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

**Washington,D.C. 20549**

** **

**FORM10-QSB/A**

**(Amendment No. 1)**

** **

| ** **                                                                                                                                                                                                                                                                                                                                     | **x**      | **Quarterly report under Section  13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **for the quarterly period ended  March 31, 2007**                                                                                                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| ** **                                                                                                                                                                                                                                                                                                                                     | **o**      | **Transition report under Section  13 or 15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                     | ** ** | ** **                                                                              |
| **(No fee required) for the  period from                          to                        ** |

** **

**CommissionFile Number 0-27666**

 

**NORTHERNCALIFORNIA BANCORP, INC.**

(Name of SmallBusiness Issuer in its Charter)

 

**Incorporatedin the State of California**

**IRSEmployer Identification Number 77-0421107**

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

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

 

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

 

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

 

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

 

 

----

 

EXPLANATORY NOTE

 

On May 14, 2007 NorthernCalifornia Bancorp, Inc., timely filed our original Quarterly Report on Form10-QSB for the quarterly period ended March 31, 2007. This Form 10-QSB/A isbeing filed solely to include revised Consolidated Statements of Cash Flows andrevised certifications pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

 

TABLE OF CONTENTS

 
| **Facing Page**       | 1                                                                                           |
|-----------------------|---------------------------------------------------------------------------------------------|
| **Table of Contents** | 2                                                                                           |
| **PART I**            | Financial Information                                                                       | 3-6 |
| Item 1                | Financial  Statements                                                                       |   |
|                  | Consolidated Balance Sheets                                                                 | 3 |
|                  | Consolidated  Statements of Operations                                                      | 4 |
|                  | Consolidated  Statements of Changes in Shareholders’ Equity                            | 5 |
|                  | Consolidated  Statements of Cash Flows                                                      | 6 |
|                  | Summary of Accounting  Policies                                                             | 7-12 |
| Item 2                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12-27 |
| Item 3                | Controls and  Procedures                                                                    | 28 |
|                  |                                                                                        |   |
| **PART II**           | Other Information                                                                           |   |
| Item 1                | Legal Proceedings                                                                           | 28 |
| Item 2                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 28 |
| Item 3                | Defaults Upon  Senior Securities                                                            | 28 |
| Item 4                | Submission  of Matters to a Vote of Security Holders                                        | 28 |
| Item 5                | Other Information                                                                           | 28 |
| Item 6                | Exhibits and Reports on Form 8-K                                                            | 29 |
| Signatures            | 29                                                                                          |
| Certifications        | 30-33                                                                                       |

 

2

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**PART I-FINANCIAL INFORMATION**

** **

Item 1.          FINANCIAL STATEMENTS

 

NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                               | ** ** | **MARCH 31** | ** **  | **DECEMBER 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|----------------------|------------|
| ** **                                                                                                               | ** ** | **2007**          | ** **  | **2006**             | ** ** |
| ** **                                                                                                               | ** ** | **(Unaudited)**   | ** **  | **(Audited)**        | ** ** |
| ASSETS:                                                                                                                  |       |              |        |                 |       |
| Cash and Due  From Banks                                                                                                 |       | $                 | 5,053,500   |                 | $          | 4,979,200 |   |
| Federal Funds  Sold                                                                                                      |       | 11,495,000        |        | 17,455,000           |       |
| Total Cash and  Cash Equivalents                                                                                         |       | 16,548,500        |        | 22,434,200           |       |
| Trading Assets                                                                                                           |       | 1,925,000         |        | 1,762,300            |       |
| Time Deposits  with other Financial Institutions                                                                         |       | 1,000,000         |        | 1,000,000            |       |
| Investment  Securities, available for sale (Note 4)                                                                      |       | 21,256,900        |        | 15,285,900           |       |
| Investment  Securities, held to maturity cost (fair value approximates $7,289,700 in  2007; $7,281,000 in 2006) (Note 4) |       | 7,009,100         |        | 7,012,300            |       |
| Other  Investments (Note 5)                                                                                              |       | 1,990,100         |        | 1,966,800            |       |
| Loans Held for  Sale                                                                                                     |       | 2,035,400         |        | 1,182,100            |       |
| Loans, net of  allowance for loan losses of $1,409,200 in 2007; $1,408,800 in 2006 (Note 6)                              |       | 130,707,000       |        | 128,867,600          |       |
| Bank Premises  and Equipment, Net                                                                                        |       | 4,836,200         |        | 4,613,000            |       |
| Cash Surrender  Value of Life Insurance                                                                                  |       | 3,702,400         |        | 3,671,000            |       |
| Interest  Receivable and Other Assets                                                                                    |       | 2,660,500         |        | 2,774,700            |       |
| Total Assets                                                                                                             |       | $                 | 193,671,100 |                 | $          | 190,569,900 |   |
|                                                                                                                     |       |              |        |                 |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY:                                                                              |       |              |        |                 |       |
|                                                                                                                     |       |              |        |                 |       |
| Non interest  bearing demand                                                                                             |       | $                 | 26,191,400  |                 | $          | 30,079,100 |   |
| Interest-bearing  demand                                                                                                 |       | 17,103,800        |        | 17,261,800           |       |
| Savings                                                                                                                  |       | 4,441,800         |        | 5,326,400            |       |
| Time less than  $100,000                                                                                                 |       | 44,772,100        |        | 43,134,600           |       |
| Time in  denominations of $100,000 or more                                                                               |       | 40,778,100        |        | 35,825,800           |       |
| Total Deposits                                                                                                           |       | 133,287,200       |        | 131,627,700          |       |
|                                                                                                                     |       |              |        |                 |       |
| Federal Home  Loan Bank Borrowed Funds                                                                                   |       | 34,750,000        |        | 34,750,000           |       |
| Junior  Subordinated Debt Secuirites                                                                                     |       | 8,248,000         |        | 8,248,000            |       |
| Interest Payable  and Other Liabilities                                                                                  |       | 3,883,700         |        | 3,542,300            |       |
| Total  Liabilities                                                                                                       |       | 180,168,900       |        | 178,168,000          |       |
|                                                                                                                     |       |              |        |                 |       |
| Shareholders’  Equity:                                                                                              |       |              |        |                 |       |
| Common Stock -  No Par Value, authorized 2,500,000 Outstanding:1,792,239 in 2007 and  1,721,715 in 2006                  |       | 5,328,400         |        | 5,059,700            |       |
| Retained  Earnings                                                                                                       |       | 8,172,400         |        | 7,363,100            |       |
| Accumulated  Other Comprehensive Income (Loss) (Note 7)                                                                  |       | 1,400             |        | (20,900              | )          |
| Total  Shareholders’ Equity                                                                                         |       | 13,502,200        |        | 12,401,900           |       |
| Total  Liabilities & Shareholders’ Equity                                                                       |       | $                 | 193,671,100 |                 | $          | 190,569,900 |   |

 

3

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF OPERATIONS (UNAUDITED)

 
| ** **                                                              | ** ** | **THREE-MONTH PERIOD ENDING** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                              | ** ** | **MARCH 31**                       | ** ** |
| ** **                                                              | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| INTEREST INCOME:                                                        |       |                                    |       |   |   |
| Loans                                                                   |       | $                                       | 3,289,700  |   | $ | 2,532,200 |   |
| Time deposits  with other financial institutions                        |       | 13,700                                  |       | 10,700 |   |
| Investment  securities                                                  |       | 400,300                                 |       | 225,300 |   |
| Federal funds  sold                                                     |       | 123,400                                 |       | 172,300 |   |
| Total Interest  Income                                                  |       | 3,827,100                               |       | 2,940,500 |   |
|                                                                    |       |                                    |       |   |   |
| INTEREST  EXPENSE:                                                      |       |                                    |       |   |   |
| Interest-bearing  transaction accounts                                  |       | 12,800                                  |       | 23,200 |   |
| Savings and time  deposit accounts                                      |       | 530,100                                 |       | 317,200 |   |
| Time deposits in  denominations of $100,000 or more                     |       | 472,900                                 |       | 301,900 |   |
| Notes payable  and other                                                |       | 624,100                                 |       | 490,400 |   |
| Total Interest  Expense                                                 |       | 1,639,900                               |       | 1,132,700 |   |
|                                                                    |       |                                    |       |   |   |
| Net Interest  Income                                                    |       | 2,187,200                               |       | 1,807,800 |   |
| Provision for  loan losses                                              |       | —                                  |       | — |   |
| Net interest  income, after provision for loan losses                   |       | 2,187,200                               |       | 1,807,800 |   |
|                                                                    |       |                                    |       |   |   |
| NONINTEREST  INCOME:                                                    |       |                                    |       |   |   |
| Service charges  on deposit accounts                                    |       | 165,600                                 |       | 138,800 |   |
| Income from  sales and servicing of Small Business Administration Loans |       | 182,200                                 |       | 288,900 |   |
| Sale of Pacific  Coast Bankers’ Bank Stock                         |       | —                                  |       | 1,313,400 |   |
| Other income                                                            |       | 977,800                                 |       | 983,900 |   |
| Total noninterest  income                                               |       | 1,325,600                               |       | 2,725,000 |   |
|                                                                    |       |                                    |       |   |   |
| NONINTEREST  EXPENSE:                                                   |       |                                    |       |   |   |
| Salaries and  Employee Benefits                                         |       | 1,077,400                               |       | 945,400 |   |
| Occupancy and  Equipment Expense                                        |       | 205,500                                 |       | 180,800 |   |
| Professional  Fees                                                      |       | 37,700                                  |       | 39,600 |   |
| Data Processing                                                         |       | 88,300                                  |       | 86,300 |   |
| Other general  and administrative                                       |       | 793,800                                 |       | 850,500 |   |
| Total  noninterest expenses                                             |       | 2,202,700                               |       | 2,102,600 |   |
|                                                                    |       |                                    |       |   |   |
| Income before  tax provision                                            |       | 1,310,100                               |       | 2,430,200 |   |
| Income tax  provision                                                   |       | 500,800                                 |       | 1,001,300 |   |
| Net income                                                              |       | $                                       | 809,300    |   | $ | 1,428,900 |   |
|                                                                    |       |                                    |       |   |   |
| Earnings per  common share                                              |       |                                    |       |   |   |
| Basic                                                                   |       | $                                       | 0.468      |   | $ | 0.876 |   |
| Diluted                                                                 |       | $                                       | 0.435      |   | $ | 0.794 |   |

 

4

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**NORTHERNCALIFORNIA BANCORP, INC. AND SUBSIDIARY**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SH****AREHOLDERS’ EQUITY**

**THREEMONTHS ENDED MARCH 31, 2007**

** **
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Accumulated**              | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | **Other Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Number of** | ** ** | **Common** | ** ** | **Retained** | ** ** | **Income**                   | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Shares**         | ** ** | **Stock**  | ** ** | **Earnings** | ** ** | **(Loss)**                   | ** ** | **Total**  | ** ** |
| ** **                                                                       | ** ** | ** **         | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                                                    |       | 1,631,439          |       | $          | 4,771,800  |         | $          | 4,128,600                    |       | $          | 30,500     |   | $ | 8,930,900 |   |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                         |       |       |       |
| Net income for  the year                                                         |       | —             |       | —     |       | 3,837,200    |       | —                       |       | 3,837,200  |       |
| Change in net  unrealized gain on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | (51,400                      | )          | (51,400    | )          |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                         |       | 3,785,800  |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| $0.35 per share  dividend                                                        |       | —             |       | —     |       | (602,700     | )          | —                       |       | (602,700   | )          |
| Stock based  compensation                                                        |       | —             |       | 17,800     |       | —       |       | —                       |       | 17,800     |       |
| Exercise of  stock options                                                       |       | 90,276             |       | 270,100    |       | —       |       | —                       |       | 270,100    |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Balance at  December 31, 2006                                                    |       | 1,721,715          |       | 5,059,700  |       | 7,363,100    |       | (20,900                      | )          | 12,401,900 |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Comprehensive  income:                                                           |       |               |       |       |       |         |       |                         |       |       |       |
| Net income for  the year                                                         |       | —             |       | —     |       | 809,300      |       | —                       |       | 809,300    |       |
| Change in net  unrealized gain on securities and other assets net of tax effects |       | —             |       | —     |       | —       |       | 22,300                       |       | 22,300     |       |
| Total  comprehensive income                                                      |       |               |       |       |       |         |       |                         |       | 831,600    |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Exercise of  stock options                                                       |       | 70,523             |       | 268,700    |       | —       |       | —                       |       | 268,700    |       |
|                                                                             |       |               |       |       |       |         |       |                         |       |       |       |
| Balance at March  31, 2007                                                       |       | 1,792,238          |       | $          | 5,328,400  |         | $          | 8,172,400                    |       | $          | 1,400      |   | $ | 13,502,200 |   |

 

5

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NORTHERNCALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTSOF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDEDMARCH 31, 2007 AND 2006

 
| ** **                                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |       |       |       |       |
| Net income                                                                         |       | $          | 809,300    |       | $          | 1,428,900 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |       |       |       |       |
| Depreciation and  amortization expense                                             |       | 69,200     |       | 69,100     |       |
| Realized (gain)  loss on sales of available-for-sale securities, net               |       | —     |       | (1,313,400 | )          |
| Amortization of  deferred loan (fees) costs                                        |       | 71,000     |       | 81,000     |       |
| Amortization  (accretion) of discounts and premiums on investment securities       |       | (400       | )          | 700        |       |
| (Gain) loss on  sale of equipment                                                  |       | (700       | )          | —     |       |
| Stock based  compensation                                                          |       | —     |       | 17,800     |       |
| Increase in  trading assets                                                        |       | (162,700   | )          | (405,700   | )          |
| (Increase)  decrease in loans held for sale                                        |       | (853,300   | )          | 2,470,200  |       |
| Increase in  interest receivable                                                   |       | (59,400    | )          | 115,200    |       |
| Increase in  other assets                                                          |       | 186,600    |       | (1,496,100 | )          |
| Increase in  deferred tax asset                                                    |       | (53,400    | )          | (82,100    | )          |
| Increase in  interest payable                                                      |       | 219,500    |       | 58,800     |       |
| Increase in  other liabilities                                                     |       | 121,900    |       | 1,359,300  |       |
| Net cash  provided by operating activities                                         |       | 347,600    |       | 2,303,700  |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |       |       |       |       |
| Proceeds from  maturity/sale of investment securities                              |       | 1,080,900  |       | 1,843,000  |       |
| Purchase of  investments                                                           |       | (7,041,600 | )          | (153,500   | )          |
| Net increase in  loans                                                             |       | (8,910,400 | )          | (7,719,700 | )          |
| Loan purchases                                                                     |       | (1,750,000 | )          | (5,500,000 | )          |
| Loan sales                                                                         |       | 8,750,000  |       | 9,207,400  |       |
| Proceeds from  sale of equipment                                                   |       | 700        |       | 17,800     |       |
| Additions to  bank premises and equipment                                          |       | (291,100   | )          | (77,700    | )          |
| Net cash used by  investing activities                                             |       | (8,161,500 | )          | (2,382,700 | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |       |       |       |       |
| Net increase in  deposits                                                          |       | 1,659,500  |       | (4,325,500 | )          |
| Proceeds from  borrowings                                                          |       | —     |       | 4,000,000  |       |
| Repayments of  borrowings                                                          |       | —     |       | (2,000,000 | )          |
| Proceeds from  exercise of stock options                                           |       | 268,700    |       | —     |       |
| Net cash provided  (used) by financing activities                                  |       | 1,928,200  |       | (2,325,500 | )          |
|                                                                               |       |       |       |       |       |
| Net decrease in  cash and cash equivalents                                         |       | (5,885,700 | )          | (2,404,500 | )          |
| **CASH  AND CASH EQUIVALENTS, BEGINNING**                                          |       | 22,434,200 |       | 24,130,600 |       |
| **CASH  AND CASH EQUIVALENTS, ENDING**                                             |       | $          | 16,548,500 |       | $          | 21,726,100 |   |

 

See Note 8 for supplemental disclosures

 

6

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**SUMMARY OF ACCOUNTINGPOLICIES**

** **

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

**** ****

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

 

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

 

(NOTE 2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In March of 2006, the FASB published SFAS No. 156, *Accounting for Servicing of Financial Assets*, which amendsSFAS No. 140, *Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities*, with respect tothe accounting for servicing of financial assets. SFAS No. 156 requires thatall separately recognized servicing rights be initially measured at fair value,if practicable. For each class of separately recognized servicing assets andliabilities, SFAS No. 156 permits an entity to choose either of the followingsubsequent measurement methods: (1) the amortization of servicing assets orliabilities in proportion to and over the period of estimated net servicingincome or net servicing loss or (2) the reporting of servicing assets orliabilities at fair value at each reporting date and reporting changes in fairvalue in earnings in the period in which the changes occur. SFAS No. 156 also requiresadditional disclosures for all separately recognized servicing rights. Earlyadoption is permitted as of the beginning of an entity’s fiscal year, providedthe entity has not yet issued financial statements, including interim financialstatements, for any period of that fiscal year. SFAS No. 156 is effective theearlier of the date an entity adopts the requirements of SFAS No. 156, or as ofthe beginning of its first fiscal year beginning after September 15, 2006. Anentity should apply the requirements for recognition and initial measurement ofservicing assets and servicing liabilities prospectively to all transactionsafter the effective date of SFAS No. 156. The Bank is currently evaluating theimpact of the adoption of this standard.

 

In September 2006, the FASB issued Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes*, aninterpretation of FASB Statement No. 109, *Accounting for IncomeTaxes*,” effective for the Company beginning after December 15, 2006with earlier adoption encouraged. FIN 48 clarifies the accounting for incometaxes by prescribing the minimum recognition threshold a tax position isrequired to meet before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interestand penalties, accounting in interim periods, disclosure and transition. TheBank is currently assessing the impact of this guidance on its financialstatements.

 

7

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

 

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

 

TheCorporation records compensation expense associated with stock-based awards inaccordance with Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123R) as interpreted by SEC Staff Accounting Bulletin No. 107. SFASNo. 123R supersedes APB No. 25, and amends SFAS No. 95 *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock Based Compensation*(SFASNo. 123). However, SFAS No. 123R requires all stock-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values at the date of grant. Stock-basedcompensation expense totaled $0 and $17,800 for the three months ended March31, 2007 and March 31, 2006, respectively. The Corporation selected to use themodified prospective method of adopting SFAS 123R. Thus, stock option expenseis recognized only for options that vested after January 1, 2006. Futurecompensation expense may be greater if additional stock options are granted bythe Corporation.

 

The fair valueof each option granted is estimated on the date of grant using the Black-Scholesoption-pricing model. The Bank uses the following input variables as of thegrant date, to arrive at the fair value for each grant:

 
| 1) | Grant date                             |
|----|----------------------------------------|
| 2) | Options granted                        |
| 3) | Exercise price                         |
| 4) | Stock price on date of  grant          |
| 5) | Expected dividend rate                 |
| 6) | Expected volatility                    |
| 7) | Risk free interest rate on  grant date |
| 8) | Expected term                          |
| 9) | Expected forfeiture rate               |

 

8

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Thefollowing table illustrates the pro-forma effect on net income and earnings pershare:

 
| ** **                                                             | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
|                                                                   |       |                             |       |                             |       |
| Reported net  earnings                                                 |       | $                                | 809,300    |                             | $          | 1,428,900 |   |
| Stock-based  employee compensation expense, net of related tax effects |       | —                           |       | (17,800                          | )          |
| Pro forma net  earnings                                                |       | $                                | 809,300    |                             | $          | 1,411,100 |   |
|                                                                   |       |                             |       |                             |       |
| Earnings per  share as reported:                                       |       |                             |       |                             |       |
| Basic                                                                  |       | $                                | 0.468      |                             | $          | 0.876 |   |
| Diluted                                                                |       | $                                | 0.435      |                             | $          | 0.794 |   |
| Pro forma  earnings per share:                                         |       |                             |       |                             |       |
| Basic                                                                  |       | $                                | 0.468      |                             | $          | 0.865 |   |
| Diluted                                                                |       | $                                | 0.435      |                             | $          | 0.785 |   |

 

(NOTE 3). EARNINGS PER SHARE

 

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

 

9

----

 

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

 
| ** **                                                         | ** ** | **Earnings per share calculation   For the three months ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                                                                                                    | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | ** **                                                                                                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Net**                                                                                                                     | ** ** | **Average** | ** ** | **Per Share** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **Income**                                                                                                                  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic earnings  per share                                          |       | $                                                                                                                           | 809,300    |   | 1,728,657 |   | $ | 0.468 |   | $ | 1,428,900 |   | 1,631,439 |   | $ | 0.876 |   |
|                                                               |       |                                                                                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive shares assumed exercise of outstanding options |       | —                                                                                                                      |       | 133,486 |   | (0.033 | ) | — |   | 167,208 |   | (0.081 | ) |
|                                                               |       |                                                                                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  per share                                        |       | $                                                                                                                           | 809,300    |   | 1,862,143 |   | $ | 0.435 |   | $ | 1,428,900 |   | 1,798,647 |   | $ | 0.794 |   |

 
| ** **                                  | ** ** | **MARCH 31** | ** ** | **DECEMBER 31** | ** ** |
|---------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                                        |       |              |       |                 |       |
| (NOTE 4)  INVESTMENT SECURITIES:            |       |              |       |                 |       |
|                                        |       |              |       |                 |       |
| Available for  sale:                        |       |              |       |                 |       |
| Government  National Mortgage Association   |       | $                 | 546,800    |                 | $          | 625,600 |   |
| U.S. government  Agencies                   |       | 20,709,200        |       | 14,660,300           |       |
|                                        |       | $                 | 21,256,000 |                 | $          | 15,285,900 |   |
|                                        |       |              |       |                 |       |
| Held to  maturity:                          |       |              |       |                 |       |
| State/Local  Agency                         |       | $                 | 7,009,100  |                 | $          | 7,012,300 |   |
|                                        |       |              |       |                 |       |
| (NOTE 5) OTHER  INVESTMENTS                 |       |              |       |                 |       |
| AT Services LLC                             |       | $                 | 20,100     |                 | $          | 20,100 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,656,600         |       | 1,633,300            |       |
| Independent  Bankers Financial Corporation  |       | 50,000            |       | 50,000               |       |
| MasterCard Inc  Class “B” Stock   |       | 5,400             |       | 5,400                |       |
| Metrocities  Mortgage, LLC                  |       | 10,000            |       | 10,000               |       |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000            |       | 93,000               |       |
| Northern  California Bancorp, Inc. Trust II |       | 155,000           |       | 155,000              |       |
|                                        |       | $                 | 1,990,100  |                 | $          | 1,966,800 |   |

 

10

----

 
| ** **                                              | ** ** | **MARCH 31** | ** **  | **DECEMBER 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                              | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| (NOTE 6) LOANS  AND ALLOWANCE FOR POSSIBLE LOAN LOSSES: |       |              |        |                  |       |
| Commercial and  Industrial                              |       | $                 | 23,817,900  |                  | $          | 26,361,000 |   |
| Construction                                            |       | 19,096,900        |        | 17,325,900            |       |
| Real Estate -  mortgage                                 |       | 88,895,100        |        | 86,207,200            |       |
| Installment                                             |       | 605,300           |        | 693,900               |       |
| Government  guaranteed loans purchased                  |       | 37,300            |        | 38,900                |       |
|                                                    |       | 132,452,500       |        | 130,626,900           |       |
| Allowance for loan  losses                              |       | (1,409,200        | )           | (1,408,800            | )          |
| Deferred  origination fees, net                         |       | (336,300          | )           | (350,500              | )          |
| Net loans                                               |       | $                 | 130,707,000 |                  | $          | 128,867,600 |   |
|                                                    |       |              |        |                  |       |
| Balance at  beginning of period                         |       | $                 | 1,408,800   |                  | $          | 1,100,700 |   |
| Recoveries                                              |       | 400               |        | 7,100                 |       |
| Provision for  possible loan losses                     |       | —            |        | 410,000               |       |
| Loans charged  off                                      |       | —            |        | (108,900              | )          |
| Balance at end  of period                               |       | $                 | 1,409,200   |                  | $          | 1,408,900 |   |

** **

(NOTE7) COMPREHENSIVE INCOME (LOSS):

 

Thecomponents of other comprehensive income and related tax effects for the threemonth periods ending March 31, 2007 and 2006 are as follows (unaudited):

 
| ** **                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding (losses) on available - for - sale securities and other assets, net |       | $        | 40,600     |     | $          | (65,900 | ) |
| Tax effect                                                                              |       | (18,300  | )          | 29,700   |       |
|                                                                                    |       |     |       |     |       |
| Net-of-tax  amount                                                                      |       | $        | 22,300     |     | $          | (36,200 | ) |

 

Thecomponents of accumulated other comprehensive income and related tax effectsare as follows:

 
| ** **                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrealized  holding losses on available – for - sale securities |       | $        | (30,700    | )        | $          | (153,000 | ) |
| Unrealized  holding gains on available for sale strip receivable     |       | 33,300   |       | 142,600  |       |
| Tax effect                                                           |       | (1,200   | )          | 4,700    |       |
|                                                                 |       |     |       |     |       |
| Net-of-tax  amount                                                   |       | $        | 1,400      |     | $          | (5,700 | ) |

 

11

----

 

(NOTE 8) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 
| ** **                                                 | ** ** | **March 31** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|
| **Payments during the period ending:** | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Interest                                                   |       | $                 | 1,295,000  |   | $ | 1,073,900 |   |
| Income Taxes                                               |       | $                 | 279,200    |   | $ | 994,000 |   |

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

** **

**Statements Regarding Forward-Looking Information**

** **

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

** **

**OVERVIEW**

 

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

 

For the three monthsended March 31, 2007 net income was $809,300, compared to $1,428,900 for thesame period in 2006. For the three months ended March 31, 2007 net interest incomeafter provision for loan losses increased $379,400, total nonitnerest incomedecreased $1,399,400, while noninterest expense increased $100,100 and incometax provision decreased $500,500. The decrease in other income was attributableprimarily to the recording of a $1,313,400 gain on the sale of an investmentduring the first quarter of 2006. Without the gain on sale of investment in2006 net income would have been $809,300 in 2007 and $706,900 an increase of14.5%.

 

12

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The following table setsforth certain selected financial ratios of the Corporation at and for the threemonths ended, March 31, 2007 and 2006.

 
| ** **                                         | ** ** | **The three months**                                                 | ** ** | **The three months**          | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Ended March 31, 2007**                                        | ** ** | **Ended March 31, 2006** | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of  Operating Results:                     |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Total interest  income                             |       | $                                                                              | 3,827      |                                    | $          | 2,941 |   |
| Total interest  expense                            |       | 1,640                                                                          |       | 1,133                                   |       |
| Net interest  income                               |       | 2,187                                                                          |       | 1,808                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Provision for possible loan losses                 |       | 0                                                                              |       | 0                                       |       |
| Net interest  income after provision for loan loss |       | 2,187                                                                          |       | 1,808                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Total other  income                                |       | 1,326                                                                          |       | 2,725                                   |       |
| Total other  expense                               |       | 2,203                                                                          |       | 2,103                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Income before  taxes                               |       | 1,310                                                                          |       | 2,430                                   |       |
| Provision for  income tax                          |       | 501                                                                            |       | 1,001                                   |       |
|                                               |       |                                                                           |       |                                    |       |
| Net income                                         |       | $                                                                              | 809        |                                    | $          | 1,429 |   |
|                                               |       |                                                                           |       |                                    |       |
| Per Common Share  Data:                            |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Net income -  Primary (1)                          |       | $                                                                              | 0.468      |                                    | $          | 0.876 |   |
| Net income -  Diluted (2)                          |       | 0.435                                                                          |       | 0.742                                   |       |
| Book value, end  of period (3)                     |       | 7.53                                                                           |       | 6.43                                    |       |
| Average shares  outstanding (4)                    |       | 1,728,657                                                                      |       | 1,631,439                               |       |
|                                               |       |                                                                           |       |                                    |       |
| Balance Sheet  Data:                               |       |                                                                           |       |                                    |       |
|                                               |       |                                                                           |       |                                    |       |
| Total loans, net  of unearned income (5)           |       | $                                                                              | 132,742    |                                    | $          | 108,761 |   |
| Total assets                                       |       | 193,671                                                                        |       | 163,148                                 |       |
| Total deposits                                     |       | 133,287                                                                        |       | 113,795                                 |       |
| Stockholders’  equity (6)                     |       | 13,502                                                                         |       | 10,341                                  |       |

 

13

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| ** **                                           | ** ** | **The three months**          | ** ** | **The three months**          | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **Ended March 31, 2007** | ** ** | **Ended March 31, 2006** | ** ** |
| Selected  Financial Ratios (4):                      |       |                                    |       |                                    |       |
|                                                 |       |                                    |       |                                    |       |
| Return on  average assets (5)                        |       | 1.73                                    | %          | 3.64                                    | %          |
| Return on average stockholders’ equity (5)      |       | 25.09                                   | %          | 59.10                                   | %          |
| Net interest  spread                                 |       | 4.81                                    | %          | 4.36                                    | %          |
| Net yield on  interest earning assets                |       | 5.37                                    | %          | 4.96                                    | %          |
| Average  shareholders’ equity to average assets |       | 6.88                                    | %          | 6.15                                    | %          |
| Risked-Based  capital ratios                         |       |                                    |       |                                    |       |
| Tier 1                                               |       | 10.76                                   | %          | 9.82                                    | %          |
| Total                                                |       | 14.71                                   | %          | 14.91                                   | %          |
| Total loans to  total deposits at end of period      |       | 99.59                                   | %          | 95.58                                   | %          |
| Allowance to  total loans at end of period           |       | 1.05                                    | %          | 1.00                                    | %          |
| Nonperforming  loans to total loans at end of period |       | 0.12                                    | %          | 0.02                                    | %          |
| Net charge-offs  to average loans                    |       | 0.00                                    | %          | 0.00                                    | %          |

 

----

(1)          Basic earnings per shareamounts were computed on the basis of the weighted average number of shares ofcommon stock outstanding during the year. The weighted average number of commonshares used for this computation was 1,728,657 and 1,631,439 for March 31, 2007and 2006, respectively.

 

(2)          Diluted earnings pershare amounts were computed on the basis of the weighted average number ofshares of common stock and common stock equivalents outstanding during the year.Common stock equivalents include director/employee stock options. The weightedaverage number of shares used for this computation was 1,862,143 and 1,798,647for March 31, 2007 and 2006, respectively.

 

(3)   Weighted average common shares.

 

(4)   Includes loans being held for sale.

 

(5)   Averages are of daily balances.

 

(6)   March 31, 2007 calculated on an annualizedbasis.

 

**NET INTEREST INCOME**

 

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

 

Net interest income forthe three months ended March 31, 2007 was $2,187,200 compared to $1,807,800 forthe same period in 2006. The increase of $379,400 resulted from total interestincome increasing $886,600, while total interest expense increased $507,200. 

 

14

----

 

Average interest earning assets increased$23,320,000 (15.77%), while the average rate earned increased 54 basis points. Averageinterest bearing liabilities increased $22,301,000 (18.06%), while the averagerate paid increased 9 basis points.

 

The following tablesshow the components of the Bank’s net interest income, setting forth, for eachof the three months ended March 31, 2007 and 2006, (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 oninterest-bearing liabilities) and (v) the net interest yield on averageinterest-earning assets (i.e., net interest income divided by averageinterest-earning assets). Yields are computed on a tax-equivalent basis,resulting in adjustments to interest earned on municipal bonds of $36,500 and$36,700 for the three months ended March 31, 2007 and 2006, respectively. Non-accrualloans and overdrafts are included in average loan balances. Average loans arepresented net of unearned income.

 

15

----

 
| ** **                                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                             | ** ** | **2006**                                             | ** ** |
| ** **                                                  | ** ** | **Average**                                          | ** ** | ** **                                           | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(dollars in thousands)**                        | ** ** | **Balance**                                          | ** ** | **Interest**                                         | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| Assets:                                                     |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Loans                                                       |       | $                                                    | 130,718    |                                                 | $          | 3,126 |   | 9.57 | % | $ | 109,881 |   | $ | 2,533 |   | 9.22 | % |
| Time deposits -  in other banks                             |       | 1,144                                                |       | 14                                                   |       | 5.01 | % | 1,000 |   | 11 |   | 4.40 | % |
| Invest  securities - taxable                                |       | 23,118                                               |       | 188                                                  |       | 3.25 | % | 14,161 |   | 134 |   | 3.79 | % |
| Invest  securities - nontaxable                             |       | 7,011                                                |       | 120                                                  |       | 6.82 | % | 7,023 |   | 119 |   | 6.75 | % |
| Federal funds  sold                                         |       | 9,190                                                |       | 220                                                  |       | 9.56 | % | 15,915 |   | 172 |   | 4.33 | % |
| Total  interest-earning assets                              |       | 171,181                                              |       | $                                                    | 3,668      |   | 8.57 | % | 147,980 |   | $ | 2,969 |   | 8.03 | % |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Allowance for  credit losses                                |       | (1,409                                               | )          |                                                 |       |   |   | (1,102 | ) |   |   |   |   |
| Non-interest  bearing assets:                               |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and due  from banks                                    |       | 6,491                                                |       |                                                 |       |   |   | 4,559 |   |   |   |   |   |
| Premises and  equipment                                     |       | 4,728                                                |       |                                                 |       |   |   | 4,368 |   |   |   |   |   |
| Accrued interest  receivable                                |       | 1,016                                                |       |                                                 |       |   |   | 706 |   |   |   |   |   |
| Other assets                                                |       | 5,559                                                |       |                                                 |       |   |   | 2,193 |   |   |   |   |   |
| Total average  assets                                       |       | $                                                    | 187,567    |                                                 |       |   |   |   | $ | 158,703 |   |   |   |   |   |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity:                  |       |                                                 |       |                                                 |       |   |   |   |   |   |   |
| Interest-bearing  liabilities:                              |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest-bearing  demand                                    |       | $                                                    | 14,434     |                                                 | $          | 9 |   | 0.25 | % | $ | 12,517 |   | $ | 15 |   | 0.47 | % |
| Money market  savings                                       |       | 2,000                                                |       | 6                                                    |       | 1.16 | % | 4,451 |   | 9 |   | 0.77 | % |
| Savings deposits                                            |       | 4,724                                                |       | 18                                                   |       | 1.55 | % | 8,147 |   | 20 |   | 0.99 | % |
| Time deposits >$100M                                     |       | 37,724                                               |       | 400                                                  |       | 4.24 | % | 30,163 |   | 302 |   | 4.00 | % |
| Time deposits  <$100M                                    |       | 43,927                                               |       | 351                                                  |       | 3.20 | % | 33,197 |   | 297 |   | 3.58 | % |
| Other borrowing                                             |       | 42,998                                               |       | 586                                                  |       | 5.46 | % | 35,031 |   | 490 |   | 5.60 | % |
| Total  interest-bearing liabilities                         |       | 145,807                                              |       | $                                                    | 1,371      |   | 3.76 | % | 123,506 |   | $ | 1,133 |   | 3.67 | % |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:                          |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Noninterest-bearing  checking                               |       | 25,273                                               |       |                                                 |       |   |   | 24,272 |   |   |   |   |   |
| Accrued interest  payable                                   |       | 1,375                                                |       |                                                 |       |   |   | 679 |   |   |   |   |   |
| Other  liabilities                                          |       | 2,211                                                |       |                                                 |       |   |   | 1,315 |   |   |   |   |   |
| Total  liabilities                                          |       | 174,666                                              |       |                                                 |       |   |   | 149,773 |   |   |   |   |   |
| Total  shareholders equity                                  |       | 12,901                                               |       |                                                 |       |   |   | 8,931 |   |   |   |   |   |
| Total average  liabilities and shareholders equity          |       | $                                                    | 187,567    |                                                 |       |   |   |   | $ | 158,703 |   |   |   |   |   |
|                                                        |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest income  as a percentage of average earning assets  |       |                                                 |       |                                                 |       | 8.57 | % |   |   |   |   | 8.03 | % |
| Interest expense  as a percentage of average earning assets |       |                                                 |       |                                                 |       | 3.20 | % |   |   |   |   | 3.06 | % |
| Net yield on  interest earning assets                       |       |                                                 |       |                                                 |       | 5.37 | % |   |   |   |   | 4.96 | % |

 

16

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** **

**Rate and Volume Analysis:**

 

Thefollowing tables show the increase or decrease in interest income, interestexpense and net interest income, resulting from changes in rates and volumes,for the three months ended March 31, 2007 compared with the same period in2006.

 
| ** **                                | ** ** | **Increase (decrease) in the three months ended**    | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **March 31, 2007 compared with March 31, 2006** | ** ** |
| ** **                                | ** ** | **Volume**                                                                         | ** ** | **Rate** | ** ** | **Total** | ** ** |
| Increase  (decrease) in interest income:  |       |                                                                               |       |   |   |   |   |
| Loans                                     |       | $                                                                                  | 480        |   | $ | 113 |   | $ | 593 |   |
| Time deposits -  in other banks           |       | 2                                                                                  |       | 2 |   | 3 |   |
| Investment  securities - taxable          |       | 85                                                                                 |       | (31 | ) | 55 |   |
| Investment  securities – nontaxable  |       | —                                                                             |       | 1 |   | 1 |   |
| Federal funds  sold                       |       | (73                                                                                | )          | 120 |   | 47 |   |
| Total  interest-earning assets            |       | 494                                                                                |       | 205 |   | 699 |   |
|                                      |       |                                                                               |       |   |   |   |   |
| Increase  (decrease) in interest expense: |       |                                                                               |       |   |   |   |   |
| Interest-bearing  demand                  |       | 2                                                                                  |       | (9 | ) | (6 | ) |
| Money market  savings                     |       | (5                                                                                 | )          | 2 |   | (3 | ) |
| Savings deposits                          |       | (8                                                                                 | )          | 7 |   | (2 | ) |
| Time deposits  >$100M                  |       | 76                                                                                 |       | 23 |   | 98 |   |
| Time deposits  <$100M                  |       | 96                                                                                 |       | (42 | ) | 54 |   |
| Other borrowing                           |       | 112                                                                                |       | (16 | ) | 96 |   |
| Total  interest-bearing liabilities       |       | 272                                                                                |       | (34 | ) | 238 |   |
| Increase in net  interest income          |       | $                                                                                  | 221        |   | $ | 239 |   | $ | 461 |   |

 

**Provision and Allowance for LoanLosses**

 

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

 

The allowance for loanlosses reflects management’s ongoing evaluation of the risks inherent in theloan portfolio both generally and with respect to specific loans, the state ofthe economy, and the level of net loan losses experienced in the past.  Management and the Board of Directors reviewthe results of the State Banking Department and FDIC examinations, independentaccountants’ observations, and the Bank’s internal review as additionalindicators to determine if the amount in the allowance for loan losses isadequate to protect against estimated future losses.

 

Provisionsto the allowance for loan losses are made quarterly if needed, in anticipationof future potential loan losses.  Thequarterly provision is calculated on a predetermined formula to ensure adequacyas the portfolio grows.  The formula iscomposed of various components. Allowance factors are utilized in estimating the adequacy of theallowance for loan losses.  The allowanceis determined by assigned specific allowances for all loans.  As higher allowance levels become necessaryas a result of this analysis, the allowance for loan losses will be increasedthrough the provision for loan losses.

 

17

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

 

Although no assurance canbe given that actual losses will not exceed the amount provided for in theallowance, Management believes that the allowance is adequate to provide forall estimated credit losses in light of all known relevant factors. At March31, 2007 and 2006 the Bank’s allowance stood at 1.05 percent and 1.00 percentof gross loans, respectively.  Noprovisions were made to the allowance during the three months ended March 31,2007 or 2006.  No loans were charged offduring the three months ended March 31, 2007 and March 31, 2006.  Recoveries for the same periods were $400 and$1,100, respectively.

 

The Bank’snon-performing (delinquent 90 days or more and non-accrual) loans as apercentage of total loans were 0.12 percent at March 31, 2007 compared with0.02 percent for the same period in 2006.

 

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

 

**Non-Interest Income**

 

Total other income forthe three months ended March 31, 2007 was $1,325,600 compared with $2,725,000for the same period in 2006.  The decreaseof $1,399,400 resulted from the first quarter 2006 gain of $1,313,400 on thesale of an investment, a decrease of $106,700 in income from sales andservicing of Small Business Administration Loans and an increase $26,800 inservice charges on deposit accounts.

 

18

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

 

There can be no assurancethat the gains on sale will continue at, or above, the levels realized in thepast three years.  In addition,increasing competition among lenders for qualified SBA borrowers makes itdifficult for the Bank to continually expand its program in this area, and maylimit the level of premium that can be earned with regard thereto.  Furthermore, the SBA recently began requiringlenders to share a portion of premiums in excess of 10% earned on the sale ofthe guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannotpredict the significance of the impact these changes will have on SBA income.

 

**Non-Interest Expense**

 

Salary and benefitsexpense for the three months ended March 31, 2007 increased $132,000 comparedwith the same period in 2006.  Theincrease was due to theaddition of a Marketing Officer, Business Development Officer and a CreditAnalyst, and merit pay increases.

 

Total occupancy andequipment expense for the three months ended March 31, 2007 was $205,500compared to $180,800 for the same period in 2006.  The increase was primarily due to increasesin premises rent expense less sublease income $9,100 and merchant terminalexpense net of terminal rent $13,100.

 

Professional fees for thethree months ended March 31, 2007 was $37,700 compared to $39,600 for the sameperiod in 2006.

 

Data processing expensefor the three months ended March 31, 2007 was $88,300 compared to $88,600 forthe same period in 2006.

 

Other general andadministrative expenses for the three months ended March 31, 2007 totaled$793,800 compared with $850,500 for the same period in 2006, a decrease of$56,700.  Significant changes occurred inthe following categories with increases in director fees of $16,700 andinsurance expense of $4,500; while decreases occurred in merchant credit cardprocessing expense of $38,500, advertising expense of $59,200, donations of$6,500, entertainment and meals of $6,200, dues and memberships of $5,100 andcollection expense of $4,100.

 

19

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The income tax provisionfor the three months ended March 31, 2007 totaled $500,800 compared with$1,001,300 for the same period of 2006. The decrease of $500,500 was due to a $591,000 provision in 2006 relatedto the gain on sale of an investment. Without the gain on sale of investment in 2006, income before taxprovision would have been $1,116,800 compared to $1,310,100 in 2007.

 

**LOANS**

 

Loans represented 76.36%of average earning assets, and 69.69% of average total assets for the threemonths ended March 31, 2007 compared with 74.25% and 69.24%, respectivelyduring 2006. For the three months ended March 31, 2007, average loans increased18.96% from $109,881,000 for the same period in 2006 to $130,718,000.  Average real estate loans increased $12,238,000(16.66%), average construction loans increased $6,862,000 (60.85%), averagecommercial loans increased $2,133,000 (8.82%), and average installment loansdecreased $396,000 (40.88%).

 

The Bank’s commercial andindustrial loans are generally made for the purpose of providing workingcapital, financing the purchase of equipment or inventory, and other businesspurposes. Such loans generally have maturities of one year or longer.  Short-term business loans are generallyintended to finance current transactions and typically provide for monthlyinterest 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 a 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 85 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 estateloan portfolio consists both of real estate construction loans and real estatemortgage loans.  The Bank has initiated aprogram 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 realestate loans secured by a first deed of trust on single family residentialproperties and commercial and industrial real estate.  California commercial banks are permitted,depending on the type and maturity of the loan, to lend up to 90 percent of thefair market value of real property (or more if the loan is insured either byprivate mortgage insurers or governmental agencies).  In certain instances, the appraised value mayexceed the actual amount that could be realized on foreclosure, or declines inmarket value subsequent to making the loan can impair the Bank’s security.

 

20

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Consumer loans are madefor the purpose of financing the purchase of various types of consumer goods,home improvement loans, auto loans and other personal loans.  Consumer installment loans generally providefor monthly payments of principal and interest, at a fixed rate.  Most of the Bank’s consumer installment loansare 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-accrualLoans**

 

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

 

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

 
| ** **                                                    | ** ** | **Three months as of   March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands****)**               | ** ** |
| Accruing, past  due 90 days or more:                          |       |                                                   |       |   |   |
|                                                          |       |                                                   |       |   |   |
| Real estate                                                   |       | $                                                      | —     |   | $ | — |   |
| Commercial                                                    |       | —                                                 |       | — |   |
| Installment                                                   |       | —                                                 |       | — |   |
| Other                                                         |       | —                                                 |       | — |   |
| Total accruing                                                |       | —                                                 |       | — |   |
|                                                          |       |                                                   |       |   |   |
| Non-accrual  Loans:                                           |       |                                                   |       |   |   |
|                                                          |       |                                                   |       |   |   |
| Real estate                                                   |       | —                                                 |       | — |   |
| Commercial                                                    |       | 155                                                    |       | 18 |   |
| Installment                                                   |       | —                                                 |       | — |   |
| Other                                                         |       | —                                                 |       | — |   |
| Total  non-accrual                                            |       | 155                                                    |       | 18 |   |
|                                                          |       |                                                   |       |   |   |
| Total  nonperforming                                          |       | $                                                      | 155        |   | $ | 18 |   |
|                                                          |       |                                                   |       |   |   |
| Total loans end  of period                                    |       | 132,742                                                |       | 108,761 |   |
|                                                          |       |                                                   |       |   |   |
| Ratio of  nonperforming loans to total loans at end of period |       | 0.12                                                   | %          | 0.02 | % |

 

21

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These ratios have beenmaintained as a result of conservative underwriting criteria, frequent reviewof new and delinquent loans and a firm collection policy (with the assistanceof outside legal counsel).  The Bank doesnot have any foreign loans or loans for highly leveraged transactions.

 

## **Summaryof Loan Loss Experience**

 
| ** **                                                                     | ** ** | ** **                           | ** ** | ** **            | ** ** | **As of the** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                     | ** ** | **As of the period**  | ** ** | **Year ended**   | ** ** |
| ** **                                                                     | ** ** | **Ended March 31,**        | ** ** | **December 31,** | ** ** |
| ** **                                                                     | ** ** | **2007**                             | ** ** | **2006**              | ** ** | **2006**                | ** ** |
| ** **                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Average loans  outstanding                                                     |       | $                                    | 130,718    |                  | $          | 109,881                 |       | $ | 118,699 |   |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance,  beginning of period                                                |       | 1,409                                |       | 1,101                 |       | 1,101                   |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Loans charged  off during period:                                              |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | —                               |       | —                |       | 109                     |       |
| Installment                                                                    |       | —                               |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | —                |       | —                  |       |
| Total charge  offs                                                             |       | —                               |       | —                |       | 109                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Recoveries  during period:                                                     |       |                                 |       |                  |       |                    |       |
| Commercial                                                                     |       | —                               |       | 1                     |       | 7                       |       |
| Installment                                                                    |       | —                               |       | —                |       | —                  |       |
| Real Estate                                                                    |       | —                               |       | —                |       | —                  |       |
| Other                                                                          |       | —                               |       | 1                     |       | —                  |       |
| Total recoveries                                                               |       | —                               |       | 1                     |       | 7                       |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Net loans  charged off during the period                                       |       | —                               |       | (1                    | )          | 102                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Additions to  allowance for possible loan losses                               |       | —                               |       | —                |       | 410                     |       |
|                                                                           |       |                                 |       |                  |       |                    |       |
| Allowance, end  of period                                                      |       | 1,409                                |       | 1,102                 |       | 1,409                   |       |
| Ratio of net  loans charged off to average loans outstanding during the period |       | 0.00                                 | %          | 0.00                  | %          | 0.09                    | %          |
| Ratio of  allowance to total loans at end of period                            |       | 1.05                                 | %          | 1.00                  | %          | 1.07                    | %          |
|                                                                                |            |                                      |            |                       |            |                         |            |  |  |  |

 

22

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**Deposits**

 

Average deposits for thethree months ended March 31, 2007 were $128,082,000 an increase of 13.60%compared with the same period in 2006. Average certificates of deposit represented 63.75% of average depositsfor the three months ended March 31, 2007. Average interest bearing checking, money market and savings accounts asa group was 16.52% of average deposits for the three months ended March 31,2007.  Average demand depositsrepresented 19.73% of average deposits for the three months ended March 31,2007.

 

Thefollowing table sets forth the scheduled maturities of the Company’s timedeposits in denominations of $100,000 or greater at March 31, 2007:

 

Maturities of Time Deposits of $ 100,000 or More

(Dollars in Thousands)

 
| Three months or  less                  |   | $          | 13,046,800 |   |
|----------------------------------------|--------|------------|------------|--------|
| Over three  months through six months  |   | 10,425,000 |       |
| Over six months  through twelve months |   | 11,311,400 |       |
| Over twelve  months                    |   | 5,994,900  |       |
| Total                                  |   | $          | 40,778,100 |   |

 

**Borrowing**

** **

**The Bank has lines of credit from the Federal Home LoanBank (FHLB) of San Francisco, Bank of the West, Pacific Coast Bankers’ Bank andThe Independent Bank with remaining available borrowing capacity on March 31,2007 of $4,698,200 (based on pledged collateral), $4,500,000, $6,000,000 and$5,000,000, respectively.  The FederalHome Loan Bank line of credit has a maximum borrowing capacity of twenty five percent(25%) of the Bank’s total assets, adjusted quarterly.  The Federal Home Loan Bank line of credit issecured by a portion of the Bank’s real estate secured loans and securities atMarch 31, 2007.  The total principalbalance of pledged loans was $27,708,400 and securities of $19,267,400.  The following table provides information onthirteen FHLB advances totaling $34,750,000 and outstanding at March 31, 2007.**

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

** **

**23**

----

** **

**The Bank** of the West, Pacific Coast Bankers’ Bank and TheIndependent Bank lines of credit are unsecured.  The Bank did not utilize any overnightborrowings in 2007 or 2006.

** **

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

** **

**Capital Resources**

 

The Corporationmaintains capital to comply with legal requirements, to provide a margin ofsafety for its depositors and stockholders, and to provide for future growthand the ability to pay dividends.  AtMarch 31, 2007, stockholders’ equity was $13,502,200 versus $12,401,900 atDecember 31, 2006.  The Corporation paidcash dividends of $0 for the three months ended March 31, 2007 and $0.35 forthe year ended December 31, 2006.  TheBank paid a $100,000 cash dividend during the three months ended March 31, 2007and $625,000 during the year ended December 31, 2006.

 

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

 

Under current rules, allbanks are required to maintain Tier 1 capital of at least 4 percent and totalcapital of 8.0% of risk-adjusted assets. The Bank had Tier 1 risk-based capitalratios of 12.65% and 12.18% at March 31, 2007 and 2006, respectively.  The Bank’s Tier 1 capital exceeds the minimumregulatory requirement by $12,874,200. The Bank had Total risk-based capital ratios of 13.62% and 13.05% atMarch 31, 2007 and 2006, respectively. The Bank’s Total Risk-Based capital exceeds the minimum regulatoryrequirement by $8,360,800. These ratios are well above the minimum regulatoryrequirements.  The Corporation had Tier 1risk-based capital ratios of 10.76% and 10.35% at March 31, 2007 and 2006,respectively.  The Corporation had Totalrisk-based capital ratios of 14.71% and 15.72% at March 31, 2007 and 2006,respectively.

 

The leverage capitalratio guidelines require a minimum leverage capital ratio of 3% of Tier 1capital to total assets less goodwill. The Company had leverage capital ratios of 8.40% and 8.02% at March 31,2007 and 2006, respectively; while the Bank’s leverage capital ratios were10.16% and 10.25% at March 31, 2007 and 2006. The Bank’s Tier 1 leverage capital exceeds the minimum regulatoryrequirement by $14,363,200.

 

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

 

24

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## **Liquidity**

 

Liquidity represents abank’s ability to provide sufficient cash flows or cash resources in a mannerthat enables it to meet obligations in a timely fashion and adequately providesfor anticipated future cash needs.  Forthe Bank, liquidity considerations involve the capacity to meet expected andpotential requirements of depositors seeking access to balances and to providefor the credit demands of borrowing customers.  In the ordinary course of the Bank’s business,funds are generated from the repayment of loans, maturities within theinvestment securities portfolio and the acquisition of deposit balances andshort-term borrowings.  In addition, theBank has a secured borrowing arrangement with the Federal Home Loan Bank of SanFrancisco of approximately $46,174,500of which $35,080,000 had been advanced at March 31, 2007****and unsecured federal funds lines ofcredit with Bank of the West, PacificCoast Bankers’ Bank and The Independent Bank of $4,500,000, $6,000,000 and$5,000,000, respectively; to meet temporary liquidity requirements.

 

As a matter of policy,the Bank seeks to maintain a level of liquid assets, including marketableinvestment securities, equal to a least 15 percent of total assets (“totalliquidity”), while maintaining sources of secondary liquidity (borrowing linesfrom other institutions) equal to at least an additional 10 percent ofassets.  Within these ratios, the Bankgenerally has excess funds available to sell as federal funds on a daily basis,and is able to fund its own liquidity needs without the need of short-termborrowing.  The Bank’s total liquidity atMarch 31, 2007 and 2006 was 24.21% and 25.42%, respectively, while its averageloan to deposit ratio for such years was 101.96% and 97.13%, respectively.

 

Brokered deposits aredeposit instruments, such as certificates of deposit, deposit notes, bankinvestment contracts and certain municipal investment contracts that are issuedthrough brokers and dealers who then offer and/or sell these depositinstruments to one or more investors. Additionally, deposits on which a financial institution pays an interestrate significantly higher than prevailing rates are considered to be brokereddeposits.  Federal law and regulationrestricts banks from soliciting or accepting brokered deposits, unless the bankis well capitalized under Federal guidelines. The Bank’s brokered deposits totaled approximately $3,664,900 or 2.74%of total deposits at March 31, 2007 and $10,974,800 or 9.63% of total depositsat March 31, 2006. None of the Bank’s brokered deposits paid an interest ratesignificantly higher than prevailing rates.

 

## **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 forasset/liability management is to provide stable net interest income growth byprotecting the Bank’s earnings from undue interest rate risk.  The Bank expects to generate earnings fromincreasing loan volume, appropriate loan pricing and expense control and notfrom trying to accurately forecast interest rates.  Another important function of asset/liabilitymanagement is managing the risk/return relationships between interest raterisk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidity concerns

 

25

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followed by capitaladequacy, then interest rate risk and market risk in the investmentportfolio.  The policy of the Bank willbe to control the exposure of the Bank’s earnings to changing interest rates bygenerally maintaining a position within a narrow range around an “earningsneutral position.” An earnings neutral position is defined as the mix of assetsand liabilities that generate a net interest margin that is not affected byinterest rate changes.  However,Management does not believe that the Bank can maintain a totally earningsneutral position.  Further, the actualtiming of repricing of assets and liabilities does not always correspond to thetiming assumed by the Bank for analytical purposes.  Therefore, changes in market rates ofinterest will generally impact on the Bank’s net interest income and netinterest margin for long or short periods of time.

 

TheBank monitors its interest rate risk on a quarterly basis through the use of amodel which calculates the effect on earnings of changes in the fed fundsrate.  The model converts a fed fundsrate change into rate changes for each major class of asset and liability, thensimulates the bank’s net interest margin based on the bank’s actual repricingover a one year period, assuming that maturities are reinvested in instrumentsidentical to those maturing during the period. The following table shows the affect on net interest income of a 100 anda 200 basis point rate shock at March 31, 2007.

 
| **Rate Shock Increase(Decrease) in  Basis Points** | ** ** | **Percent Increase(Decrease) in  Net Interest Income** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| 100                                                                    |       | 5.0                                                                        | %          |
| (100)                                                                  |       | (5.2                                                                       | )%         |
| 200                                                                    |       | 10.0                                                                       | %          |
| (200)                                                                  |       | (10.5                                                                      | )%         |

 

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

 

**Investment Securities**

 

The Corporation maintains a trading account, at fair value, consisting of marketable securities.  At March 31, 2007 and 2006 the account value was $1,925,000 and $1,433,200, respectively.  The Corporation has investments of $20,100 in AT Service LLC, which provides title insurance services for commercial, industrial and residential properties, as well as other real estate related financial and informational services, including escrow, real estate information, trustee sale guarantees and real estate tax exchanges, and $10,000 in Metrocities Mortgage, LLC.  In addition the Corporation has investments in Northern California Bancorp Trust I of $93,000 and Northern California Bancorp Trust II of $155,000, these are special-purpose trust subsidiaries which were formed to facilitate the issuance of trust preferred securities.

 

26

 

The following table setsforth the book and market value of the Bank’s investment securities at March31, 2007:

 
| ** **                                  | ** ** | **INVESTMENT PORTFOLIO MIX** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **March 31, 2007**           | ** ** |
| ** **                                  | ** ** | **Book**                               | ** ** | **Market** | ** ** |
| ** **                                  | ** ** | **Value**                              | ** ** | **Value** | ** ** |
| Securities  Available for Sale              |       |                                   |       |   |   |
| Government  National Mortgage Association   |       | $                                      | 556,900    |   | $ | 546,800 |   |
| U.S. Government  Agency Securities          |       | 20,729,800                             |       | 20,710,100 |   |
| Total                                       |       | $                                      | 21,286,700 |   | $ | 21,256,900 |   |
|                                        |       |                                   |       |   |   |
| Held to Maturity                            |       |                                   |       |   |   |
| State/Local  Agency Bonds                   |       | $                                      | 7,009,100  |   | $ | 7,289,700 |   |
|                                        |       |                                   |       |   |   |
| Other Investments,  at cost                 |       |                                   |       |   |   |
| AT Services LLC                             |       | $                                      | 20,100     |   | $ | 20,100 |   |
| Metrocities  Mortgage, LLC                  |       | 10,000                                 |       | 10,000 |   |
| Federal Home  Loan Bank stock, restricted   |       | 1,656,600                              |       | 1,656,600 |   |
| Northern  California Bancorp, Inc. Trust I  |       | 93,000                                 |       | 93,000 |   |
| Northern  California Bancorp, Inc. Trust II |       | 155,000                                |       | 155,000 |   |
| Independent  Bankers Financial Corporation  |       | 50,000                                 |       | 50,000 |   |
| MasterCard, Inc.  Class B Stock             |       | 5,400                                  |       | 5,400 |   |
|                                        |       | $                                      | 1,990,100  |   | $ | 1,990,100 |   |

 

The following tablesummarizes the maturity of the Bank’s investment securities at March 31, 2007:

####  

| ** **                              | ** ** | **INVESTMENT PORTFOLIO MATURITIES  (Dollars in thousands)** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Amortized Cost**                                                         | ** ** | **Fair Value** | ** ** |
| Available for  Sale                     |       |                                                                            |       |   |   |
| Due within one  year                    |       | $                                                                               | 3,740,600  |   | $ | 3,710,000 |   |
| Due between one  and five years         |       | —                                                                          |       | — |   |
| Due between five  and ten years         |       | 16,989,200                                                                      |       | 17,000,100 |   |
| GNMA – Mortgage  Backed Securities |       | 556,900                                                                         |       | 546,800 |   |
|                                    |       | $                                                                               | 21,286,700 |   | $ | 21,256,900 |   |
|                                    |       |                                                                            |       |   |   |
| Held to Maturity                        |       |                                                                            |       |   |   |
| Due in over ten  years                  |       | $                                                                               | 7,009,200  |   | $ | 7,289,700 |   |
|                                         |            |                                                                                 |            |  |  |  |  |  |  |

 

27

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**Item 3. Controls and Procedures**

** **

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

 

(b) Changes in Internal Controls:  In the quarter ended March 31, 2007, theCompany did not make any significant changes in, nor take any correctiveactions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

**PART II-OTHER INFORMATION**

** **

**Item1.  Legal Proceedings.**

** **

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

 

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

** **

None

 

**Item3.  Default of Senior Securities**

** **

None

 

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

** **

None

 

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

#### ** **

None

 

28

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

 

A.        EXHIBITS

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

 

B.         Reports on Form 8-K

 

None

 

 

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

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

 

29

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