** **

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

**Washington D.C.  20549**

** **

 

**FORM 10-QSB**

 

 

**ý**  **Quarterly report under Section 13 or 15(d) of theSecurities Exchange Act of 1934 for the quarterly period ended September 30,2001**

** **

**o****  Transition report under Section 13 or 15(d) of the SecuritiesExchange Act of 1934 (No fee required) for the period from ____ to ____**

** **

** **

**CommissionFile Number 0-27666**

 

** **

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

 

Incorporated inthe State of **California**

IRS EmployerIdentification Number **77-0421107**

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

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

 

 

 

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

 

As of November 1,2001, the Corporation had 1,207, 691 shares of common stock out-standing.

 

 

                    

**PART I-FINANCIAL INFORMATION**

 

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

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDBALANCE SHEET

 
|                                                                                                                        |   | **SEPTEMBER 30** |   | **DECEMBER 31** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|-----------------|--------|
|                                                                                                                        |   | **2001**         |   | **2000**        |   |
| ASSETS:                                                                                                                     |   |             |   |            |   |
| Cash and Cash  Equivalents                                                                                                  |   | 4,933,900        |   | 4,306,200       |   |
| Federal Funds  Sold                                                                                                         |   | 14,855,000       |   | 13,050,000      |   |
| Cash and Cash  Equivalents                                                                                                  |   | 19,788,900       |   | 17,356,200      |   |
| Due From Bank –  Time Deposits                                                                                         |   | 200,000          |   | 200,000         |   |
| Investment  Securities, available for sale (Note 1)                                                                         |   | 631,900          |   | 7,346,100       |   |
| Investment  Securities, held to maturity (Note 1)                                                                           |   | 0                |   | 11,050,900      |   |
| Trading Account                                                                                                             |   | 159,300          |   | 168,000         |   |
| Other  Investments                                                                                                          |   | 267,000          |   | 40,000          |   |
| Loans Held for  Sale                                                                                                        |   | 1,159,300        |   | 2,549,500       |   |
| Gross Loans  (Note 2)                                                                                                       |   | 49,752,000       |   | 41,211,500      |   |
| Allowance  for Possible Loan Losses (Note 3)                                                                                |   | (531,600         | )      | (468,500        | )      |
| Deferred  Origination Fees                                                                                                  |   | (67,900          | )      | (41,100         | )      |
| Net Loans                                                                                                                   |   | 49,152,500       |   | 40,701,900      |   |
| Bank Premises  and Equipment, Net                                                                                           |   | 1,787,200        |   | 1,773,200       |   |
| Interest  Receivable and Other Assets                                                                                       |   | 3,079,100        |   | 2,685,700       |   |
| Total Assets                                                                                                                |   | 76,225,200       |   | 83,871,500      |   |
|                                                                                                                        |   |             |   |            |   |
| LIABILITIES AND  SHAREHOLDERS' EQUITY:                                                                                      |   |             |   |            |   |
|                                                                                                                        |   |             |   |            |   |
| Total Deposits  (Note 4)                                                                                                    |   | 65,039,500       |   | 72,218,300      |   |
| Borrowed Funds                                                                                                              |   | 5,200,000        |   | 5,875,000       |   |
| Interest Payable  and Other Liabilities                                                                                     |   | 1,074,600        |   | 916,900         |   |
| Total  Liabilities                                                                                                          |   | 71,314,100       |   | 79,010,200      |   |
|                                                                                                                        |   |             |   |            |   |
| Shareholders'  Equity:                                                                                                      |   |             |   |            |   |
| Common Stock -  No Par Value

Authorized:  2,500,000 in 2001 and 2000

Outstanding:1,208,741  in 2001 and 1,222,225 in 2000 |   | 3,682,200        |   | 3,716,700       |   |
| Retained  Earnings                                                                                                          |   | 1,265,900        |   | 1,054,600       |   |
| Accumulated  Other Comprehensive Income (Loss)                                                                              |   | (37,000          | )      | 90,000          |   |
| Total  Shareholders' Equity                                                                                                 |   | 4,911,100        |   | 4,861,300       |   |
| Total  Liabilities & Shareholders' Equity                                                                               |   | 76,225,200       |   | 83,871,500      |   |

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 

 
|                                                          |   | **Three  Months Ended**

**September  30** |          | **Nine  Months Ended**

**September  30** |          |
|---------------------------------------------------------------|--------|--------------------------------------------|---------------|-------------------------------------------|---------------|
|                                                          |   | **2001**                                   |          | **2000**                                  |          | **2001** |   | **2000** |   |
| INTEREST INCOME:                                              |   |                                       |          |                                      |          |   |   |   |   |
| Interest and Fees on Loans                                    |   | 1,163,800                                  |          | 1,106,200                                 |          | 3,473,600 |   | 3,190,000 |   |
| Interest on Time  Deposits with Financial Institutions        |   | 3,300                                      |     | 1,600                                     |     | 10,900 |     | 6,100 |     |
| Interest on  Investment Securities                            |   | 76,600                                     |          | 227,300                                   |          | 446,600 |   | 636,200 |   |
| Interest on  Federal Funds                                    |   | 128,400                                    |          | 89,800                                    |          | 302,700 |   | 193,300 |   |
| Total Interest  Income                                        |   | 1,372,100                                  |          | 1,424,900                                 |          | 4,233,800 |   | 4,025,600 |   |
|                                                          |   |                                       |          |                                      |          |   |   |   |   |
| INTEREST  EXPENSE:                                            |   |                                       |          |                                      |          |   |   |   |   |
| Interest on  Interest-Bearing Transaction Accounts            |   | 30,500                                     |     | 28,900                                    |     | 89,500 |     | 84,900 |     |
| Interest on  Savings Accounts                                 |   | 18,300                                     |          | 16,900                                    |          | 57,000 |   | 44,900 |   |
| Interest on Time  Deposits                                    |   | 499,500                                    |          | 486,800                                   |          | 1,503,000 |   | 1,364,000 |   |
| Interest on  Other Borrowed Funds                             |   | 93,200                                     |          | 96,800                                    |          | 296,000 |   | 260,600 |   |
| Total Interest  Expense                                       |   | 641,500                                    |          | 629,400                                   |          | 1,945,500 |   | 1,754,400 |   |
|                                                          |   |                                       |          |                                      |          |   |   |   |   |
| Net Interest  Income                                          |   | 730,600                                    |          | 795,500                                   |          | 2,288,300 |   | 2,271,200 |   |
| PROVISION FOR  POSSIBLE LOAN LOSSES                           |   | 60,000                                     |          | 30,000                                    |          | 110,000 |   | 105,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |   | 670,600                                    |     | 765,500                                   |     | 2,178,300 |     | 2,166,200 |     |
|                                                          |   |                                       |          |                                      |          |   |   |   |   |
| NONINTEREST  INCOME:                                          |   |                                       |          |                                      |          |   |   |   |   |
| Service Charges  on Deposit Accounts                          |   | 120,200                                    |          | 103,400                                   |          | 365,100 |   | 312,300 |   |
| SBA Loan Sales  & Servicing Income                        |   | 71,600                                     |          | 118,000                                   |          | 339,800 |   | 275,900 |   |
| Other Operating  Income                                       |   | 423,300                                    |          | 654,000                                   |          | 1,634,900 |   | 1,588,400 |   |
| Total  Noninterest Income                                     |   | 615,100                                    |          | 875,400                                   |          | 2,339,800 |   | 2,176,600 |   |
|                                                          |   |                                       |          |                                      |          |   |   |   |   |
| NONINTEREST  EXPENSE:                                         |   |                                       |          |                                      |          |   |   |   |   |
| Salaries and  Employee Benefits                               |   | 519,300                                    |          | 470,700                                   |          | 1,620,000 |   | 1,409,200 |   |
| Occupancy and  Equipment Expense                              |   | 86,300                                     |          | 83,500                                    |          | 252,000 |   | 227,200 |   |
| Professional  Fees                                            |   | 35,400                                     |          | 31,300                                    |          | 104,600 |   | 74,800 |   |
| Data Processing                                               |   | 66,300                                     |          | 64,100                                    |          | 194,000 |   | 188,000 |   |
| FDIC & State  Assessments                                 |   | 10,900                                     |          | 2,600                                     |          | 24,900 |   | 12,300 |   |
| Other Operating  Expenses                                     |   | 697,500                                    |          | 600,400                                   |          | 1,819,500 |   | 1,650,200 |   |
| Income Tax Expense                                            |   | 4,000                                      |          | 104,700                                   |          | 277,000 |   | 222,100 |   |
| Total  Noninterest Expense                                    |   | 1,419,700                                  |          | 1,357,300                                 |          | 4,292,000 |   | 3,783,800 |   |
| NET INCOME  (LOSS)                                            |   | (134,000                                   | )             | 283,600                                   |          | 226,100 |   | 559,000 |   |
|                                                          |   |                                       |          |                                      |          |   |   |   |   |
| Earnings Per  Common Share                                    |   |                                       |          |                                      |          |   |   |   |   |
| Primary                                                       |   | (0.11                                      | )             | 0.23                                      |          | 0.19 |   | 0.46 |   |
| Diluted                                                       |   | (0.09                                      | )             | 0.20                                      |          | 0.16 |   | 0.39 |   |

 

 

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

NINE MONTHS ENDEDSEPTEMBER 30, 2001 AND 2000

 

 
|                                                    |   | **2001**    |   | **2000**    |   |
|---------------------------------------------------------|--------|-------------|--------|-------------|--------|
| NET INCOME                                              |   | 226,100     |   | 333,600     |   |
| Adjustments to  net income:                             |   |        |   |        |   |
| Depreciation and  amortization expense                  |   | 91,800      |   | 105,800     |   |
| Amortization/Accretion  on investments                  |   | 4,300       |   | (2,200      | )      |
| (Gain) loss on  sale of securities                      |   | (68,400     | )      | (7,400      | )      |
| Provision for  possible loan losses                     |   | 110,000     |   | 110,000     |   |
| Amortization of  deferred servicing premium             |   | 0           |   | (18,300     | )      |
| Amortization of  deferred income                        |   | (1,500      | )      | (2,500      | )      |
| Increase  (decrease) in accrued expenses                |   | 306,000     |   | (57,200     | )      |
| (Increase)  decrease in prepaid expenses                |   | (724,600    | )      | (100,600    | )      |
| Increase  (decrease) in interest payable                |   | (26,300     | )      | (50,400     | )      |
| (Increase)  decrease in interest receivable             |   | 326,200     |   | (57,000     | )      |
| (Increase)  decrease in loans held for sale             |   | 834,200     |   | (666,600    | )      |
| Total  adjustments to net income                        |   | 851,700     |   | (746,400    | )      |
| Net cash  provided (used) by operations                 |   | 1,077,800   |   | (412,800    | )      |
|                                                    |   |        |   |        |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                   |   |        |   |        |   |
| Purchase due  from time deposits                        |   | 0           |   | (100,000    | )      |
| Proceeds from  maturity of investments                  |   | 2,000,000   |   | 160,600     |   |
| Proceeds from  sale of investments                      |   | 32,255,100  |   | 1,034,500   |   |
| Purchase of  securities                                 |   | (16,495,200 | )      | (5,258,900  | )      |
| Net (increase)  decrease in loans                       |   | (8,403,800  | )      | (8,858,200  | )      |
| Capital  expenditures                                   |   | (105,800    | )      | (93,500     | )      |
| Exercise of  stock options                              |   | 0           |   | 132,000     |   |
| Stock repurchase                                        |   | (37,800     | )      | (34,200     | )      |
| Net cash provided  (used) in investing activities       |   | 9,212,500   |   | (13,017,700 | )      |
|                                                    |   |        |   |        |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                   |   |        |   |        |   |
| Net increase  (decrease) in deposit accounts            |   | (7,182,600  | )      | 7,502,900   |   |
| Net increase  (decrease) in borrowed funds              |   | (675,000    | )      | 500,000     |   |
| Net cash  provided (used) by financing activities       |   | (7,857,600  | )      | 8,002,900   |   |
|                                                    |   |        |   |        |   |
| Net increase  (decrease) in cash & cash equivalents |   | 2,432,700   |   | (5,427,600  | )      |
| Cash & cash  equivalents - beginning of year        |   | 17,556,200  |   | 12,529,900  |   |
|                                                    |   |        |   |        |   |
| Cash & cash  equivalents - end of period            |   | 19,988,900  |   | 7,102,300   |   |

 

##### See Note 5 forSupplemental Disclosures

 

 

 

 

NOTES TO FINANCIAL STATEMENTS
|                                                         |   | **SEPTEMBER  30** |   | **DECEMBER  31** |   |
|--------------------------------------------------------------|--------|-------------------|--------|------------------|--------|
|                                                         |   | **2001**          |   | **2000**         |   |
| (NOTE 1)  INVESTMENT SECURITIES:                             |   |              |   |             |   |
|                                                         |   |              |   |             |   |
| Available for  sale:                                         |   |              |   |             |   |
| US Government  Securities                                    |   | 0                 |   | 4,744,800        |   |
| State and Local  Agency Securities                           |   | 0                 |   | 1,982,300        |   |
| Other Securities                                             |   | 631,900           |   | 619,000          |   |
|                                                         |   | 631,900           |   | 7,346,100        |   |
|                                                         |   |              |   |             |   |
| Held to  maturity:                                           |   |              |   |             |   |
| US Government  Securities                                    |   | 0                 |   | 9,051,700        |   |
| State and Local  Agency Securities                           |   | 0                 |   | 1,999,200        |   |
|                                                         |   | 0                 |   | 11,050,900       |   |
|                                                         |   |              |   |             |   |
| (NOTE 2) GROSS  LOANS:                                       |   |              |   |             |   |
|                                                         |   |              |   |             |   |
| Commercial and  Industrial                                   |   | 12,853,400        |   | 10,438,600       |   |
| Construction                                                 |   | 1,779,900         |   | 2,313,800        |   |
| Real Estate –  Mortgage                                 |   | 34,124,800        |   | 27,801,600       |   |
| Installment                                                  |   | 861,500           |   | 518,500          |   |
| Government  Guaranteed Loans Purchased                       |   | 132,400           |   | 139,000          |   |
| Gross Loans                                                  |   | 49,752,000        |   | 41,211,500       |   |
|                                                         |   |              |   |             |   |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES:                |   |              |   |             |   |
|                                                         |   |              |   |             |   |
| Balance at  Beginning of Period                              |   | 468,500           |   | 400,000          |   |
| Recoveries                                                   |   | 1,800             |   | 7,400            |   |
| Provision for  Possible Loan Losses                          |   | 110,000           |   | 130,000          |   |
| Loans Charged  Off                                           |   | (48,700           | )      | (68,900          | )      |
| Balance at End  of Period                                    |   | 531,600           |   | 468,500          |   |
|                                                         |   |              |   |             |   |
| (NOTE 4)  DEPOSITS:                                          |   |              |   |             |   |
|                                                         |   |              |   |             |   |
| Demand                                                       |   | 13,772,800        |   | 25,311,200       |   |
| Interest-Bearing  Transaction                                |   | 11,040,600        |   | 10,651,600       |   |
| Savings                                                      |   | 3,604,400         |   | 2,963,400        |   |
| Time Under  $100,000                                         |   | 21,124,100        |   | 18,145,100       |   |
| Time Equal to or  Greater than $100,000                      |   | 15,497,600        |   | 15,147,000       |   |
|                                                         |   | 65,039,500        |   | 72,218,300       |   |
|                                                         |   |              |   |             |   |
| (NOTE 5)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |   |              |   |             |   |
|                                                         |   |              |   |             |   |
| Payments during  the period ending:                          |   | 9/30/01           |   | 9/30/00          |   |
| Interest                                                     |   | 1,972,129         |   | 1,626,500        |   |
| Income Taxes                                                 |   | 277,000           |   | 222,100          |   |

 

 

 

**ITEM 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATION**

 

**OVERVIEW**

 

                The following discussion reviewsand analyzes the operating results and financial condition of the Corporation,focusing on the Bank.  It should be readin conjunction with the financial statements and the other financial datapresented elsewhere herein.  TheCorporation’ only activities have been investments.

 

                For the nine months endedSeptember 30, 2001 net income was $226,100, a decrease of $332,900 whencompared to the same period in 2000. The decrease in earnings during this period resulted from a $12,100increase in net interest income after provision for loan losses and $163,200increase in net non-interest income which were offset by a $508,200 increase innon-interest expense.

 

                Net income was significantlyimpacted as the result of declines in the market value of trading accountsecurities.  The mark to market of thetrading account securities resulted in a charge to earnings of $156,200, net oftax.

 

 

 

 

 

 

                The following table sets forthcertain selected financial ratios of the Corporation at, and for the ninemonths ended, September 30, 2001 and 2000.

 

 
|                                               |   | **For  the nine months**

**Ended  September 30, 2001** |          | **For  the nine months**

**Ended  September 30, 2000** |          |
|----------------------------------------------------|--------|---------------------------------------------------------|---------------|---------------------------------------------------------|---------------|
|                                               |   | **(Dollars  in thousands except per share data)**       |          |
| Summary of Operating Results:                      |   |                                                    |          |                                                    |          |
| Total interest income                              |   | 4,234                                                   |          | 4,026                                                   |          |
| Total interest  expense                            |   | 1,945                                                   |          | 1,754                                                   |          |
| Net interest  income                               |   | 2,288                                                   |          | 2,271                                                   |          |
|                                               |   |                                                    |          |                                                    |          |
| Provision for  possible loan losses                |   | 110                                                     |     | 105                                                     |     |
| Net interest  income after provision for loan loss |   | 2,178                                                   |     | 2,166                                                   |     |
|                                               |   |                                                    |          |                                                    |          |
| Total other  income                                |   | 2,340                                                   |          | 2,177                                                   |          |
| Total other  expense                               |   | 4,015                                                   |          | 3,562                                                   |          |
|                                               |   |                                                    |          |                                                    |          |
| Income (loss)  before taxes                        |   | 503                                                     |          | 781                                                     |          |
| Provision for  income tax                          |   | 277                                                     |          | 222                                                     |          |
|                                               |   |                                                    |          |                                                    |          |
| Net income  (loss)                                 |   | 226                                                     |          | 559                                                     |          |
|                                               |   |                                                    |          |                                                    |          |
|                                               |   |                                                    |          |                                                    |          |
| Per Common Share  Data:                            |   |                                                    |          |                                                    |          |
|                                               |   |                                                    |          |                                                    |          |
| Net income -  Primary (1)                          |   | 0.19                                                    |          | 0.46                                                    |          |
| Net income -  Diluted (2)                          |   | 0.16                                                    |          | 0.39                                                    |          |
| Book value, end  of period                         |   | 4.05                                                    |          | 3.68                                                    |          |
| Avg shares  outstanding (3)                        |   | 1,215,166                                               |          | 1,223,377                                               |          |
|                                               |   |                                                    |          |                                                    |          |
| Balance Sheet  Data:                               |   |                                                    |          |                                                    |          |
|                                               |   |                                                    |          |                                                    |          |
| Total loans, net  of unearned income (4)           |   | 50,843                                                  |     | 41,615                                                  |     |
| Total assets                                       |   | 76,345                                                  |          | 73,329                                                  |          |
| Total deposits                                     |   | 65,040                                                  |          | 61,885                                                  |          |
| Stockholders'  equity                              |   | 4,911                                                   |          | 4,499                                                   |          |

 

 
|                                                  |   | **For  the nine months  Ended September 30, 2000** |   | **For  the nine months  Ended September 30, 2001** |   |
|-------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
| Selected Financial Ratios (5):                        |   |                                               |   |                                               |   |
|                                                  |   |                                               |   |                                               |   |
| Return on  average assets(6)                          |   | 0.40                                               | %      | 1.36                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Return on  average stockholders' equity(6)            |   | 6.11                                               | %      | 17.46                                              | %      |
|                                                  |   |                                               |   |                                               |   |
| Net interest  spread                                  |   | 3.92                                               | %      | 4.72                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net interest  margin                                  |   | 4.76                                               | %      | 5.56                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Avg shareholders'  equity to average assets           |   | 6.61                                               | %      | 7.81                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Risked-Based  capital ratios                          |   |                                               |   |                                               |   |
| Tier 1                                                |   | 9.41                                               | %      | 10.80                                              | %      |
| Total                                                 |   | 10.33                                              | %      | 11.76                                              | %      |
| Total loans to  total deposits at end of period       |   | 78.17                                              | %      | 67.25                                              | %      |
|                                                  |   |                                               |   |                                               |   |
| Allowance to  total loans at end of period            |   | 1.04                                               | %      | 1.07                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Non-performing  loans to total loans at end of period |   | 0.92                                               | %      | 0.07                                               | %      |
|                                                  |   |                                               |   |                                               |   |
| Net charge-offs  to average loans                     |   | 0.10                                               | %      | 0.13                                               | %      |

 

----

(1)   Primary earnings per share amounts werecomputed on the basis of the weighted average number of shares of common stockoutstanding during the year.  Theweighted average number of common shares used for this computation was 1215,166and 1,223,377 for September 30, 2001 and 2000, respectively.

(2)   Diluted earnings (loss) per share amountswere computed on the basis of the weighted average number of shares of commonstock and common stock equivalents outstanding during the year.  Common stock equivalents includedirector/employee stock options. The weighted average number of shares used forthis computation was 1,419,149 and 1,427,060 for September 30, 2001 and 2000,respectively.

(3)  Weighted average common shares.

(4)   Includes loans being held for sale.

(5)  Averages are of daily balances.

(6)   Calculated on an annualized basis.

 

**NET INTEREST INCOME**

 

                Net interest income, thedifference between (a) interest and fees earned on interest-earning assets and(b) interest paid on interest-bearing liabilities, is the most significantcomponent of the Bank's earnings.  Changesin net interest income from period to period result from increases or decreasesin the average balances of interest-earning assets portfolio, the availabilityof particular sources of funds and changes in prevailing interest rates.

 

                Net interest income for the nine month period endedSeptember 30, 2001 was $2,288,300 compared to $2,271,200 for the same period in2000.  The increase of $17,100 resultedfrom total interest income increasing $208,200, while total interest expenseincreased $191,100.  Average interestearning assets increased $6,329,000 (10.56%), while the average rate earneddecreased 79 basis points.  Averageinterest bearing liabilities increased $6,127,000 (12.48%), while the averagerate paid increased 2 basis points. The decrease in the average interest ratesearned was due to the decline in interest rates during the nine monthperiod.  The New York Prime interestrate decreased from 9.50% at December 31, 2000 to 6.00% at September 30, 2001.

 

                The following table shows thecomponents of the Bank’s net interest income, setting forth, for each the ninemonths ended September 30, 2001 and 2000, (i) average assets, liabilities andinvestments, (ii) interest income earned on interest-earning assets andinterest expense paid on interest-bearing liabilities, (iii) average yields earnedon interest-earning assets and average rates paid on interest-bearingliabilities, (iv) the net interest spread (i.e., the average yield earned oninterest-earning assets less the average rate paid on interest-bearingliabilities) and (v)the net interest yield on average interest-earning assets(i. e., net interest income divided by average interest-earning assets).  Yields are computed on a tax-equivalentbasis, resulting in adjustments to interest earned on non-taxable securities of$8,500 and $163,800 for the nine months ended September 30, 2001 and 2000,respectively.  Non-accrual loans andoverdrafts are included in average loan balances.  Average loans are presented net of unearned income.

 

** **

**INTEREST SPREAD ANALYSIS:**

 
|                                  |   |     |   | **The  Nine Months Ended  September 30,** |   |     |   | **The  Twelve Months Ended December 31,** |   |
|---------------------------------------|--------|----------|--------|-------------------------------------------|--------|----------|--------|-------------------------------------------|--------|
|                                  |   | **2001** |   | **2000**                                  |   | **2000** |   |
|                                  |   |     |   | **Int**                                   |   | **Avg**  |   |                                      |   | **Int** |   | **Avg** |   |   |   | **Int** |   | **Avg** |   |
|                                  |   | **Avg**  |   | **Earn**                                  |   | **%**    |   | **Avg**                                   |   | **Earn** |   | **%** |   | **Avg** |   | **Earn** |   | **%** |   |
|                                  |   | **Bal**  |   | **Paid**                                  |   | **Rate** |   | **Bal**                                   |   | **Paid** |   | **Rate** |   | **Bal** |   | **Paid** |   | **Rate** |   |
|                                  |   |     |   |                                      |   |     |   | **(Dollars  in thousands)**               |   |   |   |   |   |   |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Interest Earning  Assets:             |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 200      |   | 11                                        |   | 7.30     |   | 153                                       |   | 6 |   | 5.33 |   | 164 |   | 10 |   | 6.36 |   |
| Invest  securities - Taxable          |   | 9,106    |   | 430                                       |   | 6.30     |   | 5,859                                     |   | 318 |   | 7.24 |   | 5,553 |   | 396 |   | 7.12 |   |
| Invest  securities - Non-Taxable      |   | 504      |   | 25                                        |   | 6.63     |   | 8,123                                     |   | 482 |   | 7.91 |   | 9,325 |   | 746 |   | 8.00 |   |
| Federal funds  sold                   |   | 9,714    |   | 303                                       |   | 4.16     |   | 4,286                                     |   | 193 |   | 6.01 |   | 4,776 |   | 303 |   | 6.35 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Total  investments                    |   | 19,523   |   | 769                                       |   | 5.25     |   | 18,422                                    |   | 999 |   | 7.23 |   | 19,818 |   | 1455 |   | 7.34 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 2,406    |   | 189                                       |   | 10.46    |   | 3,349                                     |   | 257 |   | 10.25 |   | 3,147 |   | 329 |   | 10.45 |   |
| Real estate                           |   | 29,670   |   | 2,390                                     |   | 10.74    |   | 25,050                                    |   | 2,036 |   | 10.84 |   | 25,211 |   | 2,451 |   | 9.72 |   |
| Installment                           |   | 739      |   | 60                                        |   | 10.83    |   | 480                                       |   | 42 |   | 11.76 |   | 511 |   | 68 |   | 13.30 |   |
| Commercial                            |   | 13,945   |   | 835                                       |   | 7.99     |   | 12,651                                    |   | 854 |   | 9.00 |   | 12,643 |   | 1,451 |   | 11.48 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Total loans                           |   | 46,759   |   | 3,474                                     |   | 9.91     |   | 41,531                                    |   | 3,190 |   | 10.24 |   | 41,512 |   | 4,299 |   | 10.36 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest  earning assets        |   | 66,282   |   | 4,242                                     |   | 8.53     |   | 59,953                                    |   | 4,189 |   | 9.32 |   | 61,330 |   | 5,754 |   | 9.38 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 9,357    |   | 71                                        |   | 1.01     |   | 8,609                                     |   | 64 |   | 1.00 |   | 8,917 |   | 89 |   | 1.00 |   |
| Money market  savings                 |   | 1,332    |   | 19                                        |   | 1.86     |   | 1,493                                     |   | 21 |   | 1.83 |   | 1,428 |   | 26 |   | 1.84 |   |
| Savings deposits                      |   | 3,970    |   | 57                                        |   | 1.91     |   | 3,023                                     |   | 45 |   | 1.98 |   | 3,185 |   | 63 |   | 1.98 |   |
| Time deposits  >$100M              |   | 15,074   |   | 644                                       |   | 5.69     |   | 12,538                                    |   | 539 |   | 5.73 |   | 13,019 |   | 764 |   | 5.87 |   |
| Time deposits  <$100M              |   | 19,857   |   | 859                                       |   | 5.77     |   | 19,237                                    |   | 825 |   | 5.72 |   | 19,049 |   | 1,105 |   | 5.80 |   |
| Other Borrowing                       |   | 4,615    |   | 227                                       |   | 6.55     |   | 4,201                                     |   | 198 |   | 6.27 |   | 4,402 |   | 280 |   | 6.36 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Total interest  bearing liabilities   |   | 54,206   |   | 1,876                                     |   | 4.61     |   | 49,100                                    |   | 1,691 |   | 4.59 |   | 49,998 |   | 2,328 |   | 4.66 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                  |   |     |   | 2,366                                     |   |     |   |                                      |   | 2,498 |   |   |   |   |   | 3,426 |   |   |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                  |   |     |   |                                      |   | 3.92     |   |                                      |   |   |   | 4.72 |   |   |   |   |   | 4.73 |   |
|                                  |   |     |   |                                      |   |     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest earning assets |   |     |   |                                      |   | 4.76     |   |                                      |   |   |   | 5.56 |   |   |   |   |   | 5.59 |   |

**INTEREST SPREAD ANALYSIS**

 

** **
|                                 |   | **Nine  Months**

**Ended  September 30,**

**2001  vs 2000**

**Increase(Decrease)**

**Due to  changes** |   | **Twelve  MonthsEnded**

**December  31,**

**2000  vs 1999**

**Increase(Decrease)**

**Due to  Changes** |   |
|--------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
|                                 |   | **Avg**                                                                                                    |   | **Avg**                                                                                                    |   |   |   | **Avg** |   | **Avg** |   |   |   |
|                                 |   | **Volume**                                                                                                 |   | **Rate**                                                                                                   |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
|                                 |   |                                                                                                       |   | **(Dollars in thousands)**                                                                                 |   |   |   |
| Interest Earning  Assets:            |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks |   | 2                                                                                                          |   | 3                                                                                                          |   | 5 |   | (1 | ) | 2 |   | 1 |   |
| Invest  securities - Taxable         |   | 176                                                                                                        |   | (64                                                                                                        | )      | 112 |   | 136 |   | 38 |   | 175 |   |
| Invest  securities - Non-Taxable     |   | (452                                                                                                       | )      | (5                                                                                                         | )      | (457 | ) | 249 |   | 34 |   | 283 |   |
| Federal funds  sold                  |   | 245                                                                                                        |   | (135                                                                                                       | )      | 110 |   | (42 | ) | 67 |   | 25 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Total  investments                   |   | (29                                                                                                        | )      | (202                                                                                                       | )      | (230 | ) | 343 |   | 142 |   | 484 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                                                                                                       |   |                                                                                                       |   |   |   | 726 |   | 96 |   | 822 |   |
| Construction                         |   | (73                                                                                                        | )      | 4                                                                                                          |   | (69 | ) | 120 |   | 7 |   | 127 |   |
| Real estate                          |   | 376                                                                                                        |   | (22                                                                                                        | )      | 353 |   | 632 |   | (6 | ) | 626 |   |
| Installment                          |   | 23                                                                                                         |   | (5                                                                                                         | )      | 18 |   | 13 |   | 1 |   | 15 |   |
| Commercial                           |   | 87                                                                                                         |   | (106                                                                                                       | )      | (18 | ) | (39 | ) | 93 |   | 54 |   |
| Total loans                          |   | 413                                                                                                        |   | (130                                                                                                       | )      | 284 |   | 726 |   | 96 |   | 822 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets       |   | 384                                                                                                        |   | (332                                                                                                       | )      | 54 |   | 1,072 |   | 235 |   | 1,306 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Deposits:          |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                  |   | 5                                                                                                          |   | 1                                                                                                          |   | 6 |   | 11 |   | (1 | ) | 10 |   |
| Money market  savings                |   | (2                                                                                                         | )      | 0                                                                                                          |   | (2 | ) | (4 | ) | (1 | ) | (5 | ) |
| Savings deposits                     |   | 14                                                                                                         |   | (2                                                                                                         | )      | 12 |   | (5 | ) | 1 |   | (4 | ) |
| Time deposits  >$100M             |   | 109                                                                                                        |   | (4                                                                                                         | )      | 105 |   | 201 |   | 39 |   | 240 |   |
| Time deposits  <$100M             |   | 26                                                                                                         |   | 8                                                                                                          |   | 34 |   | 242 |   | 48 |   | 290 |   |
| Other Borrowing                      |   | 20                                                                                                         |   | 9                                                                                                          |   | 29 |   | (2 | ) | 9 |   | 7 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Total interest  bearing deposits     |   | 176                                                                                                        |   | 9                                                                                                          |   | 185 |   | 443 |   | 95 |   | 538 |   |
|                                 |   |                                                                                                       |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Net change in  net interest          |   | 208                                                                                                        |   | (340                                                                                                       | )      | (131 | ) | 629 |   | 139 |   | 768 |   |

**Provision and Allowance for LoanLosses**

 

                The provision for loan losses isan expense charged against operating income and added to the allowance for loanlosses.  The allowance for loan lossesrepresents amounts which have been set aside for the specific purpose ofabsorbing losses which may occur in the Bank's loan portfolio.

 

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

 
| **Loan Category**                             |   | **Reserve%** |   |
|-----------------------------------------------|--------|--------------|--------|
|                                          |   |         |   |
| Classified  Loans:                            |   |         |   |
| Loans classified  loss                        |   | 100.00       | %      |
| Loans classified  doubtful                    |   | 50.00        | %      |
| Loans classified  substandard                 |   |         |   |
| Real Estate  Secured                          |   | 5.00         | %      |
| Non Real Estate  Secured                      |   | 20.00        | %      |
|                                          |   |         |   |
| Unclassified  Loans:                          |   |         |   |
| Real Estate -  Loan to value 80% or less      |   | 0.10         | %      |
| Real Estate -  Loan to value over 80%         |   | 0.50         | %      |
| Real Estate -  Construction                   |   | 0.15         | %      |
| Loans to  Individuals                         |   | 3.00         | %      |
| Commercial                                    |   | 2.00         | %      |
| SBA Loans –  Unguaranteed portion        |   | 2.00         | %      |
| Unfunded Loan  Commitments                    |   | .25          | %      |
| Concentration  Risk Factor – Real Estate |   | .10          | %      |
| Economic Risk  Factor                         |   | .25          | %      |
| SBA Loans -  Guaranteed portion               |   | 0.00         | %      |
| Cash Secured  Loans                           |   | 0.00         | %      |

 

                Although noassurance can be given that actual losses will not exceed the amount providedfor in the allowance, Management believes that the allowance is adequate toprovide for all estimated credit losses in light of all known relevant factors.At September 30, 2001 and 2000 the Bank’s allowance stood at 1.04 percent and1.07 percent of gross loans, respectively. A provision of $110,000 was made to the allowance during the nine monthsended September 30, 2001, compared to a provision of $105,000 in the sameperiod in 2000.  Charged off loansduring the nine months ended September 30, 2001 and 2000 totaled $48,700 and$58,100 respectively.  Recoveries for thesame periods were $1,800 and $3,300, respectively.

 

                The Bank’s non-performing(delinquent 90 days or more and non-accrual) loans as a percentage of totalloans was 0.92 percent at September 30, 2001 compared with 0.07 percent atSeptember 30, 2000.

 

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

 

 

**Non-Interest Income**

 

                Totalnon-interest income for the nine months ended September 30, 2001 was$2,339,800, compared with $2,176,600 for the same period in 2000.  The increase of  $163,200 was the result of a $52,800 increase in service chargeson deposit accounts, an increase in income from other service charges,commissions and fees of $46,500 and an increase in SBA loan sales and servicingof $63,900.

 

                The sale of Small BusinessAdministration (SBA) guaranteed loans is a significant contributor to theBank’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 faithof the United States Government from 75 to 80 percent of the principalamount.  The guaranteed portion hasrisks comparable for an investor to a U. S. Government security and can usuallybe sold in the secondary financial market, either at a premium or at a yield whichallows the Bank to maintain a significant spread for itself.

 

                There can be no assurance thatthe gains on sale will continue at, or above, the levels realized in the pastthree years.  In addition, increasingcompetition among lenders for qualified SBA borrowers makes it difficult forthe Bank to continually expand its program in this area, and may limit thelevel of premium that can be earned with regard thereto.  Furthermore, the SBA recently beganrequiring lenders to share a portion of premiums in excess of 10% earned on thesale of the guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannotpredict that the impact of these changes will not have a significant impact onSBA income.

 

 

**Non-Interest Expense**

 

                Salary and benefits expense forthe nine months ended September 30, 2001 increased $210,800 compared with thesame period in 2000.  The increase wasprimarily due to the addition of three full time equivalent staff positions,employee merit increases, and bonus accruals.

 

                        Data processing expensefor the nine months ended September 30, 2001 increased $6,000 compared to thesame period in 2000.  The minimalincrease was due to increased numbers of accounts and transactions.

 

                        For the nine months endedSeptember 30, 2001 professional fees increased $29,800 compared to the sameperiod in 2000.  The increase was due toincreases in audit/accounting fees of $16,400 and legal fees of $13,400.

 

                Other expenses forthe nine months ended September 30, 2001 totaled $1,819,500 compared with$1,650,200 for the same period in 2000. Significant changes occurred in the following categories with increasesin merchant processing expense $85,100, ATM expense $8,200, entertainment andmeal $8,000, postage $2,700, bank fees $13,500, auto expense $6,800,miscellaneous expense $19,800, donations $4,500 shareholder expense $4,700,insurance $8,200, loan expense $6,100, collection expense $4,200 andstationary/supplies $3,700; decreases occurred in advertising $2,100, subscriptions/publications$5,200, telephone expense $2,100 and travel expense $8,400.

 

                Income tax expensefor the nine months ended September 30, 2001 was $277,000 compared with$222,100 for the same period in 2000. The $54,900 increase was due to the liquidation of the Bank’s tax-freemunicipal bond portfolio, partially offset by a $278,000 decline in pretaxincome.

 

 

 

**LOANS**

 

                Loansrepresented 70.55% of average earning assets, and 62.98% of average totalassets for the nine months ended September 30, 2001, compared with 69.28% and60.91%, respectively during 2000.  Forthe nine months ended September 30, 2001 average loans increased 12.59% from$41,531,000 for the same period in 2000 to $46,759,000. Average real estateincreased $3,676,000 (12.94%) and average installment loans increased $258,000(53.84%) and average commercial loans increased $1,294,000 (10.22%).

 

                The Bank's commercial andindustrial loans are generally made for the purpose of providing workingcapital, financing the purchase of equipment or inventory, and other businesspurposes. Such loans generally have maturities ranging from one year to severalyears.  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 the recognizedleader for Small Business Administration lending in Monterey County, and holdsSBA’s coveted Preferred Lender Status. Generally, SBA loans are guaranteed by the SBA for 75 to 80 percent oftheir principal amount, which can be retained in portfolio or sold toinvestors.  Such loans are made atfloating interest rates, but generally for longer terms (up to 25 years) thanare available on a conventional basis to small businesses.  Theunguaranteed portion of the loans, although generally supported by collateral,is considered to be more risky than conventional commercial loans because theymay be based upon credit standards the Bank would not otherwise apply, such aslower cash flow coverage, or longer repayment terms.

 

                The Bank's real estate loanportfolio consists both of real estate construction loans and real estatemortgage loans.  The Bank has initiateda program to generate more commercial and industrial real estate loans, whichgenerally 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 also makes real estateloans secured by a first deed of trust on single family residential propertiesand commercial and industrial real estate. California commercial banks are permitted, depending on the type andmaturity of the loan, to lend up to 90 percent of the fair market value of realproperty (or more if the loan is insured either by private mortgage insurers orgovernmental agencies).  In certaininstances, the appraised value may exceed the actual amount that could berealized on foreclosure, or declines in market value subsequent to making theloan can impair the Bank's security.

 

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

 

**Non-performing and Non-accrual Loans**

 

                TheBank's present policy is to cease accruing interest on loans which are past dueas to principal or interest 90 days or more, except for loans which are wellsecured or when collection of interest and principal is deemed likely.  When a loan is placed on non-accrual,previously accrued and unpaid interest is generally reversed out of incomeunless adequate collateral from which to collect the principal of, and intereston, the loan appears to be available.

 

                Thefollowing table presents information with respect to loans which, as of thedates indicated, were past due 90 days or more or were placed on non-accrualstatus (referred to collectively as "non-performing loans"):

 

                                                                                                                                                          
|                                                           |   | **Nine  Months Ended**

**September  30,** |     |
|----------------------------------------------------------------|--------|--------------------------------------------|----------|
|                                                           |   | **2001**                                   |     | **2000** |   |
|                                                           |   | **(Dollars in thousands)**                 |     |
| Accruing,                                                      |   |                                       |     |   |   |
| past due 90 days  or more:                                     |   |                                       |     |   |   |
|                                                           |   |                                       |     |   |   |
| Real Estate                                                    |   | 0                                          |     | 0 |   |
| Commercial                                                     |   | 0                                          |     | 0 |   |
| Installment                                                    |   | 0                                          |     | 0 |   |
| Other                                                          |   | 0                                          |     | 0 |   |
|                                                           |   | 0                                          |     | 0 |   |
|                                                           |   |                                       |     |   |   |
| Nonaccrual  Loans:                                             |   |                                       |     |   |   |
|                                                           |   |                                       |     |   |   |
| Real Estate                                                    |   | 320                                        |     | 0 |   |
| Commercial                                                     |   | 150                                        |     | 28 |   |
| Installment                                                    |   | 0                                          |     | 0 |   |
| Other                                                          |   | 0                                          |     | 0 |   |
| Total  non-accrual                                             |   | 470                                        |     | 28 |   |
|                                                           |   |                                       |     |   |   |
| Total  non-performing                                          |   | 470                                        |     | 28 |   |
|                                                           |   |                                       |     |   |   |
| Total loans end  of period                                     |   | 50,911                                     |     | 41,653 |   |
|                                                           |   |                                       |     |   |   |
| Ratio of  non-performing loansto  total loans at end of period |   | 0.92                                       |   % | 0.07 |   % |

 

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

**Summary of Loan Loss Experience**

 

 
|                                                                           |   | **Nine  Months Ended**      |            | **Nine  Months Ended**  |            |
|--------------------------------------------------------------------------------|--------|-----------------------------|-----------------|-------------------------|-----------------|
|                                                                           |   | **September  30, 2001**     |            | **September  30, 2000** |            |
|                                                                           |   | **(Dollars  in thousands)** |            |
| Average loans  outstanding                                                     |   | 46,759                      |            | 41,531                  |            |
|                                                                           |   |                        |            |                    |            |
| Allowance,  beginning of period                                                |   | 468                         |            | 400                     |            |
|                                                                           |   |                        |            |                    |            |
| Loans charged  off during period:                                              |   |                        |            |                    |            |
| Commercial                                                                     |   | 41                          |            | 56                      |            |
| Installment                                                                    |   | 8                           |            | 2                       |            |
| Real Estate                                                                    |   | 0                           |            | 0                       |            |
| Other                                                                          |   | 0                           |            | 0                       |            |
| Total charge  offs                                                             |   | 49                          |            | 58                      |            |
|                                                                           |   |                        |            |                    |            |
| Recoveries  during period:                                                     |   |                        |            |                    |            |
| Commercial                                                                     |   | 1                           |            | 3                       |            |
| Installment                                                                    |   | 1                           |            | 0                       |            |
| Other                                                                          |   | 0                           |            | 0                       |            |
| Total recoveries                                                               |   | 2                           |            | 3                       |            |
|                                                                           |   |                        |            |                    |            |
| Net Loans  charged off during the period                                       |   | 47                          |       | 55                      |       |
|                                                                           |   |                        |            |                    |            |
| Additions to  allowance for possible loan losses                               |   | 110                         |       | 105                     |       |
|                                                                           |   |                        |            |                    |            |
| Allowance, end  of period                                                      |   | 531                         |            | 450                     |            |
|                                                                           |   |                        |            |                    |            |
| Ratio of net  loans charged off to average Loans outstanding during the period |   | 0.10                        |     % | 0.13                    |     % |
|                                                                           |   |                        |            |                    |            |
| Ratio of  allowance to total loans at end of period                            |   | 1.04                        |   %        | 1.07                    |   %        |

 

 

 

**Funding Sources**

 

                Averagedeposits for the nine months ended September 30, 2001 were $63,294,000 anincrease of 8.62% compared with the average balance for 2000.  Average certificates of deposit represented55.19% of average deposits for the nine months ended September 30, 2001.  Average interest checking accounts, moneymarket and savings accounts as a group was 23.16% of average deposits.  Average demand deposits represented 21.65%of average deposits.

 

                The Company has a $1,000,000 term loan with UnitedSecurity Bank with a maturity of July 5. 2011. The interest rate is a floating rate based on United Security Bank’sreference rate plus seventy five (75) basis points.  Interest is payable monthly, with quarterly principal paymentsof  $27,777 beginning October 5, 2002.

 

                TheCompany has a $200,000 revolving line of credit with the Pacific Coast Bankers'Bank which matures in July 2002.  Theinterest rate is a floating rate based on the prime lending rate plus seventyfive (75) basis points.  At June 30,2001 the line of credit was fully advanced.

 

                TheBank has a line of credit from the Federal Home Loan Bank of San Francisco witha maximum borrowing limit on September 30, 2001 of approximately$6,700,000.  Certain of the Bank’s realestate secured loans and investment securities secure the line of credit.  At September 30, 2001 the Bank had four$1,000,000 advances which bear interest at 4.83%, 6.81%, 6.86% and 7.71%, respectively.  The advances mature in October 2003, June2004, August 2005 and June 2030, respectively. The Bank did not utilize any short-term borrowings in 2000, 1999 or1998.

 

                TheBank has a $105,000 letter of credit issued by the Federal Home Loan Bank ofSan Francisco to secure the uninsured portion of local agency depositsmaintained with the Bank.  The letter ofcredit matures April 17, 2006.

 

 

**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, 2001, stockholders’ equity was $5,031,100 versus$4,861,300 at December 31, 2000.  TheCompany paid a ten (10%) percent stock dividend in 2000, 1999 and 1998.  The Bank paid cash dividends to theCorporation totaling $200,000 during the nine months ended September 30, 2001,$100,000 in 2000 and $50,000 in 1999.

 

                The FDIC and Federal ReserveBoard have adopted capital adequacy guidelines for use in their examination andregulation of banks and bank holding companies.  If the capital of a bank or bank holding company falls below theminimum levels established by these guidelines, it may be denied approval toacquire or establish additional banks or non-bank businesses, or the FDIC orFederal Reserve Board may take other administrative actions.  The guidelines employ two measures ofcapital:  (1) risk-based capital and (2)leverage capital.

 

                Under currentrules, all banks were required to maintain Tier 1 capital of at least 4 percentand total capital of 8.0% of risk-adjusted assets. The Bank had a Tier 1risk-based capital ratio of 9.41% and a total risk-based capital ratio of10.33% at September 30, 2001, well above the minimum regulatory requirements.

 

                The leverage capitalratio guidelines require a minimum leverage capital ratio of 3% of Tier 1capital to total assets less goodwill. The Bank had a leverage capital ratio of 7.20% at September 30, 2001.

 

 

**Liquidity**

 

                Liquidity represents a bank'sability to provide sufficient cash flows or cash resources in a manner thatenables it to meet obligations in a timely fashion and adequately provides foranticipated future cash needs.  For theBank, liquidity considerations involve the capacity to meet expected andpotential requirements of depositors seeking access to balances and to providefor the credit demands of borrowing customers. In the ordinary course of the Bank's business, funds are generated fromthe repayment of loans, maturities within the investment securities portfolioand the acquisition of deposit balances and short-term borrowings. The Bank hasa line of credit from the Federal Home Loan Bank of San Francisco ofapproximately $6,700,000, and a $2,500,000 unsecured Federal Funds Purchasedline of credit with the Pacific Coast Bankers' Bank, 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 ofsecondary liquidity (borrowing lines from other institutions) equal to at leastan additional 10 percent of assets.  Inaddition, it seeks to generally limit loans to not more than 90 percent ofdeposits.  Within these ratios, the Bank generally has excess fundsavailable to sell as federal funds on a daily basis, and is able to fund itsown liquidity needs without the need of short-term borrowing.  The Bank's primary liquidity at September30, 2001 was 25.24 percent, while its average loan to deposit ratio for thenine months ended September 30, 2001 was 78.13 percent.

 

 

## **Interest Rate Risk**

 

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

 

                The purpose for asset/liabilitymanagement is to provide stable net interest income growth by protecting theBank's earnings from undue interest rate risk. The Bank expects to generate earnings from increasing loan volume,appropriate loan pricing and expense control and not from trying to accuratelyforecast interest rates.  Anotherimportant function of asset/liability management is managing the risk/returnrelationships between interest rate risk, liquidity, market risk and capitaladequacy.  The Bank gives priority toliquidity concerns followed by capital adequacy, then interest rate risk andmarket risk in the investment portfolio. The policy of the Bank will be to control the exposure of the Bank'searnings to changing interest rates by generally maintaining a position withina narrow range around an "earnings neutral position." An earningsneutral position is defined as the mix of assets and liabilities that generatea net interest margin that is not affected by interest rate changes.  However, Management does not believe thatthe Bank can maintain a totally earnings neutral position.  Further, the actual timing of repricing ofassets and liabilities does not always correspond to the timing assumed by theBank for analytical purposes. Therefore, changes in market rates of interest will generally impact onthe Bank’s net interest income and net interest margin for long or shortperiods of time.

 

                The Bank monitorsits interest rate risk on a quarterly basis through the use of a model whichcalculates the effect on earnings of changes in the fed funds rate.  The model converts a fed funds rate changeinto rate changes for each major class of asset and liability, then simulatesthe bank’s net interest margin based on the bank’s actual repricing over a oneyear period, assuming that maturities are reinvested in instruments identicalto those maturing during the period.  AtSeptember 30, 2001 the affect of a 2% increase in the federal funds sold ratewould result in a 6.8% increase in equity, while a 2% decrease in the federalfunds sold rate would result in a 6.8% decrease in equity.

 

 

**Investment Securities**

 

                At September 30, 2001 theCompany, in addition to its investment in Monterey County Bank, heldinvestments of $159,300 in Trading Account Securities, $42,000 in CommunityBankers Insurance Agency, LLC, $25,000 in Mission Valley Bank and $200,000 inLender Services Acquisition Corporation.

 

                At September 30, 2001 the Bank’s securities portfolioconsisted of $282,000 of Federal Home Loan Bank stock and $349,900 of PacificCoast Bankers’ Bank stock.

** **

 

 

**PART II-OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

        None

 

**Item 4. Submission of Matters to a vote of Security Holders.**

 

        None

 

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

 

        None

 

** **

** **

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

** **

A.            EXHIBITS

 
| **Item**        |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 2               |   | Plan of Merger and  Meger Agreement, Monterey County Bank with Monterey County Merger Corporation  un the Charter of Monterey County Bank under the Title of Monterey County  Bank, joined in by Northern California Bancorp,Inc. dated November 1, 1995.

Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                                                                                                                                                                                                 |   |
| 3 (i)           |   | Articles of Incorporation

Filed as exhibit to Form 10KSB dated December 31,  1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| 3 (ii)          |   | Bylaws

Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| 10 (i) D        |   | Lease agreement  Carmel Branch Office

Filed as exhibit to  Form 10KSB dated December 31, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| 10 (ii)         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|  A

  |   | (1) Employment  Contract of Charles T. Chrietzberg, Jr., dated January 1, 2000 Filed as  exhibit to Form 10KSB dated December 31, 1999

(2)  Deferred  Compensation Agreement, dated December 31, 1993. Filed as exhibit to Form  10KSB dated December 31, 1995.

(3)  Northern  California Bancorp, Inc. 1998 Stock Option Plan and Stock Option Agreements  Filed as exhibit to Form 10KSB dated December 31, 1998.

(4) Amendment to  the Salary Continuation Agreement Dated December 31, 1993 Filed as exhibit to  Form 10KSB dated December 31, 1999

(5) Life  Insurance Endorsement Method Split Dollar Plan Agreement 

Filed as exhibit to  Form 10KSB dated December 31, 1999. |   |

 

B.            Reports on Form 8-K 

                    None

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to 

be signed on its behalfby the undersigned, thereunto duly authorized.

 

                                                                                                NORTHERNCALIFORNIA BANCORP, INC.

 
| Date:   November 6, 2001 | By:   /s/Charles T. Chrietzberg, Jr. |
|-------------------------------|-------------------------------------------|
|                          | Charles T.  Chrietzberg, Jr.              |
|                          | Chief Executive  Officer                  |
|                          | and President                             |
|                          |                                      |
| Date: November 6, 2001        | By:  /s/Bruce  N. Warner             |
|                          | Bruce N. Warner                           |
|                          | Chief Financial  Officer and              |
|                          | Principal  Accounting Officer             |