositbalances and short-term borrowings.  Inaddition, the Bank has a secured borrowing arrangement with the Federal HomeLoan Bank of San Francisco of approximately $40,278,800 of which $33,080,000 hadbeen advanced at September 30, 2006****andunsecured federal funds lines of credit with Bank of the West, Pacific Coast Bankers’ Bank and The Independent Bankof $4,500,000, $6,000,000 and $5,000,000, respectively; to meet temporaryliquidity requirements.

Asa matter of policy, the Bank seeks to maintain a level of liquid assets,including marketable investment securities, equal to a least 10 percent oftotal assets (“primary liquidity”), while maintaining sources of secondaryliquidity (borrowing lines from other institutions) equal to at least anadditional 10 percent of assets.  Withinthese ratios, the Bank generally has excess funds available to sell as federalfunds on a daily basis, and is able to fund its own liquidity needs without theneed of short-term borrowing.  The Bank’sprimary liquidity at September 30, 2006 was 15.85 percent, while primaryliquidity plus available borrowing was 24.55 percent of total assets.

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

**Interest Rate Risk**

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

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

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interest willgenerally impact on the Bank’s net interest income and net interest margin forlong or short periods of time.

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed fundsrate.  The model converts a fed fundsrate change into rate changes for each major class of asset and liability, thensimulates the bank’s net interest margin based on the bank’s actual repricingover a one year period, assuming that maturities are reinvested in instrumentsidentical to those maturing during the period. At September 30, 2006 the affect of a 200 basis points increase in thefederal funds sold rate, expressed, as a percentage change in net interestincome, was a positive 8.80%; while a 200 basis points decrease in the federalfunds sold rate, expressed, as a percentage change in net interest income, wasa negative 9.50%. These percentage changes in net interest income are wellwithin policy limits of 20%.

TheCorporation’s sources of revenues and liquidity are the dividends, taxequalization payments or management fees from the Bank, gains on securitiesheld in a trading account and the line of credit from the Pacific Coast Bankers’Bank.  The ability of the Bank to pay suchitems to the Corporation is subject to limitations under state and Federal law.

**InvestmentSecurities**

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At September 30, 2006 the account value was $1,262,800.  In addition the Corporation has a $20,100 investment in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges.

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

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

Thefollowing table sets forth the book and market value of the Bank’s investmentsecurities at September 30, 2006:
| ** **                                | ** ** | **Investment Portfolio Mix**

**September 30, 2006** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                           | ** ** | **Book  Value**                                                          | ** ** | **Market  Value** | ** ** |
| **Securities  Available for Sale**        | ** ** | ** **                                                               | ** ** |   |   |   |   |
| Government  National Mortgage Association |       | $                                                                        | 679,200    |   | $ | 692,000 |   |
| U.S. Government  Agency Securities        |       | 12,730,000                                                               |       | 12,649,600 |   |
| Corporate Debt  Securities                |       | 742,200                                                                  |       | 742,200 |   |
| Total                                     |       | $                                                                        | 14,151,400 |   | $ | 14,083,800 |   |
| **Held to  Maturity**                     | ** ** | ** **                                                               | ** ** |   |   |   |   |
| State/Local  Agency Bonds                 |       | $                                                                        | 7,015,500  |   | $ | 7,300,200 |   |
|                                      |       |                                                                     |       |   |   |
|                                           |            |                                                                          |            |  |  |  |  |  |  |  |  |

 

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| Other Investments, at cost                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| AT Services LLC                             |       | $          | 20,100     |       | $          | 20,100     |       |
| Metrocities  Mortgage, LLC                  |       | 10,000     |       | 10,000     |       |
| Federal Home  Loan Bank stock, restricted   |       | 1,539,300  |       | 1,539,300  |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000     |       | 93,000     |       |
| Northern California  Bancorp, Inc. Trust II |       | 155,000    |       | 155,000    |       |
| Independent  Bankers Financial Corporation  |       | 50,000     |       | 50,000     |       |
| MasterCard, Inc.  Class B Stock             |       | 5,400      |       | 5,400      |       |
| Rush Financial  Technologies, Inc.          |       | 90,000     |       | 90,000     |       |
|                                        |       | $          | 1,962,800  |       | $          | 1,962,800  |       |
|                                        |       |       |       |       |       |

 

The followingtable summarizes the maturity of the Bank’s investment securities at September30, 2006:
| ** **                              | ** ** | **Investment Portfolio Maturities** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
|                                         | ** ** | **Amortized Cost**             | ** ** | **Fair Value** | ** ** |
| **Available for Sale**                  | ** ** | ** **                          | ** ** | **(Dollars in thousands)** |   |
| Due within one  year                    |       | $                                   | 4,742,600  |   | $ | 4,720,300 |   |
| Due between one  and five years         |       | 2,987,400                           |       | 2,946,200 |   |
| Due between five  and ten years         |       | 5,742,200                           |       | 5,725,300 |   |
| GNMA — Mortgage  Backed Securities |       | 679,200                             |       | 692,000 |   |
|                                    |       | $                                   | 14,151,400 |   | $ | 14,083,800 |   |
|                                    |       |                                |       |   |   |
| **Held to  Maturity**                   | ** ** | ** **                          | ** ** |   |   |   |   |
| Due in over ten years                   |       | $                                   | 7,015,500  |   | $ | 7,300,200 |   |
|                                         |            |                                     |            |  |  |  |  |  |  |  |  |

 

**Item 3.  Controls and Procedures**

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

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Act is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

(b)Changes in Internal Controls:  In thequarter ended September 30, 2006, 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-OTHERINFORMATION**

**Item 1.  Legal Proceedings.**

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

**Item 2.  Unregistered Sales of Equity Securities anduse of Proceeds**

None

**Item 3.  Default of Senior Securities**

None

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

None

**Item 5.  Other Information.**

None

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#### ** **

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

A.            EXHIBITS

31.1                           Certification of the ChiefExecutive Officer of Northern California Bancorp, Inc. pursuant to Section 302of the Sarbanes-Oxley Act of 2002.

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

32.1                           Certificationof the Chief Executive Officer of Northern California Bancorp, Inc. pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certificationof the Chief Financial Officer of Northern California Bancorp, Inc. pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

B.            Reports on Form 8-K

None

 

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

 

 

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