**U.S. SECURITIES AND EXCHANGECOMMISSION**

 

**Washington D.C.  20549**

 

**FORM 10-QSB**

 

 

| **ý** | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for  the quarterly period ended June 30, 2002** |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|

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

 

**CommissionFile Number 0-27666**

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of Small BusinessIssuer in its Charter)

 

Incorporated in the Stateof California

 

IRS EmployerIdentification Number **77-0421107**

 

Address:**  601 MunrasAvenue, 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. Yes ý       No o

 

As of August 5, 2002, the Corporation had 1,343,538 sharesof common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCESHEET

 
|                                                 |   | **JUNE 30  2002** |   | **DECEMBER  31  2001** |   |
|------------------------------------------------------|--------|-------------------|--------|------------------------|--------|
| ASSETS:                                              |   |              |   |                   |   |
| Cash and Cash  Equivalents                           |   | 16,682,800        |   | 11,392,900             |   |
| Due From Bank -  Time Deposits                       |   | 100,000           |   | 100,000                |   |
| Cash and Cash  Equivalents                           |   | 16,782,800        |   | 11,492,900             |   |
| Trading Account                                      |   | 111,000           |   | 173,000                |   |
| Investment  Securities, available for sale (Note 1)  |   | 3,523,100         |   | 9,478,400              |   |
| Other Investments                                    |   | 958,900           |   | 950,600                |   |
| Loans Held for  Sale                                 |   | 1,666,700         |   | 605,600                |   |
| Gross Loans  (Note 2)                                |   | 54,854,100        |   | 52,601,400             |   |
| Allowance for  Possible Loan Losses (Note 3)         |   | (616,000          | )      | (566,300               | )      |
| Deferred  Origination Fees                           |   | (83,700           | )      | (78,800                | )      |
| Net Loans                                            |   | 54,154,400        |   | 51,956,300             |   |
| Bank Premises  and Equipment, Net                    |   | 1,837,000         |   | 1,804,700              |   |
| Cash Surrender  Value of Life Insurance              |   | 2,055,500         |   | 2,000,700              |   |
| Interest  Receivable and Other Assets                |   | 1,030,600         |   | 1,272,700              |   |
| Total Assets                                         |   | 82,120,000        |   | 79,734,900             |   |
|                                                 |   |              |   |                   |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:          |   |              |   |                   |   |
| Total Deposits  (Note 4)                             |   | 70,560,000        |   | 68,332,400             |   |
| Short-term  Borrowing                                |   | 200,000           |   | 200,000                |   |
| Long-term  Borrowing                                 |   | 1,000,000         |   | 1,000,000              |   |
| Federal Home  Loan Bank Borrowed Funds               |   | 4,000,000         |   | 4,000,000              |   |
| Interest Payable  and Other Liabilities              |   | 1,034,800         |   | 1,115,600              |   |
| Total  Liabilities                                   |   | 76,794,800        |   | 74,648,000             |   |
|                                                 |   |              |   |                   |   |
| Shareholders’  Equity:                          |   |              |   |                   |   |
| Common Stock -  No Par Value                         |   |              |   |                   |   |
| Authorized:  2,500,000 in 2002 and 2001              |   |              |   |                   |   |
| Outstanding:1,343,548  in 2002 and 1,336,371 in 2001 |   | 4,068,500         |   | 4,040,600              |   |
| Retained  Earnings                                   |   | 1,214,300         |   | 1,038,000              |   |
| Accumulated  Other Comprehensive Income (Loss)       |   | 42,400            |   | 8,300                  |   |
| Total  Shareholders’ Equity                     |   | 5,325,200         |   | 5,086,900              |   |
| Total  Liabilities & Shareholders’ Equity   |   | 82,120,000        |   | 79,734,900             |   |

 

2

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NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF OPERATIONS

 
|                                                          |   | **Three  Months Ended  June 30** |       | **Six Months  Ended  June 30** | ** ** |
|---------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                          |   |                             |
|                                                          |   | **2002**                         | ** ** | **2001**                       | ** ** | **2002** | ** ** | **2001** |   |
| INTEREST INCOME:                                              |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Interest and  Fees on Loans                                   |   | 1,080,500                        |       | 1,151,500                      |       | 2,140,900 |   | 2,309,800 |   |
| Interest on Time  Deposits with Financial Institutions        |   | 800                              |       | 4,300                          |       | 1,700 |   | 7,600 |   |
| Interest on  Investment Securities                            |   | 73,100                           |       | 201,500                        |       | 186,600 |   | 370,000 |   |
| Interest on  Federal Funds                                    |   | 33,800                           |       | 52,900                         |       | 60,400 |   | 174,300 |   |
| Total Interest  Income                                        |   | 1,188,200                        |       | 1,410,200                      |       | 2,389,600 |   | 2,861,700 |   |
|                                                          |   |                             |       |                           |       |   |   |   |   |
| INTEREST  EXPENSE:                                            |   |                             |       |                           |       |   |   |   |   |
| Interest on  Interest-Bearing Transaction Accounts            |   | 29,200                           |       | 35,900                         |       | 55,900 |   | 59,000 |   |
| Interest on  Savings Accounts                                 |   | 14,700                           |       | 13,400                         |       | 28,500 |   | 38,700 |   |
| Interest on Time  Deposits                                    |   | 366,700                          |       | 501,500                        |       | 771,700 |   | 1,003,500 |   |
| Interest on  Other Borrowed Funds                             |   | 82,400                           |       | 101,400                        |       | 163,900 |   | 202,800 |   |
| Total Interest  Expense                                       |   | 493,000                          |       | 652,200                        |       | 1,020,000 |   | 1,304,000 |   |
|                                                          |   |                             |       |                           |       |   |   |   |   |
| Net Interest  Income                                          |   | 695,200                          |       | 758,000                        |       | 1,369,600 |   | 1,557,700 |   |
| PROVISION FOR  POSSIBLE LOAN LOSSES                           |   | 15,000                           |       | 40,000                         |       | 52,000 |   | 50,000 |   |
| Net Interest  Income After Provision for Possible Loan Losses |   | 680,200                          |       | 718,000                        |       | 1,317,600 |   | 1,507,700 |   |
|                                                          |   |                             |       |                           |       |   |   |   |   |
| NONINTEREST  INCOME:                                          |   |                             |       |                           |       |   |   |   |   |
| Service Charges  on Deposit Accounts                          |   | 117,200                          |       | 123,500                        |       | 238,800 |   | 244,900 |   |
| SBA Loan Sales  & Servicing Income                        |   | 172,500                          |       | 191,800                        |       | 245,300 |   | 268,200 |   |
| Other Operating  Income                                       |   | 553,800                          |       | 534,600                        |       | 1,140,800 |   | 1,211,600 |   |
| Total  Noninterest Income                                     |   | 843,500                          |       | 849,900                        |       | 1,624,900 |   | 1,724,700 |   |
|                                                          |   |                             |       |                           |       |   |   |   |   |
| NONINTEREST  EXPENSE:                                         |   |                             |       |                           |       |   |   |   |   |
| Salaries and  Employee Benefits                               |   | 498,100                          |       | 536,200                        |       | 1,029,300 |   | 1,100,700 |   |
| Occupancy and  Equipment Expense                              |   | 92,800                           |       | 88,500                         |       | 176,500 |   | 165,700 |   |
| Professional  Fees                                            |   | 21,700                           |       | 30,000                         |       | 40,400 |   | 69,200 |   |
| Data Processing                                               |   | 88,100                           |       | 64,200                         |       | 167,200 |   | 127,700 |   |
| FDIC & State  Assessments                                 |   | 7,100                            |       | 3,900                          |       | 14,200 |   | 14,000 |   |
| Other Operating  Expenses                                     |   | 643,500                          |       | 583,000                        |       | 1,242,700 |   | 1,122,000 |   |
| Income Tax  Expense                                           |   | 72,000                           |       | 120,100                        |       | 77,600 |   | 273,000 |   |
| Total  Noninterest Expense                                    |   | 1,423,300                        |       | 1,425,900                      |       | 2,747,900 |   | 2,872,300 |   |
| NET INCOME  (LOSS)                                            |   | 100,400                          |       | 142,000                        |       | 194,600 |   | 360,100 |   |
|                                                          |   |                             |       |                           |       |   |   |   |   |
| Earnings Per Common  Share                                    |   |                             |       |                           |       |   |   |   |   |
| Primary                                                       |   | 0.08                             |       | 0.11                           |       | 0.15 |   | 0.27 |   |
| Diluted                                                       |   | 0.06                             |       | 0.09                           |       | 0.12 |   | 0.23 |   |

 

3

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NORTHERN CALIFORNIABANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS

SIX MONTHS ENDED JUNE 30,2002 AND 2001

 
|                                                    |   | **2002**   |   | **2001**    |   |
|---------------------------------------------------------|--------|------------|--------|-------------|--------|
| NET INCOME                                              |   | 194,600    |   | 360,100     |   |
| Adjustments to  net income:                             |   |       |   |        |   |
| Depreciation and  amortization expense                  |   | 60,900     |   | 58,400      |   |
| Amortization/Accretion  on investments                  |   | (2,100     | )      | 3,800       |   |
| (Gain) loss on  sale of securities                      |   | (17,800    | )      | (130,100    | )      |
| Provision for  possible loan losses                     |   | 52,000     |   | 50,000      |   |
| (Increase)  decrease in deferred servicing              |   | 0          |   | 2,800       |   |
| Amortization of  deferred income                        |   | 0          |   | (1,100      | )      |
| Increase  (decrease) in accrued expenses                |   | 65,100     |   | 214,600     |   |
| (Increase)  decrease in prepaid expenses                |   | 204,900    |   | (1,290,100  | )      |
| Increase  (decrease) in interest payable                |   | (145,900   | )      | 2,600       |   |
| (Increase)  decrease in interest receivable             |   | (14,700    | )      | 131,300     |   |
| (Increase)  decrease in loans held for sale             |   | (1,061,100 | )      | 1,577,200   |   |
| Total  adjustments to net income                        |   | (858,700   | )      | 619,400     |   |
| Net cash  provided (used) by operations                 |   | (664,100   | )      | 979,500     |   |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                   |   |       |   |        |   |
| Proceeds from  maturity of investments                  |   | 0          |   | 3,999,400   |   |
| Proceeds from  sale of investments                      |   | 10,801,900 |   | 18,417,700  |   |
| Purchase of  securities                                 |   | (4,741,900 | )      | (16,003,300 | )      |
| Net (increase)  decrease in loans                       |   | (2,250,100 | )      | (4,014,700  | )      |
| Proceeds from  exercise of stock options                |   | 30,300     |   | 0           |   |
| Repurchase of  common stock and stock options           |   | (20,600    | )      | (11,500     | )      |
| Capital  expenditures                                   |   | (93,200    | )      | (75,800     | )      |
| Net cash  provided (used) in investing activities       |   | 3,726,400  |   | 2,311,800   |   |
|                                                    |   |       |   |        |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                   |   |       |   |        |   |
| Net increase  (decrease) in deposit accounts            |   | 2,227,600  |   | (8,432,400  | )      |
| Net increase  (decrease) in borrowed funds              |   | 0          |   | (875,000    | )      |
| Net cash  provided (used) by financing activities       |   | 2,227,600  |   | (9,307,400  | )      |
|                                                    |   |       |   |        |   |
| Net increase  (decrease) in cash & cash equivalents |   | 5,289,900  |   | (6,016,100  | )      |
| Cash & cash  equivalents - beginning of year        |   | 11,492,900 |   | 17,556,200  |   |
|                                                    |   |       |   |        |   |
| Cash & cash  equivalents - end of period            |   | 16,782,800 |   | 11,540,100  |   |

 

4

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NOTES TO FINANCIAL STATEMENTS

 
|                                                         |   | **JUNE 30  2002** |   | **DECEMBER 31  2001** |   |
|--------------------------------------------------------------|--------|-------------------|--------|----------------------------|--------|
|                                                         |   |              |   |                       |   |
| (NOTE 1)  INVESTMENT SECURITIES:                             |   |              |   |                       |   |
|                                                         |   |              |   |                       |   |
| Available for  sale:                                         |   |              |   |                       |   |
| U. S. Government  Agencies                                   |   | 0                 |   | 6,008,000                  |   |
| Corporate Debt  Securities                                   |   | 3,523,100         |   | 3,470,400                  |   |
| Total Securities  Available for Sale                         |   | 3,523,100         |   | 9,478,400                  |   |
|                                                         |   |              |   |                       |   |
| (NOTE 2) GROSS  LOANS:                                       |   |              |   |                       |   |
|                                                         |   |              |   |                       |   |
| Commercial and  Industrial                                   |   | 14,553,300        |   | 13,863,200                 |   |
| Construction                                                 |   | 2,560,500         |   | 1,896,000                  |   |
| Real Estate -  Mortgage                                      |   | 36,782,500        |   | 36,009,500                 |   |
| Installment                                                  |   | 832,500           |   | 702,600                    |   |
| Government  Guaranteed Loans Purchased                       |   | 125,300           |   | 130,100                    |   |
| Gross Loans                                                  |   | 54,854,100        |   | 52,601,400                 |   |
|                                                         |   |              |   |                       |   |
| (NOTE 3)  ALLOWANCE FOR POSSIBLE LOAN LOSSES:                |   |              |   |                       |   |
|                                                         |   |              |   |                       |   |
| Balance at  Beginning of Period                              |   | 566,300           |   | 468,500                    |   |
| Recoveries                                                   |   | 12,500            |   | 1,700                      |   |
| Provision for  Possible Loan Losses                          |   | 52,000            |   | 185,000                    |   |
| Loans Charged  Off                                           |   | (14,800           | )      | (88,900                    | )      |
| Balance at End  of Period                                    |   | 616,000           |   | 566,300                    |   |
|                                                         |   |              |   |                       |   |
| (NOTE 4)  DEPOSITS:                                          |   |              |   |                       |   |
|                                                         |   |              |   |                       |   |
| Demand                                                       |   | 15,377,300        |   | 14,525,800                 |   |
| Interest-Bearing  Transaction                                |   | 14,239,000        |   | 12,014,500                 |   |
| Savings                                                      |   | 3,944,200         |   | 3,849,000                  |   |
| Time Under  $100,000                                         |   | 20,404,000        |   | 21,434,500                 |   |
| Time Equal to or  Greater than $100,000                      |   | 16,595,500        |   | 16,508,600                 |   |
|                                                         |   | 70,560,000        |   | 68,332,400                 |   |
|                                                         |   |              |   |                       |   |
| (NOTE 5)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |   |              |   |                       |   |
|                                                         |   |              |   |                       |   |
| Payments during  the period ending:                          |   | **6/30/02**       |   | **6/30/01**                |   |
| Interest                                                     |   | 1,177,000         |   | 1,312,000                  |   |
| Income Taxes                                                 |   | 77,600            |   | 273,000                    |   |

 

5

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

**OVERVIEW**

 

The following discussion reviews and analyzes theoperating results and financial condition of the Corporation, focusing on theBank.  It should be read in conjunctionwith the financial statements and the other financial data presented elsewhereherein.  

 

For the six months, ended June 30, 2002 net income was$194,600, a decrease of $165,500 when compared to the same period in 2001.  The decrease in earnings during this periodwas the result of a $190,100 decrease in net interest income after provisionfor loan losses and a $99,800 decrease in non-interest income, partially offsetby a $124,400 decrease in non-interest expense.

 

6

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The following table sets forth certain selected financialratios of the Corporation at and for the six months ended, June 30, 2002 and2001.

 
|                                                  |   | **For the  six months  Ended June 30, 2002**      |   | **For the  six months  Ended June 30, 2001** |   |
|-------------------------------------------------------|--------|---------------------------------------------------|--------|----------------------------------------------|--------|
|                                                  |   | **(Dollars  in thousands except per share data)** |   |
| Summary of Operating Results                          |   |                                              |   |                                         |   |
|                                                  |   |                                              |   |                                         |   |
| Total interest  income                                |   | 2,390                                             |   | 2,862                                        |   |
| Total interest  expense                               |   | 1,020                                             |   | 1,304                                        |   |
| Net interest  income                                  |   | 1,370                                             |   | 1,558                                        |   |
|                                                  |   |                                              |   |                                         |   |
| Provision for  possible loan losses                   |   | 52                                                |   | 50                                           |   |
| Net interest  income after provision for loan loss    |   | 1,318                                             |   | 1,508                                        |   |
|                                                  |   |                                              |   |                                         |   |
| Total other  income                                   |   | 1,625                                             |   | 1,725                                        |   |
| Total other  expense                                  |   | 2,670                                             |   | 2,599                                        |   |
|                                                  |   |                                              |   |                                         |   |
| Income (loss)  before taxes                           |   | 272                                               |   | 633                                          |   |
| Provision for  income tax                             |   | 78                                                |   | 273                                          |   |
|                                                  |   |                                              |   |                                         |   |
| Net income  (loss)                                    |   | 195                                               |   | 360                                          |   |
|                                                  |   |                                              |   |                                         |   |
| Per Common Share  Data:                               |   |                                              |   |                                         |   |
|                                                  |   |                                              |   |                                         |   |
| Net income -  Primary (1)                             |   | 0.15                                              |   | 0.27                                         |   |
| Net income -  Diluted (2)                             |   | 0.12                                              |   | 0.23                                         |   |
| Book value, end  of period                            |   | 3.96                                              |   | 3.86                                         |   |
| Avg shares  outstanding (3)                           |   | 1,344,539                                         |   | 1,336,724                                    |   |
|                                                  |   |                                              |   |                                         |   |
| Balance Sheet  Data:                                  |   |                                              |   |                                         |   |
|                                                  |   |                                              |   |                                         |   |
| Total loans, net  of unearned income (4)              |   | 56,437                                            |   | 46,151                                       |   |
| Total assets                                          |   | 82,117                                            |   | 75,059                                       |   |
| Total deposits                                        |   | 70,560                                            |   | 63,786                                       |   |
| Stockholders’  equity                            |   | 5,322                                             |   | 5,160                                        |   |
|                                                  |   |                                              |   |                                         |   |
| Selected Financial Ratios (4)                         |   |                                              |   |                                         |   |
|                                                  |   |                                              |   |                                         |   |
| Return on  average assets(5)                          |   | 0.49                                              | %      | 0.98                                         | %      |
|                                                  |   |                                              |   |                                         |   |
| Return on average  stockholders’ equity(6)       |   | 7.53                                              | %      | 14.63                                        | %      |
|                                                  |   |                                              |   |                                         |   |
| Net interest  spread                                  |   | 3.37                                              | %      | 4.01                                         | %      |
|                                                  |   |                                              |   |                                         |   |
| Net interest  margin                                  |   | 3.92                                              | %      | 4.78                                         | %      |
|                                                  |   |                                              |   |                                         |   |
| Avg  shareholders’ equity to average assets      |   | 6.50                                              | %      | 6.67                                         | %      |
|                                                  |   |                                              |   |                                         |   |
| Risked-Based  capital ratios                          |   |                                              |   |                                         |   |
| Tier 1                                                |   | 9.30                                              | %      | 9.90                                         | %      |
| Total                                                 |   | 10.28                                             | %      | 10.77                                        | %      |
| Total loans to  total deposits at end of period       |   | 79.98                                             | %      | 72.35                                        | %      |
|                                                  |   |                                              |   |                                         |   |
| Allowance to  total loans at end of period            |   | 1.09                                              | %      | 1.11                                         | %      |
|                                                  |   |                                              |   |                                         |   |
| Non-performing  loans to total loans at end of period |   | 0.19                                              | %      | .18                                          | %      |
|                                                  |   |                                              |   |                                         |   |
| Net charge-offs  to average loans                     |   | 0.00                                              | %      | 0.01                                         | %      |
|                                                       |        |                                                   |        |                                              |        |  |

 

7

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----

(1)          Primary earnings pershare amounts were computed on the basis of the weighted average number ofshares of common stock outstanding during the year.  The weighted average number of common shares used for thiscomputation was 1,344,539 and 1,336,724 for June 30, 2002 and 2001,respectively.

(2)          Dilutedearnings (loss) per share amounts were computed on the basis of the weightedaverage number of shares of common stock and common stock equivalentsoutstanding during the year.  Commonstock equivalents include director/employee stock options. The weighted averagenumber of shares used for this computation was 1,593,641 and 1,554,595 for June30, 2002 and 2001, respectively.

(3)          Weightedaverage common shares.

(4)          Includesloans being held for sale.

(5)          Averages areof daily balances.

(6)          June 30,2002 calculated on an annualized basis.

 

8

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**NETINTEREST INCOME**

 

Net interest income, the difference between (a)interest and fees earned on interest-earning assets and (b) interest paid oninterest-bearing liabilities, is the most significant component of the Bank’searnings.  Changes in net interestincome from period to period result from increases or decreases in the averagebalances of interest earning assets portfolio, the availability of particularsources of funds and changes in prevailing interest rates.

 

Net interest income for the six-month period ended June30, 2002 was $1,369,600 compared to $1,557,700 for the same period in2001.  The decrease of $188,100 resultedfrom total interest income decreasing $472,100, while total interest expensedecreased $284,000.  Average interestearning assets increased $4,151,000 (6.31%) with average loans increasing$9,503,000 and investments decreasing $5,352,000, while the average rate earneddecreased 192 basis points.  The averageinterest rate earned on loans decreased 233 basis points while the averageinterest rated earned on investments decreased 128 basis points.  Average interest bearing liabilitiesincreased $3,996,000 (7.29%), while the average rate paid increased 14 basispoints.

 

The following table shows the components of the Bank’snet interest income, setting forth, for each the six months ended June 30, 2002and 2001 and for the twelve months ended December 31, 2001, (i) average assets,liabilities and investments, (ii) interest income earned on interest-earningassets and interest expense paid on interest-bearing liabilities, (iii) averageyields earned on interest-earning assets and average rates paid oninterest-bearing liabilities, (iv) the net interest spread (i.e., the averageyield earned on interest-earning assets less the average rate paid on interest-bearingliabilities) and (v)the net interest yield on average interest-earning assets(i. e., net interest income divided by average interest-earning assets).  Yields are computed on a tax-equivalentbasis, resulting in an adjustment to interest earned on non-taxable securitiesof $16,500 for the six months ended June 30, 2001.  Non-accrual loans and overdrafts are included in average loanbalances.  Average loans are presentednet of unearned income.

 

9

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**INTEREST SPREAD ANALYSIS:**

 
|                                  |   | **The Six Months  Ended June 30,** |   | **The Twelve Months  Ended December 31,** |   |
|---------------------------------------|--------|------------------------------------|--------|-------------------------------------------|--------|
|                                  |   | **2002**                           |   | **2001**                                  |   | **2001** |   |
|                                  |   | **Avg  Bal**                       |   | **Int  Earn  Paid**                       |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   |
|                                  |   | **(Dollars in thousands)**         |   |
| Interest Earning  Assets:             |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  deposits at other banks  |   | 100                                |   | 2                                         |   | 3.49 |   | 200 |   | 8 |   | 7.61 |   | 178 |   | 12 |   | 6.99 |   |
| Invest  securities - Taxable          |   | 7,085                              |   | 187                                       |   | 5.27 |   | 11,678 |   | 353 |   | 6.05 |   | 7,444 |   | 469 |   | 6.30 |   |
| Invest securities  - Non-Taxable      |   | 0                                  |   | 0                                         |   | 0.00 |   | 552 |   | 25 |   | 9.09 |   | 377 |   | 25 |   | 6.65 |   |
| Federal funds  sold                   |   | 7,249                              |   | 60                                        |   | 1.67 |   | 7,148 |   | 174 |   | 4.88 |   | 10,310 |   | 363 |   | 3.52 |   |
| Total  investments                    |   | 14,434                             |   | 249                                       |   | 3.45 |   | 19,578 |   | 560 |   | 5.73 |   | 18,308 |   | 870 |   | 4.75 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                 |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                          |   | 2,002                              |   | 123                                       |   | 12.24 |   | 2,499 |   | 145 |   | 11.57 |   | 2,209 |   | 227 |   | 10.29 |   |
| Real estate                           |   | 37,129                             |   | 1,527                                     |   | 8.23 |   | 28,658 |   | 1,394 |   | 9.73 |   | 31,258 |   | 2,805 |   | 8.97 |   |
| Installment                           |   | 729                                |   | 33                                        |   | 8.94 |   | 715 |   | 41 |   | 11.54 |   | 767 |   | 90 |   | 11.67 |   |
| Commercial                            |   | 15,615                             |   | 458                                       |   | 5.87 |   | 14,099 |   | 730 |   | 10.36 |   | 14,335 |   | 1,454 |   | 10.15 |   |
| Total loans                           |   | 55,474                             |   | 2,141                                     |   | 7.72 |   | 45,971 |   | 2,310 |   | 10.05 |   | 48,570 |   | 4,576 |   | 9.42 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest  earning assets        |   | 69,908                             |   | 2,390                                     |   | 6.84 |   | 65,549 |   | 2,870 |   | 8.76 |   | 66,878 |   | 5,446 |   | 8.14 |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:        |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                   |   | 10,277                             |   | 47                                        |   | 0.91 |   | 9,302 |   | 47 |   | 1.00 |   | 9,422 |   | 93 |   | 0.99 |   |
| Money market  savings                 |   | 1,781                              |   | 9                                         |   | 1.02 |   | 1,350 |   | 13 |   | 1.86 |   | 1,328 |   | 22 |   | 1.66 |   |
| Savings deposits                      |   | 3,863                              |   | 28                                        |   | 1.48 |   | 4,108 |   | 39 |   | 1.89 |   | 3,885 |   | 71 |   | 1.82 |   |
| Time deposits  >$100M              |   | 16,775                             |   | 325                                       |   | 3.88 |   | 15,065 |   | 437 |   | 5.80 |   | 15,216 |   | 833 |   | 5.47 |   |
| Time deposits  <$100M              |   | 20,914                             |   | 446                                       |   | 4.27 |   | 19,271 |   | 567 |   | 5.88 |   | 20,263 |   | 1,126 |   | 5.56 |   |
| Other Borrowing                       |   | 5,200                              |   | 163                                       |   | 6.28 |   | 5,717 |   | 201 |   | 7.03 |   | 4,460 |   | 293 |   | 6.56 |   |
| Total interest  bearing liabilities   |   | 58,809                             |   | 1,019                                     |   | 3.47 |   | 54,813 |   | 1,302 |   | 4.75 |   | 54,574 |   | 2,437 |   | 4.47 |   |
| Net interest  income                  |   |                               |   | 1,370                                     |   |   |   |   |   | 1,568 |   |   |   |   |   | 3,009 |   |   |   |
|                                  |   |                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  spread                  |   |                               |   |                                      |   | 3.37 |   |   |   |   |   | 4.01 |   |   |   |   |   | 3.68 |   |
| Net yield on  interest earning assets |   |                               |   |                                      |   | 3.92 |   |   |   |   |   | 4.78 |   |   |   |   |   | 4.50 |   |

 

10

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|                                |   | **Six Months  Ended June 30,  2002 vs 2001** |   | **Twelve Months  Ended December 31,  2001 vs 2000** |   |
|-------------------------------------|--------|----------------------------------------------|--------|-----------------------------------------------------|--------|
|                                |   | **Increase(Decrease)  Due to changes**       |   | **Increase(Decrease)  Due to Changes**              |   |
|                                |   | **Avg  Volume**                              |   | **Avg  Rate**                                       |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                                |   | **(Dollars in thousands)**                   |   |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Interest Earning Assets:            |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Int-bearing deposits at other banks |   | (4                                           | )      | (2                                                  | )      | (6 | ) | 1 |   | 1 |   | 2 |   |
| Invest  securities - Taxable        |   | (139                                         | )      | (27                                                 | )      | (166 | ) | 135 |   | (61 | ) | 74 |   |
| Invest  securities - Non-Taxable    |   | (25                                          | )      | 0                                                   |   | (25 | ) | (716 | ) | (5 | ) | (721 | ) |
| Federal funds  sold                 |   | 2                                            |   | (116                                                | )      | (114 | ) | 352 |   | (291 | ) | 60 |   |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Total  investments                  |   | (165                                         | )      | (145                                                | )      | (311 | ) | (229 | ) | (357 | ) | (586 | ) |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Loans                               |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Construction                        |   | (29                                          | )      | 7                                                   |   | (22 | ) | (98 | ) | (4 | ) | (102 | ) |
| Real estate                         |   | 412                                          |   | (278                                                | )      | 134 |   | 588 |   | (234 | ) | 354 |   |
| Installment                         |   | 1                                            |   | (10                                                 | )      | (9 | ) | 34 |   | (12 | ) | 22 |   |
| Commercial                          |   | 79                                           |   | (350                                                | )      | (272 | ) | 194 |   | (191 | ) | 4 |   |
| Total loans                         |   | 462                                          |   | (631                                                | )      | (169 | ) | 718 |   | (441 | ) | 277 |   |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Total Interest  Earning Assets      |   | 297                                          |   | (777                                                | )      | (480 | ) | 489 |   | (797 | ) | (308 | ) |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Interest Bearing  Liabilities:      |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Int-bearing  demand                 |   | 5                                            |   | (5                                                  | )      | 0 |   | 5 |   | (1 | ) | 4 |   |
| Money market  savings               |   | 4                                            |   | (7                                                  | )      | (3 | ) | (1 | ) | (3 | ) | (4 | ) |
| Savings deposits                    |   | (2                                           | )      | (8                                                  | )      | (10 | ) | 14 |   | (6 | ) | 7 |   |
| Time deposits  >$100M            |   | 50                                           |   | (162                                                | )      | (112 | ) | 129 |   | (60 | ) | 69 |   |
| Time deposits  <$100M            |   | 48                                           |   | (168                                                | )      | (120 | ) | 70 |   | (50 | ) | 21 |   |
| Other Borrowing                     |   | (18                                          | )      | (20                                                 | )      | (38 | ) | 4 |   | 9 |   | 13 |   |
|                                |   |                                         |   |                                                |   |   |   |   |   |   |   |   |   |
| Total interest  bearing liabilities |   | 87                                           |   | (369                                                | )      | (282 | ) | 221 |   | (112 | ) | 109 |   |
| Net change in  net interest         |   | 210                                          |   | (407                                                | )      | (197 | ) | 268 |   | (685 | ) | (418 | ) |

 

11

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**Provision and Allowance for LoanLosses**

 

The provision for loan losses is an expense chargedagainst operating income and added to the allowance for loan losses.  The allowance for loan losses representsamounts, which have been set aside for the specific purpose of absorbinglosses, which may occur in the Bank’s loan portfolio.

 

The allowance for loan losses reflects management’songoing evaluation of the risks inherent in the loan portfolio both generallyand with respect to specific loans, the state of the economy, and the level ofnet loan losses experienced in the past. Management and the Board of Directors review the results of theCalifornia Department of Financial Institutions and FDIC examinations,independent accountants’ observations, and the Bank’s internal review asadditional indicators to determine if the amount in the allowance for loanlosses is adequate to protect against estimated future losses.  It is the Bank ‘s current practice, whichcould change in accordance with the factors mentioned above, to maintain anallowance that is at least equal to the sum of the following percentage of loanbalances by loan category.

 

| **Loan Category**                             |   | **Reserve%** |   |
|-----------------------------------------------|--------|--------------|--------|
|                                          |   |         |   |
| Classified  Loans:                            |   |         |   |
| Loans classified  loss                        |   | 100.00       | %      |
| Loans classified  doubtful                    |   | 50.00        | %      |
| Loans classified  substandard                 |   |         |   |
| Real Estate  Secured                          |   | 5.00         | %      |
| Non Real Estate  Secured                      |   | 20.00        | %      |
|                                          |   |         |   |
| Unclassified  Loans:                          |   |         |   |
| Real Estate -  Loan to value 80% or less      |   | 0.10         | %      |
| Real Estate -  Loan to value over 80%         |   | 0.50         | %      |
| Real Estate -  Construction                   |   | 0.25         | %      |
| Loans to  Individuals                         |   | 2.00         | %      |
| Commercial                                    |   | 2.00         | %      |
| SBA Loans –  Unguaranteed portion        |   | 2.00         | %      |
| Unfunded Loan Commitments                     |   | .25          | %      |
| Concentration  Risk Factor – Real Estate |   | .10          | %      |
| Economic Risk  Factor                         |   | .25          | %      |
| SBA Loans -  Guaranteed portion               |   | 0.00         | %      |
| Cash Secured  Loans                           |   | 0.00         | %      |

 

12

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Although no assurance canbe given that actual losses will not exceed the amount provided for in theallowance, Management believes that the allowance is adequate to provide forall estimated credit losses in light of all known relevant factors. At June 30,2002 and 2001 the Bank’s allowance stood at 1.09 and 1.11 percent,respectively.  A provision of $52,000was made to the allowance during the six months ended June 30, 2002 comparedwith $50,000 in the same period in 2001. Charged off loans during the six months ended June 30, 2002 and 2001 totaled$14,800 and $8,000 respectively. Recoveries for the same periods were $12,500 and $1,800, respectively.

 

The Bank’s non-performing(delinquent 90 days or more and non-accrual) loans as a percentage of totalloans were 0.51 percent at June 30, 2002 compared with 0. 18 percent at June30, 2001.

 

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

 

**Non-Interest Income**

 

Total non-interest incomefor the six months ended June 30, 2002 was $1,624,900, compared with $1,724,700for the same period in 2001.  Thedecrease of  $99,800 was the result of a$70,800 decrease in income from other operating income, a $6,100 decrease inservice charges on deposit accounts and a decrease of $22,900 in SBA loan salesand servicing.  

 

The sale of Small Business Administration (SBA)guaranteed loans is a significant contributor to the Bank’s income.  SBA guaranteed loans yield up to 3 3/4% overthe New York prime rate, and the guaranteed portions can be sold at premiums,which vary with market conditions.  SBAloans are guaranteed by the full faith of the United States Government from 75to 80 percent of the principal amount. The guaranteed portion has risks comparable for an investor to a U. S.Government security and can usually be sold in the secondary financial market,either at a premium or at a yield which allows the Bank to maintain asignificant spread for itself.

 

There can be no assurance that the gains on sale willcontinue at, or above, the levels realized in the past three years.  In addition, increasing competition amonglenders for qualified SBA borrowers makes it difficult for the Bank tocontinually expand its program in this area, and may limit the level of premiumthat can be earned with regard thereto. The level of premium income on longer-term loans has been significantlyreduced due to the volume of loans that have been paid off early.

 

13

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**Non-Interest Expense**

 

Salary and benefits expense for the six months endedJune 30, 2002 decreased $71,400 compared with the same period in 2001.  The decrease was due primarily to reducedbonus accruals.

 

Total occupancy and equipment expense for the sixmonths ended June 30, 2002 was $176,500 compared to $165,700 for the sameperiod in 2001.  The increase was due toleasing additional office space in Monterey and increases under existing leaseagreements.

 

For the six months ended June 30, 2002 professionalfees were $40,400 compared with $69,200 the same period in 2001.  Accounting/audit fees decreased $6,700 andlegal fees decreased $22,100.

 

Data processing for the six months ended June 30, 2002increased $39,500 compared to the same period in 2001.  The increase was due primarily to costassociated with converting to an image item processing system and developing anInternet site.

** **

Other expenses for the six months ended June 30, 2002totaled $1,334,500 compared with $1,409,000 for the same period in 2001.  Significant changes occurred in thefollowing categories with increases in merchant expense of $114,800, messenger& freight $14,200, bank fees $2,200, insurance $17,300, due &memberships $3,100, telephone $3,000, other losses $6,700 and advertising$2,100 with decreases in collection expense $16,400, miscellaneous $2,800,donation expense $6,900, entertainment & meals $2,200, security $4,100,postage expense $7,300, stationary & supplies $4,500 and income tax expense$195,400.

 

**LOANS**

 

Loans represented 79.35% of average earning assets,and 69.91% of average total assets for the six months ended June 30, 2002,compared with 69.91% and 62.31%, respectively during 2001.  For the six months ended June 30, 2002average loans increased 20.67% from $45,971,000 for the same period in 2001 to$55,474,000.  Average installment loansincreased $14,000 (1.92%), average commercial loans increased $1,516,000(10.75) and average real estate loans increased $8,471,000 (29.56%), whileconstruction loans decreased $497,000 (19.90%).

 

The Bank’s commercial and industrial loans aregenerally made for the purpose of providing working capital, financing thepurchase of equipment or inventory, and other business purposes. Such loansgenerally have terms ranging from one year to several years.  Short-term business loans are generallyintended to finance current transactions and typically provide for monthlyinterest payments with principal being payable at maturity or at 90-day

 

14

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intervals. Term loans(usually for a term of two to five years) normally provide for monthlyinstallments of principal and interest. The Bank from time to time utilizes accounts receivable and inventory assecurity for loans.

 

The Bank is a recognized leader for Small BusinessAdministration lending in Monterey County, and holds SBA’s coveted PreferredLender Status.  Generally, the SBAguarantees SBA loans for 75 to 80 percent of their principal amount, which canbe retained in portfolio or sold to investors. Such loans are made at floating interest rates, but generally for longerterms (up to 25 years) than are available on a conventional basis to smallbusinesses.  The unguaranteed portion of the loans, although generallysupported by collateral, is considered to be more risky than conventional commercialloans because they may be based upon credit standards the Bank would nototherwise apply, such as lower cash flow coverage, or longer repayment terms.

 

The Bank’s real estate loan portfolio consists both ofreal estate construction loans and real estate mortgage loans.  The Bank has initiated a program to generatemore commercial and industrial real estate loans, which generally yield higherreturns than normal commercial loans. The Bank has also developed a broker program for generating residentialreal estate loans.  The Bank does notmake real estate development loans.  Real estate construction loans aremade for a much shorter term, and often at higher interest rates, thanconventional single-family residential real estate loans.  The cost of administering such loans isoften higher than for other real estate loans, as principal is drawn onperiodically as construction progresses.

 

The Bank also makes real estate loans secured by afirst deed of trust on single family residential properties and commercial andindustrial real estate.  Californiacommercial banks are permitted, depending on the type and maturity of the loan,to lend up to 90 percent of the fair market value of real property (or more ifthe loan is insured either by private mortgage insurers or governmentalagencies).  In certain instances, theappraised value may exceed the actual amount, which could be realized onforeclosure, or declines in market value subsequent to making the loan canimpair the Bank’s security.

 

Consumer loans are made for the purpose of financingthe purchase of various types of consumer goods, home improvement loans, autoloans and other personal loans. Consumer installment loans generally provide for monthly payments ofprincipal and interest, at a fixed rate. Most of the Bank’s consumer installment loans are generally secured bythe personal property being purchased. The Bank generally makes consumer loans to those customers with a priorbanking relationship with the Bank.

 

15

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**Nonperforming and Nonaccrual Loans**

 

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

 

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

 
|                                                           |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------------|--------|--------------------------------|--------|
|                                                           |   | **2002**                       |   | **2001** |   |
|                                                           |   | **(Dollars in thousands)**     |   |
| Accruing, past due 90 days or more:                            |   |                           |   |
|                                                           |   |                           |   |   |   |
| Real Estate                                                    |   | 0                              |   | 0 | ** ** |
| Commercial                                                     |   | 0                              |   | 0 | ** ** |
| Installment                                                    |   | 0                              |   | 0 | ** ** |
| Other                                                          |   | 0                              |   | 0 | ** ** |
| Total accruing                                                 |   | 0                              |   | 0 | ** ** |
|                                                           |   |                           |   |   | ** ** |
| Nonaccrual  Loans:                                             |   |                           |   |   | ** ** |
|                                                           |   |                           |   |   | ** ** |
| Real Estate                                                    |   | 0                              |   | 0 | ** ** |
| Commercial                                                     |   | 109                            |   | 83 | ** ** |
| Installment                                                    |   | 0                              |   | 0 | ** ** |
| Other                                                          |   | 0                              |   | 0 | ** ** |
| Total  non-accrual                                             |   | 109                            |   | 83 | ** ** |
|                                                           |   |                           |   |   | ** ** |
| Total  non-performing                                          |   | 109                            |   | 83 | ** ** |
|                                                           |   |                           |   |   | ** ** |
| Total loans end  of period                                     |   | 56,437                         |   | 46,224 | ** ** |
|                                                           |   |                           |   |   | ** ** |
| Ratio of  non-performing loans to total loans at end of period |   | 0.19                           | %      | 0.18 | **%** |

 

16

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

 

**Summary of Loan Loss Experience**

 
|                                                                           |   | **Six Months  Ended  June 30, 2002** |   | **Six Months  Ended  June 30, 2001** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**          |   |
|                                                                           |   |                                 |   |                                 |   |
| Average loans outstanding                                                      |   | 55,474                               |   | 45,971                               |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance,  beginning of period                                                |   | 566                                  |   | 468                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Loans charged  off during period:                                              |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 13                                   |   | 8                                    |   |
| Installment                                                                    |   | 0                                    |   | 0                                    |   |
| Real Estate                                                                    |   | 1                                    |   | 0                                    |   |
| Other                                                                          |   | 1                                    |   | 0                                    |   |
| Total charge  offs                                                             |   | 15                                   |   | 8                                    |   |
|                                                                           |   |                                 |   |                                 |   |
| Recoveries  during period:                                                     |   |                                 |   |                                 |   |
| Commercial                                                                     |   | 13                                   |   | 1                                    |   |
| Installment                                                                    |   | 0                                    |   | 1                                    |   |
| Other                                                                          |   | 0                                    |   | 0                                    |   |
| Total recoveries                                                               |   | 13                                   |   | 2                                    |   |
|                                                                           |   |                                 |   |                                 |   |
| Net Loans  charged off during the period                                       |   | 2                                    |   | 6                                    |   |
|                                                                           |   |                                 |   |                                 |   |
| Additions to  allowance for possible loan losses                               |   | 52                                   |   | 50                                   |   |
|                                                                           |   |                                 |   |                                 |   |
| Allowance, end  of period                                                      |   | 616                                  |   | 512                                  |   |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of net  loans charged off to average Loans outstanding during the period |   | 0.00                                 | %      | 0.01                                 | %      |
|                                                                           |   |                                 |   |                                 |   |
| Ratio of  allowance to total loans at end of period                            |   | 1.09                                 | %      | 1.11                                 | %      |

 

17

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**Funding Sources**

 

Average deposits for the six months ended June 30,2002 were $68,263,000 an increase of 9.60% compared with the average balancefor 2001.  Average certificates ofdeposit represented 55.21% of average deposits for the six months ended June30, 2002.  Average interest bearingchecking, money market and savings accounts as a group were 23.32% of averagedeposits.  Average demand deposits represented21.47% 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.  

 

The Company has a $200,000 revolving line of creditwith the Pacific Coast Bankers’ Bank which matures in July 2001.  The interest rate is a floating rate basedon the prime lending rate plus seventy five (75) basis points.  At June 30, 2001 the line of credit wasfully advanced.

 

The Bank has a line of credit from the Federal HomeLoan Bank of San Francisco with a maximum borrowing limit on June 30, 2001 ofapproximately $10,000,000.  Certain ofthe Bank’s real estate secured loans and investment securities secure the lineof credit.  At June 30, 2001 the Bankhad 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 2001, 2000 or1999.

 

The Bank has a $105,000 letter of credit issued by theFederal Home Loan Bank of San Francisco to secure the uninsured portion oflocal agency deposits maintained with the Bank.  The letter of credit matures April 17, 2006.

 

**Capital Resources**

 

The Bank maintains capital to comply with legalrequirements, to provide a margin of safety for its depositors andstockholders, and to provide for future growth and the ability to paydividends.  At June 30, 2002,stockholders’ equity was $5,325,200 versus $5,086,900 at December 31, 2001. TheCompany paid a ten (10%) percent stock dividend in 2001, 2000 and 1999.  The Bank paid cash dividends to theCorporation totaling  $75,000 during thesix months ended June 30, 2002, $200,000, and $100,000 in 2001 and 2000,respectively.

 

The FDIC and Federal Reserve Board have adoptedcapital adequacy guidelines for use in their examination and regulation ofbanks and bank holding companies.  Ifthe capital of a bank or bank holding company falls below the minimum levelsestablished by these 

 

18

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guidelines, it may be denied approval to acquire or establishadditional banks or non-bank businesses, or the FDIC or Federal Reserve Boardmay take other administrative actions. The guidelines employ two measures of capital:  (1) risk-based capital and (2) leverage capital.

 

Under current rules, all banks were required tomaintain Tier 1 capital of at least 4 percent and total capital of 8.0% ofrisk-adjusted assets. The Bank had a Tier 1 risk-based capital ratio of 9.30%and a total risk-based capital ratio of 10.28% at June 30, 2002 well above theminimum regulatory requirements.

 

The leverage capital ratio guidelines require aminimum leverage capital ratio of 3% of Tier 1 capital to total assets lessgoodwill.  The Bank had a leveragecapital ratio of 7.38% at June 30, 2002.

 

**Liquidity**

 

Liquidity represents a bank’s ability to providesufficient cash flows or cash resources in a manner that enables it to meetobligations in a timely fashion and adequately provides for anticipated futurecash needs.  For the Bank, liquidityconsiderations involve the capacity to meet expected and potential requirementsof depositors seeking access to balances and to provide for the credit demandsof borrowing customers.  In the ordinarycourse of the Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. The Bank has a line of credit fromthe Federal Home Loan Bank of San Francisco of approximately $10,000,000 and a$2,500,000 unsecured Federal Funds Purchased line with the Pacific CoastBankers’ Bank to meet temporary liquidity requirements.

 

As a matter of policy, the Bank seeks to maintain alevel of liquid assets, including marketable investment securities, equal to aleast 15 percent of total assets (“primary liquidity”), while maintainingsources of secondary liquidity (borrowing lines from other institutions) equalto at least an additional 10 percent of assets.  In addition, it seeks to generally limit loans to not more than90 percent of deposits.  Within these ratios, the Bank generally hasexcess funds available to sell as federal funds on a daily basis, and is ableto fund its own liquidity needs without the need of short-term borrowing.  The Bank’s total liquidity at June 30, 2002was 24.85 percent; while its average loan to deposit ratio for the six monthsended June 30, 2002 was 81.27 percent.

 

## **InterestRate Risk**

 

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

 

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The purpose for asset/liability management is toprovide stable net interest income growth by protecting the Bank’s earningsfrom undue interest rate risk.  The Bankexpects to generate earnings from increasing loan volume, appropriate loanpricing and expense control and not from trying to accurately forecast interestrates.  Another important function ofasset/liability management is managing the risk/return relationships betweeninterest rate risk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidityconcerns followed by capital adequacy, then interest rate risk and market riskin the investment portfolio.  The policyof the Bank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain atotally earnings neutral position. Further, the actual timing of repricing of assets and liabilities doesnot always correspond to the timing assumed by the Bank for analyticalpurposes.  Therefore, changes in marketrates of interest will generally impact on the Bank’s net interest income andnet interest margin for long or short periods of time.

 

The Bank monitors its interest rate risk on aquarterly basis through the use of a model which calculates the effect onearnings of changes in the fed funds rate. The model converts a fed funds rate change into rate changes for eachmajor class of asset and liability, then simulates the bank’s net interestmargin based on the bank’s actual repricing over a one year period, assumingthat maturities are reinvested in instruments identical to those maturingduring the period.  At June 30, 2002 theaffect of a 2% increase in the federal funds sold rate would result in a 7.05%increase in equity.  A 2% decrease inthe federal funds sold rate would result in a 7.34% decrease in equity.

 

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**Investment Securities**

 

The following table sets forth the book and marketvalue of the Bank’s investment securities at June 30, 2002:

 

INVESTMENT PORTFOLIO MIX

 
|                      |   | **Book  Value**            |   | **Market  value** |   |
|---------------------------|--------|----------------------------|--------|-------------------|--------|
|                      |   | **(Dollars in thousands)** |   |
| Available for sale:       |   |                       |   |              |   |
| Corporate Debt Securities |   | 3,501                      |   | 3,523             |   |
|                      |   |                       |   |              |   |
| Total                     |   | 3,501                      |   | 3,523             |   |

 

The following tablesummarizes the maturity of the Bank’s investment securities at June 30, 2002:

 

INVESTMENT PORTFOLIOMATURITIES

(Dollars in thousands)

 
|                       |   | **1 year  or less** |   | **over 1  through  3 years** |   | **over 3  through  5 years** |   | **over 5  through  15 years** |   | **over  15 years** | ** ** |
|----------------------------|--------|---------------------|--------|------------------------------|--------|------------------------------|--------|-------------------------------|--------|--------------------|------------|
|                       |   |                |   |                         |   |                         |   |                          |   |               |       |
| Corporate Debt  Securities |   | —              |   | 743                          |   | 2,035                        |   | 745                           |   | —             |       |
|                       |   |                |   |                         |   |                         |   |                          |   |               |       |
| Total                      |   | —              |   | 743                          |   | 2,035                        |   | 745                           |   | —             |       |

 

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# **PARTII-OTHER INFORMATION**

 

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

** **

The following proposals werepresented to shareholders at the Corporation’s annual shareholders’ meetingheld on June 13, 2002.

** **

**ProposalNumber 1:  Election of Directors**

** **
|                            |   | **Number  of  Affirmative Votes** |   | **Number  of  Votes Withheld** |       |
|---------------------------------|--------|-----------------------------------|--------|--------------------------------|------------|
| **Charles T. Chrietzberg, Jr.** |   | **1,028,649**                     |   | **2,988**                      |       |
| **Sandra G. Chrietzberg**       |   | **1,028,649**                     |   | **2,988**                      | ** ** |
| **Peter J. Coniglio**           |   | **1,028,667**                     |   | **2,970**                      | ** ** |
| **Carla S. Hudson**             |   | **1,029,380**                     |   | **2,291**                      | ** ** |
| **John M. Lotz**                |   | **1,026,812**                     |   | **4,791**                      | ** ** |

** **

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

** **

** **

A.            EXHIBITS

 

| **Item**  |   | **Description**                                                                                                                                                                                                                                                                                                      |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2         |   | Plan of Merger and Merger 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.                                                                                                                                                                                    |
|      |   | (6)   Amendment to the Life Insurance Endorsement Method Split Dollar Plan  Agreement Dated January 6, 2000  Filed as exhibit to Form 10KSB dated December 31, 2001                                                                                                                                             |
|      |   | (7)   Amendment to the Life Insurance Endorsement Method Split Dollar Plan  Agreement  Filed as exhibit to Form 10KSB dated December 31, 2001                                                                                                                                                                   |
|      |   | (8)   Amendment to the Salary Continuation Agreement dated December 31, 1993  Filed as exhibit to Form 10KSB dated December 31, 2001                                                                                                                                                                            |

 

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B.            Reports on Form 8-K

None

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   |           |   |   | NORTHERN CALIFORNIA BANCORP, INC. |
|--------|----------------|--------|--------|-----------------------------------|
|   |           |   |   |                              |   |
| Date:  | August 8, 2002 |   |   | By:                               |  /s/ Charles T. Chrietzberg, Jr. |   |
|   |           |   |   |                              | Charles T.  Chrietzberg, Jr. |   |
|   |           |   |   |                              | Chief Executive Officer  and President |   |
|   |           |   |   |                              |   |   |
|   |           |   |   |                              |   |   |
| Date:  | August 8, 2002 |   |   | By:                               |  /s/ Bruce N. Warner |   |
|   |           |   |   |                              | Bruce N. Warner |   |
|   |           |   |   |                              | Chief Financial Officer  and  Principal Accounting Officer |   |
|        |                |        |        |                                   |  |  |  |

 

CERTIFICATION UNDER SECTION906OF THE SARBANES0OXLEY ACT OF 2002

 

Pursuant to Section 906 of the Sabanes-Oxley Act of2002, each of the undersigned certifies that this periodic report fullycomplies with the requirements of section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in this periodic reportfairly presents, in all material respects, the financial condition and resultsof operations of Northern California Bancorp, Inc.

 
|   |   |   |   |   | /s/ Charles T. Chrietzberg, Jr.                           |   |
|--------|--------|--------|--------|--------|-----------------------------------------------------------|--------|
|   |   |   |   |   | Charles T. Chrietzberg, Jr.                               |
|   |   |   |   |   | Chief Executive Officer  and President                    |   |
|   |   |   |   |   |                                                      |   |
|   |   |   |   |   | /s/ Bruce N. Warner                                       |   |
|   |   |   |   |   | Bruce N. Warner                                           |   |
|   |   |   |   |   | Chief Financial Officer and  Principal Accounting Officer |

 

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