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

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 
| **ý** |   | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                 |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|       |   | **for the quarterly period ended March 31,  2004**                                                                                     |
|       |   |                                                                                                                                   |
| **o**      |   | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No  fee required)**                             |
|       |   | **for the period  from         to         ** |

 

**Commission File Number 0-27666**

 

**NORTHERN CALIFORNIA BANCORP, INC.**

(Name of Small Business Issuer in its Charter)

 

| Incorporated in the State of California                        |
|----------------------------------------------------------------|
|                                                           |
| IRS Employer Identification Number **77-0421107**              |
|                                                           |
| Address:  **601 Munras Avenue, Monterey, CA  93940** |
|                                                           |
| Telephone: **(831) 649-4600**                                  |

 

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

 

As of April 30, 2004, the Corporation had1,566,658 shares of common stock outstanding.

 

 

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**PART I-FINANCIAL INFORMATION**

 

Item 1.                    FINANCIALSTATEMENTS

 

NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

 
|                                                                                                                     |   | **MARCH 31  2004** |   | **DECEMBER  31  2003** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
| ASSETS:                                                                                                                  |   |               |   |                   |   |
| Cash and Due From Banks                                                                                                  |   | 4,444,200          |   | 4,798,100              |   |
| Federal Funds Sold                                                                                                       |   | 12,970,000         |   | 12,395,000             |   |
| Total Cash and Cash Equivalents                                                                                          |   | 17,414,200         |   | 17,193,100             |   |
| Trading Assets                                                                                                           |   | 188,400            |   | 163,300                |   |
| Investment Securities, available for sale  (Note 1)                                                                      |   | 6,758,200          |   | 6,075,500              |   |
| Other Investments (Note 2)                                                                                               |   | 1,854,600          |   | 1,667,500              |   |
| Loans Held for Sale                                                                                                      |   | 2,095,000          |   | 2,347,800              |   |
| Loans, Net (Note 3, 4)                                                                                                   |   | 82,389,200         |   | 74,560,600             |   |
| Bank Premises and Equipment, Net                                                                                         |   | 2,189,700          |   | 2,197,700              |   |
| Cash Surrender Value of Life Insurance                                                                                   |   | 2,318,300          |   | 2,251,000              |   |
| Interest Receivable and Other Assets                                                                                     |   | 1,572,000          |   | 1,415,500              |   |
| Total Assets                                                                                                             |   | 116,779,600        |   | 107,872,000            |   |
|                                                                                                                     |   |               |   |                   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY:                                                                               |   |               |   |                   |   |
| Total Deposits (Note 5)                                                                                                  |   | 82,037,600         |   | 78,132,400             |   |
| Federal Home Loan Bank Borrowed Funds                                                                                    |   | 18,650,000         |   | 13,750,000             |   |
| Junior Subordinated Debt Securities                                                                                      |   | 8,248,000          |   | 8,248,000              |   |
| Interest Payable and Other Liabilities                                                                                   |   | 1,190,200          |   | 1,331,100              |   |
| Total Liabilities                                                                                                        |   | 110,125,800        |   | 101,461,500            |   |
|                                                                                                                     |   |               |   |                   |   |
| Shareholders’ Equity:                                                                                               |   |               |   |                   |   |
| Common Stock - No Par Value Authorized:  2,500,000 in 2004 and 2003 Outstanding:1,566,658 in 2004 and 1,493,822 in  2003 |   | 4,630,900          |   | 4,630,900              |   |
| Retained Earnings                                                                                                        |   | 1,927,400          |   | 1,725,700              |   |
| Accumulated Other Comprehensive Income  (Loss)                                                                           |   | 95,500             |   | 53,900                 |   |
| Total Shareholders’ Equity                                                                                          |   | 6,653,800          |   | 6,410,500              |   |
| Total Liabilities & Shareholders’  Equity                                                                       |   | 116,779,600        |   | 107,872,000            |   |

 

2

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NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                          |   | **THREE-MONTH  PERIOD ENDING  MARCH 31** |   |
|---------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                          |   | **2004**                                 |   | **2003** |   |
| INTEREST INCOME:                                              |   |                                     |   |   |   |
| Interest and Fees on Loans                                    |   | 1,509,100                                |   | 1,195,500 |   |
| Interest on Investment Securities                             |   | 60,400                                   |   | 82,200 |   |
| Interest on Federal Funds                                     |   | 24,900                                   |   | 19,700 |   |
| Total Interest Income                                         |   | 1,594,400                                |   | 1,297,400 |   |
|                                                          |   |                                     |   |   |   |
| INTEREST EXPENSE:                                             |   |                                     |   |   |   |
| Interest-Bearing Transaction Accounts                         |   | 14,000                                   |   | 12,200 |   |
| Savings Accounts                                              |   | 19,600                                   |   | 14,200 |   |
| Time Deposits                                                 |   | 257,700                                  |   | 294,400 |   |
| Notes Payable and other                                       |   | 226,700                                  |   | 143,300 |   |
| Total Interest Expense                                        |   | 518,000                                  |   | 464,100 |   |
|                                                          |   |                                     |   |   |   |
| Net Interest Income                                           |   | 1,076,400                                |   | 833,300 |   |
| PROVISION FOR LOAN LOSSES                                     |   | 70,000                                   |   | 50,000 |   |
| Net Interest Income After Provision for  Possible Loan Losses |   | 1,006,400                                |   | 783,300 |   |
|                                                          |   |                                     |   |   |   |
| NONINTEREST INCOME:                                           |   |                                     |   |   |   |
| Service Charges on Deposit Accounts                           |   | 127,700                                  |   | 137,500 |   |
| SBA Loan Sales & Servicing Income                         |   | 188,600                                  |   | 178,200 |   |
| Other Operating Income                                        |   | 692,000                                  |   | 628,900 |   |
| Total Non-interest Income                                     |   | 1,008,300                                |   | 944,600 |   |
|                                                          |   |                                     |   |   |   |
| NONINTEREST EXPENSE:                                          |   |                                     |   |   |   |
| Salaries and Employee Benefits                                |   | 729,800                                  |   | 611,400 |   |
| Occupancy and Equipment Expense                               |   | 132,200                                  |   | 140,800 |   |
| Professional Fees                                             |   | 33,200                                   |   | 21,900 |   |
| Data Processing                                               |   | 91,200                                   |   | 90,700 |   |
| FDIC & State Assessments                                  |   | 12,300                                   |   | 7,500 |   |
| Other Operating Expenses                                      |   | 680,900                                  |   | 630,300 |   |
| Income Tax Expense                                            |   | 133,300                                  |   | 79,200 |   |
| Total Non-interest Expense                                    |   | 1,813,000                                |   | 1,581,800 |   |
| NET INCOME (LOSS)                                             |   | 201,600                                  |   | 146,100 |   |
|                                                          |   |                                     |   |   |   |
| Earnings per common share                                     |   |                                     |   |   |   |
| Primary                                                       |   | 0.129                                    |   | 0.098 |   |
| Diluted                                                       |   | 0.107                                    |   | 0.084 |   |

 

3

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NORTHERN CALIFORNIA BANCORP, INC.

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2004 AND 2003

 
|                                                                         |   | **2004**    |       | **2003**   |   |
|------------------------------------------------------------------------------|--------|-------------|------------|------------|--------|
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                     |   |        |       |       |   |
| Net income                                                                   |   | $           | 201,600    |       | $      | 146,100 |   |
| Adjustments to reconcile net income to net  cash                             |   |        |       |       |   |
| used by operating activities:                                                |   |        |       |       |   |
| Depreciation and amortization expense                                        |   | 16,400      |       | 41,900     |   |
| Realized gain on sales of  available-for-sale securities, net                |   | 35,700      |       | —     |   |
| Amortization of deferred loan (fees) costs                                   |   | (29,700     | )          | (22,000    | )      |
| Amortization (accretion) of discounts and  premiums on investment securities |   | (9,800      | )          | (700       | )      |
| Gain on sale of equipment                                                    |   | 1,000       |       | —     |   |
| Provision for loan losses                                                    |   | 70,000      |       | 50,000     |   |
| (Increase) decrease in trading assets                                        |   | (25,100     | )          | (16,200    | )      |
| (Increase) decrease in interest receivable                                   |   | (8,600      | )          | (11,000    | )      |
| Increase in other assets                                                     |   | (134,100    | )          | (311,700   | )      |
| (Increase) decrease in deferred tax asset                                    |   | (18,000     | )          | (31,500    | )      |
| Increase (decrease) in interest payable                                      |   | (2,500      | )          | (12,800    | )      |
| Decrease in other liabilities                                                |   | (138,400    | )          | —     |   |
| Net cash used by operating activities                                        |   | (41,500     | )          | (167,900   | )      |
|                                                                         |   |        |       |       |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                     |   |        |       |       |   |
| Proceeds from maturity of investment  securities                             |   | 1,352,900   |       | 562,900    |   |
| Purchase of investments                                                      |   | (2,192,000  | )          | (104,100   | )      |
| Net (increase) decrease in loans                                             |   | (14,421,700 | )          | (5,332,800 | )      |
| Loan purchases                                                               |   | (1,180,000  | )          | —     |   |
| Loan sales                                                                   |   | 7,672,700   |       | 1,997,800  |   |
| (Increase) decrease in loans held for sale                                   |   | 252,800     |       | (646,500   | )      |
| Proceeds from sale of equipment                                              |   | 2,400       |       | 900        |   |
| Additions to bank premises and equipment                                     |   | (29,700     | )          | (55,000    | )      |
| Net cash used by investing activities                                        |   | (8,542,600  | )          | (3,576,800 | )      |
|                                                                         |   |        |       |       |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                     |   |        |       |       |   |
| Net increase (decrease) in deposits                                          |   | 3,905,200   |       | 1,842,800  |   |
| Proceeds from borrowings                                                     |   | 4,900,000   |       | 5,500,000  |   |
| Repayments of borrowings                                                     |   | —      |       | (1,172,200 | )      |
| Net cash provided by financing activities                                    |   | 8,805,200   |       | 6,170,600  |   |
|                                                                         |   |        |       |       |   |
| Net increase in cash and cash equivalents                                    |   | 221,100     |       | 2,425,900  |   |
|                                                                         |   |        |       |       |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING**                                     |   | 17,193,100  |       | 13,017,100 |   |
|                                                                         |   |        |       |       |   |
| **CASH AND CASH EQUIVALENTS, ENDING**                                        |   | $           | 17,414,200 |       | $      | 15,443,000 |   |

 

See Note 8 for supplemental disclosures

 

4

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NOTES TOFINANCIAL STATEMENTS

 
|                                          |   | **MARCH 31  2004** |   | **DECEMBER  31  2003** |   |
|-----------------------------------------------|--------|--------------------|--------|------------------------|--------|
| (NOTE 1) INVESTMENT SECURITIES:               |   |               |   |                   |   |
| Available for sale:                           |   |               |   |                   |   |
| Corporate Debt Securities                     |   | 754,700            |   | 1,841,500              |   |
| Government National Mortgage Association      |   | 1,978,500          |   | 2,246,100              |   |
| U.S. government Agencies                      |   | 4,025,000          |   | 1,987,900              |   |
|                                          |   | 6,758,200          |   | 6,075,500              |   |
|                                          |   |               |   |                   |   |
| (Note 2) Other Investments                    |   |               |   |                   |   |
| AT Services LLC                               |   | 202,000            |   | 202,000                |   |
| Mission Valley Bank                           |   | 25,000             |   | 25,000                 |   |
| Federal Home Loan Bank stock, restricted      |   | 939,700            |   | 752,600                |   |
| Northern California Bancorp, Inc. Trust I     |   | 93,000             |   | 93,000                 |   |
| Northern California Bancorp, Inc. Trust II    |   | 155,000            |   | 155,000                |   |
| Pacific Coast Bankers’ Bank Stock        |   | 439,900            |   | 439,900                |   |
|                                          |   | 1,854,600          |   | 1,667,500              |   |
|                                          |   |               |   |                   |   |
| (NOTE 3) GROSS LOANS:                         |   |               |   |                   |   |
| Commercial and Industrial                     |   | 18,164,500         |   | 16,869,700             |   |
| Construction                                  |   | 7,172,800          |   | 5,379,100              |   |
| Real Estate - Mortgage                        |   | 57,455,200         |   | 52,698,400             |   |
| Installment                                   |   | 590,900            |   | 523,600                |   |
| Government Guaranteed Loans Purchased         |   | 56,100             |   | 57,600                 |   |
| Gross Loans                                   |   | 83,439,500         |   | 75,528,400             |   |
| Allowance for Loan Losses                     |   | (845,400           | )      | (774,800               | )      |
| Deferred Origination Fees, net                |   | (204,900           | )      | (193,000               | )      |
| Loans, net                                    |   | 82,389,200         |   | 74,560,600             |   |
|                                          |   |               |   |                   |   |
| (NOTE 4) ALLOWANCE FOR POSSIBLE LOAN  LOSSES: |   |               |   |                   |   |
| Balance at Beginning of Period                |   | 774,800            |   | 636,900                |   |
| Recoveries                                    |   | 600                |   | 1,300                  |   |
| Provision for Possible Loan Losses            |   | 70,000             |   | 155,000                |   |
| Loans Charged Off                             |   | 0                  |   | (18,400                | )      |
| Balance at End of Period                      |   | 845,400            |   | 774,800                |   |
|                                          |   |               |   |                   |   |
| (NOTE 5) DEPOSITS:                            |   |               |   |                   |   |
| Demand                                        |   | 19,290,700         |   | 17,859,800             |   |
| Interest-Bearing Transaction                  |   | 17,130,100         |   | 16,454,500             |   |
| Savings                                       |   | 8,594,000          |   | 8,444,900              |   |
| Time Under $100,000                           |   | 20,553,900         |   | 19,241,100             |   |
| Time Equal to or Greater than $100,000        |   | 16,468,900         |   | 16,132,100             |   |
|                                          |   | 82,037,600         |   | 78,132,400             |   |

 

5

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(Note 6)Comprehensive Income

 

Thecomponents of other comprehensive income and related tax effects for the threemonth periods ending March 31, 2004 and 2003 are as follows:

 
|                                                                                |   | **2004** |   | **2003** |   |
|-------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Unrealized holding gains on available- for  - sale securities and other assets, net |   | 75,600   |   | (43,800  | )      |
| Tax effect                                                                          |   | (34,000  | )      | 19,700   |   |
|                                                                                |   |     |   |     |   |
| Net-of-tax amount                                                                   |   | 41,600   |   | (24,100  | )      |

 

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

 
|                                                             |   | **2004** |   | **2003** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Unrealized holding gains on available for  sale securities       |   | 1,600    |   | (44,100  | )      |
| Unrealized holding gains on available for  sale strip receivable |   | 172,000  |   | 32,300   |   |
| Tax effect                                                       |   | (78,100  | )      | 5,300    |   |
|                                                             |   |     |   |     |   |
| Net-of-tax amount                                                |   | 95,500   |   | (6,500   | )      |

 

(Note 7) Stock Option Plan:

 

**TheCorporation applies APB Opinion 25 and related Interpretations in accountingfor the plan.  Accordingly, nocompensation cost has been recognized. Had compensation cost for the Corporation’s stock-based compensationplan been determined based on the fair value at the grant date for awards underthe plan consistent with the method prescribed by SFAS No. 123 as amended bySFAS 148, the Corporation’s net income and basic earnings per share would havebeen adjusted by the compensation cost net of taxes to the pro forma amountsindicated below:**

 

6

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|                            |   | **3 Months  Ended  2004** |    | **3 Months  Ended  2003** |   |
|---------------------------------|--------|---------------------------|---------|---------------------------|--------|
| Net income:                     |   |                      |    |                      |   |
| As reported                     |   | $                         | 201,600 |                      | $      | 146,100 |   |
| Pro forma                       |   | $                         | 80,900  |                      | $      | 116,200 |   |
|                            |   |                      |    |                      |   |
| Compensation cost, net of taxes |   | $                         | 120,700 |                      | $      | 29,900 |   |
|                            |   |                      |    |                      |   |
| Basic earnings per share:       |   |                      |    |                      |   |
| As reported                     |   | $                         | 0.129   |                      | $      | 0.098 |   |
| Pro forma                       |   | $                         | 0.052   |                      | $      | 0.078 |   |
|                            |   |                      |    |                      |   |
| Diluted earnings per share:     |   |                      |    |                      |   |
| As reported                     |   | $                         | 0.107   |                      | $      | 0.084 |   |
| Pro forma                       |   | $                         | 0.043   |                      | $      | 0.067 |   |

 

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

 

**TheCorporation applies APB Opinion 25 and related Interpretations in accountingfor the plan.  Accordingly, nocompensation cost has been recognized. Had compensation cost for the Corporation’s stock-based compensationplan been determined based on the fair value at the grant date for awards underthe plan consistent with the method prescribed by SFAS No. 123 as amended bySFAS 148, the Corporation’s net income and basic earnings per share would havebeen adjusted by the compensation cost net of taxes to the pro forma amountsindicated below:**

 

The fair value of these optionswas estimated at the grant date using the Black-Scholes option pricing modelwith the following weighted-average assumptions for 2004 and 2003: risk-freeinterest rate of 4.78% and 4.83% for 2004 and 2003, respectively; dividendyield of .017% and 0% for 2004 and 2003, respectively; expected option life of5.18 years and 5.0 years for 2004 and 2003, respectively; and volatility of 20%and 30% in 2004 and 2003, respectively.

 

(NOTE 8) SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION:

 
|                               |   | **3/31/04** |   | **3/31/03** |   |
|------------------------------------|--------|-------------|--------|-------------|--------|
| Payments during the period ending: |   |        |   |        |   |
| Interest                           |   | 520,600     |   | 461,400     |   |
| Income Taxes                       |   | 146,100     |   | 79,200      |   |

 

7

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

** **

**OVERVIEW**

 

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

 

For the threemonths ended March 31, 2004 net income was $201,600, compared to $146,100 forthe same period in 2003.  For the threemonths ended March 31, 2004 interest income after provision for loan lossesincreased $223,100, non-interest income increased $63,700, while non-interestexpense increased $231,300.

 

8

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The following table sets forth certainselected financial ratios of the Corporation at and for the three months ended,March 31, 2004 and 2003.

 
|                                               |   | **The three  months  Ended March 31, 2004**       |   | **The three  months  Ended March 31, 2003** |   |
|----------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------|--------|
|                                               |   | **(Dollars  in thousands except per share data)** |   |
|                                               |   |                                              |   |
| Summary of Operating Results:                      |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Total interest income                              |   | 1,594                                             |   | 1,297                                       |   |
| Total interest expense                             |   | 518                                               |   | 464                                         |   |
| Net interest income                                |   | 1,076                                             |   | 833                                         |   |
|                                               |   |                                              |   |                                        |   |
| Provision for possible loan losses                 |   | 70                                                |   | 50                                          |   |
| Net interest income after provision for  loan loss |   | 1,006                                             |   | 783                                         |   |
|                                               |   |                                              |   |                                        |   |
| Total other income                                 |   | 1,008                                             |   | 945                                         |   |
| Total other expense                                |   | 1,680                                             |   | 1,503                                       |   |
|                                               |   |                                              |   |                                        |   |
| Income (loss) before taxes                         |   | 335                                               |   | 225                                         |   |
| Provision for income tax                           |   | 133                                               |   | 79                                          |   |
|                                               |   |                                              |   |                                        |   |
| Net income (loss)                                  |   | 202                                               |   | 146                                         |   |
|                                               |   |                                              |   |                                        |   |
| Per Common Share Data:                             |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Net income - Primary (1)                           |   | 0.129                                             |   | 0.098                                       |   |
| Net income - Diluted (2)                           |   | 0.107                                             |   | 0.084                                       |   |
| Book value, end of period                          |   | 4.25                                              |   | 3.86                                        |   |
| Avg shares outstanding (3)                         |   | 1,566,658                                         |   | 1,493,816                                   |   |
|                                               |   |                                              |   |                                        |   |
| Balance Sheet Data:                                |   |                                              |   |                                        |   |
|                                               |   |                                              |   |                                        |   |
| Total loans, net of unearned income (4)            |   | 84,484                                            |   | 64,223                                      |   |
| Total assets                                       |   | 116,780                                           |   | 92,358                                      |   |
| Total deposits                                     |   | 82,038                                            |   | 69,459                                      |   |
| Stockholders’ equity                          |   | 6,654                                             |   | 5,761                                       |   |

 

9

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|                                                 |   | **The three  months  Ended March 31, 2004** |   | **The three  months  Ended March 31, 2003** |   |
|------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|                                                 |   |                                        |   |                                        |   |
| Selected Financial Ratios (5):                       |   |                                        |   |                                        |   |
|                                                 |   |                                        |   |                                        |   |
| Return on average assets (6)                         |   | 0.74                                        | %      | 0.67                                        | %      |
| Return on average stockholders’ equity (6)      |   | 12.33                                       | %      | 10.25                                       | %      |
| Net interest spread                                  |   | 3.98                                        | %      | 3.98                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Net interest margin                                  |   | 4.38                                        | %      | 4.32                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Avg shareholders’ equity to average assets      |   | 6.02                                        | %      | 6.49                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Risked-Based capital ratios                          |   |                                        |   |                                        |   |
| Tier 1                                               |   | 8.58                                        | %      | 9.64                                        | %      |
| Total                                                |   | 16.13                                       | %      | 12.70                                       | %      |
| Total loans to total deposits at end of  period      |   | 102.98                                      | %      | 92.46                                       | %      |
|                                                 |   |                                        |   |                                        |   |
| Allowance to total loans at end of period            |   | 1.00                                        | %      | 1.04                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Nonperforming loans to total loans at end  of period |   | 0.03                                        | %      | 0.04                                        | %      |
|                                                 |   |                                        |   |                                        |   |
| Net charge-offs to average loans                     |   | 0.00                                        | %      | 0.01                                        | %      |

 

----

(1)   Primaryearnings per share amounts were computed on the basis of the weighted averagenumber of shares of common stock outstanding during the year.  The weighted average number of common sharesused for this computation was 1,566,658 and 1,493,816 for March 31, 2004 and2003, respectively.

 

(2)   Dilutedearnings (loss) per share amounts were computed on the basis of the weightedaverage number of shares of common stock and common stock equivalentsoutstanding during the year.  Commonstock equivalents include director/employee stock options. The weighted averagenumber of shares used for this computation was 1,878,032 and 1,745,347 forMarch 31, 2004 and 2003, respectively.

 

(3)   Weightedaverage common shares.

 

(4)   Includesloans being held for sale.

 

(5)   Averagesare of daily balances.

 

(6)   March31, 2004 calculated on an annualized basis.

 

10

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**NETINTEREST 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 to period result fromincreases or decreases in the average balances of interest-earning assetsportfolio, the availability of particular sources of funds and changes inprevailing interest rates.

 

Net interest income for thethree months ended March 31, 2004 was $1,076,400 compared to $833,300 for thesame period in 2003.  The increase of$243,100 resulted from total interest income increasing $297,000, while totalinterest expense increased $53,900. Average interest earning assets increased $21,863,000 (28.58%), whilethe average rate earned decreased 26 basis points.  Average interest bearing liabilities increased $15,607,000(23.27%), while the average rate paid decreased 26 basis points.

 

The following table showsthe components of the Bank’s net interest income, setting forth, for each thethree months ended March 31, 2004 and 2003, (i) average assets, liabilities andinvestments, (ii) interest income earned on interest-earning assets andinterest expense paid on interest-bearing liabilities, (iii) average yieldsearned on interest-earning assets and average rates paid on interest-bearing liabilities,(iv) the net interest spread (i.e., the average yield earned oninterest-earning assets less the average rate paid on interest-bearingliabilities) and (v) the net interest yield on average interest-earning assets(i.e., net interest income divided by average interest-earning assets).  Yields are computed on a tax-equivalentbasis, no tax-exempt investments were held in 2004 or 2003.  Non-accrual loans and overdrafts areincluded in average loan balances. Average loans are presented net of unearned income.

 

11

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**INTERESTSPREAD ANALYSIS:**

 
|                                 |   | **Three Months  Ended March 31,** |   | **Twelve Months  Ended December 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|
|                                 |   | **2004**                          |   | **2003**                              |   | **2003** |   |
|                                 |   | **Avg  Bal**                      |   | **Int  Earn  Paid**                   |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   | **Avg  Bal** |   | **Int  Earn  Paid** |   | **Avg  %  Rate** |   |
|                                 |   | **(Dollars in thousands)**        |   |
| Interest Earning Assets:             |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Invest securities - Taxable          |   | 7,778                             |   | 60                                    |   | 3.07 |   | 6,809 |   | 74 |   | 4.34 |   | 8,113 |   | 299 |   | 3.69 |   |
| Federal funds sold                   |   | 10,399                            |   | 25                                    |   | 0.96 |   | 6,552 |   | 20 |   | 1.20 |   | 8,891 |   | 97 |   | 1.09 |   |
| Total investments                    |   | 18,177                            |   | 85                                    |   | 1.86 |   | 13,361 |   | 94 |   | 2.80 |   | 17,004 |   | 396 |   | 2.33 |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                         |   | 6,185                             |   | 189                                   |   | 12.21 |   | 4,047 |   | 88 |   | 8.67 |   | 3,847 |   | 369 |   | 9.59 |   |
| Real estate                          |   | 54,296                            |   | 974                                   |   | 7.18 |   | 43,342 |   | 827 |   | 7.64 |   | 47,264 |   | 3,585 |   | 7.59 |   |
| Installment                          |   | 536                               |   | 14                                    |   | 10.29 |   | 474 |   | 14 |   | 12.03 |   | 494 |   | 38 |   | 7.62 |   |
| Commercial                           |   | 19,164                            |   | 333                                   |   | 6.95 |   | 15,271 |   | 267 |   | 6.99 |   | 16,344 |   | 1,182 |   | 7.23 |   |
| Total loans                          |   | 80,181                            |   | 1,510                                 |   | 7.53 |   | 63,134 |   | 1,196 |   | 7.58 |   | 67,949 |   | 5,174 |   | 7.61 |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest earning assets        |   | 98,358                            |   | 1,594                                 |   | 6.48 |   | 76,495 |   | 1,290 |   | 6.74 |   | 84,953 |   | 5,570 |   | 6.56 |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Liabilities:        |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Int-bearing demand                   |   | 13,305                            |   | 8                                     |   | 0.25 |   | 10,364 |   | 6 |   | 0.25 |   | 10,892 |   | 27 |   | 0.25 |   |
| Money market savings                 |   | 2,956                             |   | 6                                     |   | 0.78 |   | 2,241 |   | 6 |   | 1.03 |   | 2,592 |   | 22 |   | 0.86 |   |
| Savings deposits                     |   | 7,847                             |   | 20                                    |   | 1.00 |   | 5,538 |   | 14 |   | 1.03 |   | 6,011 |   | 62 |   | 1.03 |   |
| Time deposits >$100M              |   | 16,215                            |   | 118                                   |   | 2.92 |   | 16,610 |   | 135 |   | 3.26 |   | 16,378 |   | 511 |   | 3.12 |   |
| Time deposits <$100M              |   | 19,127                            |   | 140                                   |   | 2.92 |   | 18,988 |   | 159 |   | 3.35 |   | 20,074 |   | 618 |   | 3.08 |   |
| Other Borrowing                      |   | 23,236                            |   | 227                                   |   | 3.90 |   | 13,339 |   | 143 |   | 4.30 |   | 16,781 |   | 680 |   | 4.05 |   |
| Total interest bearing liabilities   |   | 82,686                            |   | 518                                   |   | 2.51 |   | 67,079 |   | 464 |   | 2.77 |   | 72,729 |   | 1920 |   | 2.64 |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                  |   |                              |   | 1,076                                 |   |   |   |   |   | 826 |   |   |   |   |   | 3,649 |   |   |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                  |   |                              |   |                                  |   | 3.98 |   |   |   |   |   | 3.98 |   |   |   |   |   | 3.92 |   |
|                                 |   |                              |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on interest earning assets |   |                              |   |                                  |   | 4.38 |   |   |   |   |   | 4.32 |   |   |   |   |   | 4.30 |   |

 

12

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|                            |   | **Three  Months  Ended March 31,  2004 vs 2003  Increase (Decrease)  Due to changes** |   | **Twelve  Months  Ended December 31,  2003 vs 2002  Increase (Decrease)  Due to Changes** |   |
|---------------------------------|--------|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|
|                            |   | **Avg  Volume**                                                                       |   | **Avg  Rate**                                                                             |   | **Total** |   | **Avg  Volume** |   | **Avg  Rate** |   | **Total** |   |
|                            |   | **(Dollars  in thousands)**                                                           |   |
| Interest Earning Assets:        |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Invest securities - Taxable     |   | 11                                                                                    |   | (25                                                                                       | )      | (14 | ) | (125 | ) | 7 |   | (118 | ) |
| Federal funds sold              |   | 12                                                                                    |   | (6                                                                                        | )      | 5 |   | 30 |   | (48 | ) | (18 | ) |
| Total investments               |   | 22                                                                                    |   | (31                                                                                       | )      | (9 | ) | (96 | ) | (40 | ) | (135 | ) |
|                            |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Loans                           |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Construction                    |   | 46                                                                                    |   | 55                                                                                        |   | 101 |   | 108 |   | (11 | ) | 97 |   |
| Real estate                     |   | 209                                                                                   |   | (62                                                                                       | )      | 147 |   | 715 |   | 24 |   | 739 |   |
| Installment                     |   | 2                                                                                     |   | (2                                                                                        | )      | (0 | ) | (18 | ) | (10 | ) | (28 | ) |
| Commercial                      |   | 68                                                                                    |   | (2                                                                                        | )      | 66 |   | 57 |   | (58 | ) | (1 | ) |
| Total loans                     |   | 325                                                                                   |   | (11                                                                                       | )      | 314 |   | 862 |   | (55 | ) | 807 |   |
|                            |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Total Interest Earning Assets   |   | 347                                                                                   |   | (43                                                                                       | )      | 304 |   | 766 |   | (95 | ) | 671 |   |
|                            |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:      |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Int-bearing demand              |   | 2                                                                                     |   | 0                                                                                         |   | 2 |   | (0 | ) | (46 | ) | (46 | ) |
| Money market savings            |   | 2                                                                                     |   | (2                                                                                        | )      | (0 | ) | 6 |   | (5 | ) | 1 |   |
| Savings deposits                |   | 5                                                                                     |   | (0                                                                                        | )      | 5 |   | 23 |   | (16 | ) | 8 |   |
| Time deposits >$100M         |   | (3                                                                                    | )      | (14                                                                                       | )      | (17 | ) | 12 |   | (101 | ) | (89 | ) |
| Time deposits <$100M         |   | 1                                                                                     |   | (21                                                                                       | )      | (20 | ) | (13 | ) | (195 | ) | (207 | ) |
| Other Borrowing                 |   | 106                                                                                   |   | (23                                                                                       | )      | 83 |   | 590 |   | (284 | ) | 306 |   |
|                            |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Total interest bearing deposits |   | 112                                                                                   |   | (59                                                                                       | )      | 53 |   | 618 |   | (646 | ) | (28 | ) |
|                            |   |                                                                                  |   |                                                                                      |   |   |   |   |   |   |   |   |   |
| Net change in net interest      |   | 235                                                                                   |   | 16                                                                                        |   | 251 |   | 148 |   | 550 |   | 699 |   |

 

13

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**Provisionand Allowance for Loan Losses**

 

The provision for loanlosses is an expense charged against operating income and added to theallowance for loan losses.  Theallowance for loan losses represents amounts set aside for the specific purposeof absorbing 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.  It is the Bank’s current practice, which could change inaccordance with the factors mentioned above, to maintain an allowance, which isat least equal to the sum of the following percentage of loan balances by loancategory.

 

| **Loan Category**                       |   | **Reserve%** |   |
|-----------------------------------------|--------|--------------|--------|
|                                    |   |         |   |
| Classified Loans:                       |   |         |   |
| Loans classified loss                   |   | 100.00       | %      |
| Loans classified doubtful               |   | 50.00        | %      |
| Loans classified substandard            |   |         |   |
| Real Estate Secured                     |   | 5.00         | %      |
| Non Real Estate Secured                 |   | 20.00        | %      |
|                                    |   |         |   |
| Unclassified Loans:                     |   |         |   |
| Real Estate - Loan to value 80% or less |   | 0.10         | %      |
| Real Estate - Loan to value over 80%    |   | 0.70         | %      |
| Real Estate - Construction              |   | 0.25         | %      |
| Loans to Individuals                    |   | 3.00         | %      |
| Commercial                              |   | 2.00         | %      |
| SBA Loans - Unguaranteed portion        |   | 2.00         | %      |
| Unfunded Loan Commitments               |   | .25          | %      |
| Concentration Risk Factor - Real Estate |   | .10          | %      |
| Economic Risk Factor                    |   | .20          | %      |
| SBA Loans - Guaranteed portion          |   | 0.00         | %      |
| Cash Secured Loans                      |   | 0.00         | %      |

 

Although no assurance can begiven 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, 2004 and 2003 the Bank’s allowance stood at 1.00 percent and 1.04 percentof gross loans, respectively.  Aprovision of $70,000 was made to the allowance during the three months endedMarch 31, 2004, compared with a provision of $50,000 for the same period in2003.  No loans were charged off duringthe three months ended March 31, 2004, compared to $10,000 in the same periodof 2003.  Recoveries for the sameperiods were $600 and $700, respectively.

 

14

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The Bank’s non-performing(delinquent 90 days or more and non-accrual) loans as a percentage of totalloans were 0.03 percent at March 31, 2004 compared with 0.71 percent for thesame period in 2003.

 

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

 

**Non-InterestIncome**

 

Total non-interest incomefor the three months ended March 31, 2004 was $1,008,300 compared with $944,600for the same period in 2003.  Theincrease of $63,700 was the result of income from SBA loan sales and servicingincreasing $10,400 and income from other service charges, commissions and feesincreasing $63,100; while service charges on deposit accounts decreased $9,800.

 

The sale, of Small BusinessAdministration (SBA) guaranteed loans, is a significant contributor to theBank’s income.  SBA guaranteed loansyield up to 3 3/4% over the New York prime rate, and the guaranteed portionscan be sold at premiums, which vary with market conditions.  SBA loans are guaranteed by the full faithof the United States Government from 75 to 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 beganrequiring lenders to share a portion of premiums in excess of 10% earned on thesale of the guaranteed portions, and to pay 50 basis points on the outstandingguaranteed balance.  Management cannotpredict the significance of the impact these changes will have on SBA income.

 

**Non-InterestExpense**

 

Salary and benefits expensefor the three months ended March 31, 2004 increased $118,400 compared with thesame period in 2003.  The increase wasdue the addition of a Chief Lending Officer, merit pay increases, increasedemployee benefits cost and increased recruitment expense.

 

Total occupancy and equipment expense for the three months ended March31, 2004 was $132,200 compared to $140,800 for the same period in 2003.

 

15

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Professional fees for thethree months ended March 31, 2004 increased $11,500 compared to the same periodin 2003.  The increase was due toaccounting/audit fees increasing $11,600; while legal fees decreased $100.

 

Data processing expense forthe three months ended March 31, 2004 was $91,200 compared to $90,700  for the same period in 2003.  

 

Other expenses for the threemonths ended March 31, 2004 totaled $826,500 compared with $717,000 for thesame period in 2003.  Significantchanges occurred in the following categories with increases in advertising$2,200, postage expense $3,100, entertainment and meals $5,000, insuranceexpense $10,100, business development $17,400, merchant expense $22,200,telephone $4,300, FDIC & State assessments $4,800, operational losses$2,600, telephone expense $4,300, income tax expense $54,100 and decreases incollection expense $2,800, director fees $3,100, stationary and supplies $2,600,subscriptions/publications $2,200, travel expense $2,700 and due andmemberships $3,200.

 

**LOANS**

 

Loans represented 81.52% ofaverage earning assets, and 74.18% of average total assets for the three monthsended March 31, 2004 compared with 82.53% and 71.88%, respectively during 2003.For the three months ended March 31, 2004, average loans increased 27.00% from$63,134,000 for the same period in 2003 to $80,181,000.  Average construction loans increased $2,138,000(52.82%) real estate loans increased $10,954,000 (25.27%), commercial loansincreased $3,893,000 (25.49%) and average installment loans increased $62,000(13.13%).

 

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

 

The Bank is 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.  The unguaranteed portion of the loans,although generally supported by collateral, is considered to be more risky thanconventional commercial loans because they may be based upon credit standardsthe Bank would not otherwise apply, such as lower cash flow coverage, or longerrepayment terms.

 

The Bank’s real estate loanportfolio consists both of real estate construction loans and real estatemortgage loans.  The Bank has initiateda program to generate more commercial and industrial real estate loans, whichgenerally yield higher returns than normal commercial loans.  The Bank has also developed a broker programfor generating residential real estate loans. The

 

16

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Bankdoes not make real estate development loans. Real estate construction loans are made for a much shorter term, andoften at higher interest rates, than conventional single-family residentialreal estate loans.  The cost ofadministering such loans is often higher than for other real estate loans, as principalis drawn on 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 typeand maturity of the loan, to lend up to 90 percent of the fair market value ofreal property (or more if the loan is insured either by private mortgageinsurers or governmental agencies).  Incertain instances, the appraised value may exceed the actual amount that couldbe realized on foreclosure, or declines in market value subsequent to makingthe loan can impair the Bank’s security.

 

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

 

**Non-performingand Non-accrual Loans**

 

The Bank’s present policy isto 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 table presentsinformation with respect to loans which, as of the dates indicated, were pastdue 90 days or more or were placed on non-accrual status (referred tocollectively as “non-performing loans”):

 

17

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|                                                          |   | **Three  Months Ended****March 31,** |   |
|---------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                          |   | **2004**                             |   | **2003** |   |
|                                                          |   | **(Dollars  in thousands)**          |   |
| Accruing, past due 90 days or more:                           |   |                                 |   |   |   |
|                                                          |   |                                 |   |   |   |
| Real Estate                                                   |   | 0                                    |   | 0 |   |
| Commercial                                                    |   | 0                                    |   | 0 |   |
| Installment                                                   |   | 0                                    |   | 0 |   |
| Other                                                         |   | 0                                    |   | 0 |   |
| Total accruing                                                |   | 0                                    |   | 0 |   |
|                                                          |   |                                 |   |   |   |
| Nonaccrual Loans:                                             |   |                                 |   |   |   |
|                                                          |   |                                 |   |   |   |
| Commercial                                                    |   | 29                                   |   | 28 |   |
| Installment                                                   |   | 0                                    |   | 0 |   |
| Other                                                         |   | 0                                    |   | 0 |   |
| Total nonaccrual                                              |   | 29                                   |   | 28 |   |
|                                                          |   |                                 |   |   |   |
| Total nonperforming                                           |   | 29                                   |   | 28 |   |
|                                                          |   |                                 |   |   |   |
| Total loans end of period                                     |   | 84,484                               |   | 64,901 |   |
|                                                          |   |                                 |   |   |   |
| Ratio of nonperforming loans to total loans  at end of period |   | 0.03                                 | %      | 0.04 | % |

 

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 Bankdoes not have any foreign loans or loans for highly leveraged transactions.

 

18

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## **Summary of Loan LossExperience**

 
|                                                                           |   | **Three  Months Ended****March 31,********2004** |   | **Three  Months Ended****March 31,  2003** |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                           |   | **(Dollars  in thousands)**                      |   |
|                                                                           |   |                                             |   |                                       |   |
| Average loans outstanding                                                      |   | 80,181                                           |   | 63,134                                     |   |
|                                                                           |   |                                             |   |                                       |   |
| Allowance, beginning of period                                                 |   | 775                                              |   | 637                                        |   |
|                                                                           |   |                                             |   |                                       |   |
| Loans charged off during period:                                               |   |                                             |   |                                       |   |
| Commercial                                                                     |   | 0                                                |   | 10                                         |   |
| Installment                                                                    |   | 0                                                |   | 0                                          |   |
| Real Estate                                                                    |   | 0                                                |   | 0                                          |   |
| Other                                                                          |   | 0                                                |   | 0                                          |   |
| Total charge offs                                                              |   | 0                                                |   | 10                                         |   |
|                                                                           |   |                                             |   |                                       |   |
| Recoveries during period:                                                      |   |                                             |   |                                       |   |
| Commercial                                                                     |   | 0                                                |   | 1                                          |   |
| Installment                                                                    |   | 0                                                |   | 0                                          |   |
| Other                                                                          |   | 0                                                |   | 0                                          |   |
| Total recoveries                                                               |   | 0                                                |   | 1                                          |   |
|                                                                           |   |                                             |   |                                       |   |
| Net Loans charged off during the period                                        |   | 0                                                |   | 9                                          |   |
|                                                                           |   |                                             |   |                                       |   |
| Additions to allowance for possible loan  losses                               |   | 70                                               |   | 50                                         |   |
|                                                                           |   |                                             |   |                                       |   |
| Allowance, end of period                                                       |   | 845                                              |   | 678                                        |   |
|                                                                           |   |                                             |   |                                       |   |
| Ratio of net loans charged off to average  Loans outstanding during the period |   | 0.0                                              | %      | 0.014                                      | %      |
|                                                                           |   |                                             |   |                                       |   |
| Ratio of allowance to total loans at end of  period                            |   | 1.00                                             | %      | 1.04                                       | %      |

 

19

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**FundingSources**

 

Average deposits for thethree months ended March 31, 2004 were $59,450,000 an increase of 10.62%compared with the same period in 2003. Average certificates of deposit represented 45.70% of average depositsfor the three months ended March 31, 2004. Average interest bearing checking, money market and savings accounts asa group was 31.18% of average deposits. Average demand deposits represented 23.12% of average deposits.

 

The Bank has lines of creditfrom the Federal Home Loan Bank of San Francisco and Pacific Coast Bankers’Bank with available borrowing capacity on March 31, 2004 of $2,733,600 and$2,500,000, respectively.  The FederalHome Loan Bank line of credit has a maximum borrowing capacity of twenty fivepercent (25%) of the Bank’s total assets, adjusted quarterly.  The Federal Home Loan Bank line of credit issecured by some of  the Bank’s realestate secured loans and securities.  AtMarch 31, 2004 the total principal balances of pledged loans was $27,440,600and securities of $5,853,400.  Thefollowing table provides information on nine (12) advances totaling $18,650,000outstanding at March 31, 2004.

 
| **Amount** |   | **Rate** |   | **Funding  Date** |   | **Maturity  Date** |   |
|------------|--------|----------|--------|-------------------|--------|--------------------|--------|
| 1,000,000  |   | 6.81     | %      | 6/3/97            |   | 6/3/04             |   |
| 1,500,000  |   | 1.01     | %      | 6/20/03           |   | 6/21/04            |   |
| 1,000,000  |   | 6.86     | %      | 8/10/00           |   | 8/10/05            |   |
| 100,000    |   | 2.89     | %      | 10/29/02          |   | 10/31/05           |   |
| 3,900,000  |   | 2.83     | %      | 10/29/02          |   | 10/31/05           |   |
| 1,000,000  |   | 2.54     | %      | 2/4/03            |   | 2/6/06             |   |
| 1,000,000  |   | 1.77     | %      | 3/9/04            |   | 3/9/06             |   |
| 2,750,000  |   | 3.44     | %      | 9/27/02           |   | 9/27/07            |   |
| 1,500,000  |   | 3.34     | %      | 2/14/03           |   | 2/14/08            |   |
| 2,000,000  |   | 3.18     | %      | 3/9/04            |   | 3/9/09             |   |
| 1,000,000  |   | 7.72     | %      | 6/1/00            |   | 6/3/30             |   |
| 1,900,000  |   | 5.55     | %      | 3/9/04            |   | 3/8/34             |   |

** **

The Bank has a letter ofcredit in the amount of $105,000, expiring April 17, 2006, issued by FederalHome Loan Bank of San Francisco, which is used to secure local agencydeposits.  The beneficiary of the letterof credit is the Administrator of Local Agency Security, Department ofFinancial Institutions.

** **

The Pacific Coast Bankers’Bank line of credit is unsecured.  TheBank did not utilize any overnight borrowings in 2004 or 2003.

** **

**CapitalResources**

 

The Company maintainscapital to comply with legal requirements, to provide a margin of safety forits depositors and stockholders, and to provide for future growth and theability to pay dividends.  At March 31,2004, stockholders’ equity was $6,653,800 versus $6,410,500 at December 31,2003.  The Company paid a $0.15 pershare cash dividend in 2003 and a ten

 

20

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(10%)percent stock dividend in 2002.  TheBank paid no cash dividends during the three months ended March 31, 2004, cashdividends totaling $50,000 to the Corporation in 2003.

 

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

 

Under 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 a Tier 1 risk-basedcapital ratio of 12.10% and a total risk-based capital ratio of 13.00% at March31, 2004, well above the minimum regulatory requirements.  The Company had a Tier 1 risk-based capitalratio of 8.58% and a total risk-based capital ratio of 16.13% at March 31,2004.

 

The leverage capital ratioguidelines require a minimum leverage capital ratio of 3% of Tier 1 capital tototal assets less goodwill.  The Companyhad a leverage capital ratio of 6.88% at March 31, 2004 while the Bank’sleverage capital ratio was 10.50%.

 

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

 

## **Liquidity**

 

Liquidity represents a bank’s ability toprovide sufficient cash flows or cash resources in a manner that enables it tomeet obligations in a timely fashion and adequately provides for anticipatedfuture cash needs.  For the Bank, liquidityconsiderations involve the capacity to meet expected and potential requirementsof depositors seeking access to balances and to provide for the credit demandsof borrowing customers.  In the ordinarycourse of the Bank’s business, funds are generated from the repayment of loans,maturities within the investment securities portfolio and the acquisition ofdeposit balances and short-term borrowings. In addition, the Bank has lines of credit from the Federal Home LoanBank of San Francisco of approximately $26,763,000****and a $2,500,000 federal funds line of credit with thePacific Coast Bankers’ Bank to meet temporary liquidity requirements.

 

As a matter of policy, theBank seeks to maintain a level of liquid assets, including marketableinvestment securities, equal to a least 10 percent of total assets (“primaryliquidity”), 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 primary liquidityat March 31, 2004 was 19.95 percent.

 

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

 

21

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## **Interest Rate Risk**

 

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

 

The purpose for asset/liabilitymanagement is to provide stable net interest income growth by protecting theBank’s earnings from undue interest rate risk. The Bank expects to generate earnings from increasing loan volume,appropriate loan pricing and expense control and not from trying to accuratelyforecast interest rates.  Anotherimportant function of asset/liability management is managing the risk/returnrelationships between interest rate risk, liquidity, market risk and capital adequacy.  The Bank gives priority to liquidityconcerns followed by capital adequacy, then interest rate risk and market riskin the investment portfolio.  The policyof the Bank will be to control the exposure of the Bank’s earnings to changinginterest rates by generally maintaining a position within a narrow range aroundan “earnings neutral position.” An earnings neutral position is defined as themix of assets and liabilities that generate a net interest margin that is notaffected by interest rate changes. However, Management does not believe that the Bank can maintain atotally earnings neutral position. Further, the actual timing of repricing of assets and liabilities doesnot always correspond to the timing assumed by the Bank for 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.

 

The Bank monitors itsinterest rate risk on a quarterly basis through the use of a model whichcalculates the effect on earnings of changes in the fed funds rate.  The model converts a fed funds rate changeinto rate changes for each major class of asset and liability, then simulatesthe bank’s net interest margin based on the bank’s actual repricing over a oneyear period, assuming that maturities are reinvested in instruments identicalto those maturing during the period.  AtMarch 31, 2004 the affect of a 2% increase in the federal funds sold rate,expressed, as a percentage of equity, was a positive 5.00%.  At March 31, 2004 the fed funds target ratewas less than 1.00%; therefore, the model assumed a 0.50% decrease in the fedfunds rate resulting in negative affect on capital of 1.3%.

 

The Corporation’s sources ofrevenues 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.

 

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**InvestmentSecurities**

 

The following table setsforth the book and market value of the Bank’s investment securities at March31, 2004:

 
|                                       |   | **INVESTMENT  PORTFOLIO MIX  March 31, 2004** |   |
|--------------------------------------------|--------|-----------------------------------------------|--------|
|                                       |   | **Book  Value**                               |   | **Market  Value** |   |
| Securities Available for Sale              |   |                                          |   |   |   |
|                                       |   |                                          |   |   |   |
| Government National Mortgage Association   |   | 2,007,000                                     |   | 1,978,500 |   |
| U.S. Government Agency Securities          |   | 4,000,000                                     |   | 4,025,000 |   |
| Corporate Debt Securities                  |   | 750,000                                       |   | 754,700 |   |
| Total                                      |   | 6,757,000                                     |   | 6,758,200 |   |
|                                       |   |                                          |   |   |   |
| Other Investments, at cost                 |   |                                          |   |   |   |
| AT Services LLC                            |   | 202,000                                       |   | 202,000 |   |
| Mission Valley Bank                        |   | 25,000                                        |   | 25,000 |   |
| Federal Home Loan Bank stock, restricted   |   | 939,700                                       |   | 939,700 |   |
| Northern California Bancorp, Inc. Trust I  |   | 93,000                                        |   | 93,000 |   |
| Northern California Bancorp, Inc. Trust II |   | 155,000                                       |   | 155,000 |   |
| Pacific Coast Bankers’ Bank Stock     |   | 439,900                                       |   | 439,900 |   |
|                                       |   | 1,854,600                                     |   | 1,854,600 |   |

 

The following tablesummarizes the maturity of the Bank’s investment securities at March 31, 2004:

 
|                              |   | **INVESTMENT  PORTFOLIO MATURITIES** |   |
|-----------------------------------|--------|--------------------------------------|--------|
|                              |   | **(Dollars  in thousands)**          |   |
|                              |   | **Available  for Sale**              |   |
|                              |   | **Amortized  Cost**                  |   | **Fair  Value** |   |
| Due between one and five years    |   | 2,000,000                            |   | 2, 002,200 |   |
| Due between five and ten years    |   | 2,750,000                            |   | 2,777,500 |   |
| Due between ten and fifteen years |   | —                               |   | — |   |
| Due in over fifteen years         |   | 2,007,000                            |   | 1,978,500 |   |
|                              |   | 6,757,000                            |   | 6,758,200 |   |

** **

**Item 3.  Controls and Procedures**

** **

(a) Evaluation of Disclosure Controls andProcedures:  An evaluation of theCompany’s disclosure controls and procedures (as Defined in Section 13(a) -14(c) of the Securities Exchange Act of 1934 (the “Act”) was carried out underthe supervision and with the participation of the Company’s Chief ExecutiveOfficer, Chief Financial Officer and other members of the Company’s management withinthe 90-day period preceding the filing date of

 

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this quarterly report.  The Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures as currently in effect are effective in ensuring that theinformation required to be disclosed by the Registrant in the reports it filesor submits under the Act is (i) accumulated and communicated to the Company’smanagement (including the Chief Executive Officer and Chief Financial Officer)in a timely manner, and (ii) recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

(b) Changes in Internal Controls:  In the quarter ended March 31, 2004, theCompany did not make any significant changes in, nor take any correctiveactions regarding, its internal controls or other factor that couldsignificantly affect these controls.

 

24

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**PART II-OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

None

 

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

** **

None

 

#### **Item 5.  OtherInformation.**

####  

None

 

#### **Item 6.  Exhibits andReports 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.            Reportson Form 8-K

 

None

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   | NORTHERN CALIFORNIA  BANCORP, INC. |
|--------|------------------------------------|
|   |                               |   |
| Date:  | May 12, 2004                       |   | By: |  /s/ Charles T. Chrietzberg, Jr. |   |
|   |                               | Charles T. Chrietzberg, Jr. |
|   |                               | Chairman of the Board & |
|   |                               | Chief Executive Officer |
|   |                               |   |
| Date:  | May 12, 2004                       |   | By: |  /s/ Bruce N. Warner |   |
|   |                               | Bruce N. Warner |
|   |                               | Chief Financial Officer and |
|   |                               | Principal Accounting Officer |

 

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